What happens when wealthy speculators attempt to acquire all of the assets in an active market? Economists are familiar with such activities; generally speaking, the speculators often succeed in creating a temporary valuation bubble that enriches them, though it inevitably (and sometimes spectacularly) bursts.
For a while, these speculators reap huge profits, as individuals and organizations who need the assets have no choice but to purchase them at inflated prices. But then, eventually, competing speculators buy their way into the market and undermine those high prices. Or government regulators step in, regulate prices, and break up monopolies. Or the buyers themselves grow tired of paying inflated prices and pursue novel methods to eliminate their need for the assets.
During the past two years of our severe global recession, very few individuals and organizations needed and demanded large quantities of any asset, and thus economists expressed few concerns about inflationary asset price increases of any kind. Last month, however, as the global economy continued to lurch towards recovery, the copper market was suddenly rumored to be under assault by one or more wealthy speculators.
The Home Asset Bubble
Of all the commodities that could serve as a target for speculation, why copper? Why not, for instance, pork bellies, that iconic staple of the Chicago Mercantile Exchange? Or frozen orange juice, the commodity that served as the fictional source of a price manipulation scheme in the 1983 classic film comedy Trading Places?
In a sense, propaganda serves as the defining element of any successful price manipulation scheme, i.e. the widespread dissemination of a plausibly convincing and yet misleading rationale that convinces gullible investors that asset prices will remain high for the foreseeable future. The run-up of asset values of Collateralized Mortgage Obligation securities and other derivative instruments prior to the 2008 market crash, for instance, was predicated on the plausible and yet misleading assumption that American home values would never suffer widespread declines on a national basis.
That assumption appeared to be reasonable in light of the fact that, prior to 2008, American home values had never declined during the modern history of the mortgage underwriting industry. Only in retrospect, after the 2008 crash, did it become obvious that home values were in fact vulnerable to significant declines. The great oversight prior to 2008, of course, is that the modern underwriting industry was created with the birth of the national underwriter Fannie Mae in 1938; thus, all of the historical home asset valuation declines that occurred throughout American history prior to that Great Depression year were not incorporated into the valuation models of investors.
But what about copper? What plausible but misleading rationale now exists to support an assumption that the price of copper will not decline? Such an assumption is necessary for copper prices to remain high for a sufficiently long period for speculators to sell their inflated bubble assets and reap huge profits.
The Ubiquity of Copper
One useful rationale for convincing gullible investors that a common asset’s market value will not decline is its sheer ubiquity. Homes, for instance, can be found in every city, village, and town in the United States, and thus it became easy to convince buyers that they would always remain in demand at ever higher values. Copper, similarly, is a type of industrial material that can be found in an incredibly wide array of global products, from the simple copper penny to complex electronics applications.
That’s why, for the past several years, police departments around the United States have struggled with thieves who have literally stripped copper off telephone poles and building utility systems for resale purposes. To whom do such thieves resell the precious commodity? To recyclers of scrap metals, who then supply manufacturers of heating systems, plumbing equipment, building materials, and a myriad of other products that we purchase every day.
Furthermore, these copper-laden products are not solely purchased in America and other developed markets; they are increasingly demanded by consumers in emerging markets as well. The citizens of developing nations such as China and India are demanding the same finished products as Americans do, and thus copper and other commodities are now expected to remain in high demand across the globe for the foreseeable future.
Cornering The Market
It should thus be of no surprise that J.P. Morgan or another market speculator was rumored late last week to have purchased most of the copper that currently resides in the London Metals Exchange. It should also be of no surprise that the market price of copper soared to an all-time high late last week as well.
As long as there is a plausible reason for gullible investors to believe that the demand for copper will remain high for the foreseeable future, the commodity will undoubtedly continue to represent an inviting target for speculators. No one should be surprised, though, when the price of copper eventually comes crashing down to earth, as all bubble assets inevitably do.