Saturday, August 16, 2008

Supply and Demand

I've been working on an economic table for the sidebar, and stumbled upon a pretty good example of the law of supply and demand in action, courtesy of Unlike gold and other precious metals, the copper market is nearly devoid of day traders and speculators. At just over $3/lb, it's not the best place to make a quick buck. As a result of the "crooks" having better targets of opportunity, the copper market has remained relatively free and unregulated.

The first chart shows a falling price over the last 30 days, a result of the economic slow-down. Note the upswings in the general downward trend. This is caused by the warehouses finding temporary alternative suppliers. Every bear market has rallies.

The second chart shows 30 day inventories on the London Mercantile Exchange (LME). The warehouses are buying on the way down. Each time they buy they reduce their break-even point. Compare the flat spots to the price rises. They lag slightly behind. As the producers (miners) slow production, the supplies decrease, thereby increasing the demand among the warehouses (exporters).

The third chart shows a natural business cycle, the way God and Adam Smith intended it. Eventually, the price (demand) hits bottom as the inventories (supply) tops out.

A chart like this allows a small investor (like me) to plan ahead and buy low/sell high. It's very difficult to find a chart like this, given government meddling in the economy and a toothless SEC that allows the crooks to run rampant. But, once in a while one can still spot good old fashioned main street capitalism in it's natural habitat. Sort of like Bigfoot sightings.

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