Summary of Key Points
Since encountering countermeasures last year, the United States has embarked on an epic strategic copper hoarding campaign. By leveraging financial instruments and market mechanisms (rather than direct government purchases), it has encouraged global private capital and traders to transport copper to the U.S. The current total copper inventory exceeds 1 million tons, approaching the peak of 1.2 million tons during the Korean War from 1949-1953. However, the core of this system is the expectation of strong future copper demand, which could be shattered by the mid-term elections in early November, representing the greatest uncertainty.
I. The Scale of U.S. Copper Hoarding: From a Fraction to Millions of Tons
The visible copper inventory on exchanges (such as Comex) can be seen as just the tip of the iceberg—having increased from 80,000 tons at the beginning of last year to 662,000 tons today, more than an eightfold increase. The real “underwater part” is even more alarming: including the strategic reserves supported by the Project Vault (a $12 billion credit program provided by the Export-Import Bank of the United States) and copper stored by private companies, the total inventory has surpassed 1 million tons, nearly matching the 1.2 million tons hoarded by the U.S. during the Korean War (which accounted for nearly 20% of global supply at that time). This indicates that the U.S. is moving a significant portion of the world’s copper resources to its own territory.
II. The New Approach to Copper Hoarding: Using Financial Instruments Instead of Direct Government Spending
In the past, the U.S. hoarded copper by directly funding purchases through the Treasury Department and issuing administrative orders, which was inefficient, costly, and placed a heavy burden on public finances. Now, a decentralized and leveraged approach is being used:
1. Leverage Mechanism: The Export-Import Bank of the United States (EXIM) provides $12 billion in credit to help companies fund their copper hoarding efforts.
2. Arbitrage Opportunities: A “super forward premium” (where future copper prices are much higher than current prices) is created. For example, traders can buy 1 ton of copper and sign a contract to sell it at a higher price in six months, ensuring a profit that covers interest and storage costs. As a result, global traders compete to transport copper to U.S. warehouses and lock in profits through forward contracts—without the government having to spend a single dime.
III. Why the Super Forward Premium Can Persist? Two Key Drivers
The expectation of higher future copper prices is not baseless; it is supported by two fundamental factors:
1. Time Cost Compensation under High Interest Rates: With current high interest rates, borrowing money for copper hoarding incurs costs (interest and storage fees). Future prices must be high enough to cover these expenses; otherwise, no one would engage in such hoarding.
2. Future Demand Expectations: There is a widespread belief that copper will be in high demand due to various factors, such as the need for copper in AI data centers, power system upgrades, and strategic reserves by the U.S. Hedge funds and CTA funds are betting on rising future copper prices, which drives up forward contract prices and provides liquidity for traders.
IV. The Weakness of the System: A Change in Expectations Could Lead to a Collapse
The entire hoarding system relies on the belief that future copper demand will surge. However, this expectation is fragile, with the mid-term elections in November posing the greatest risk:
1. Senate Control: If Democrats gain control of the Senate, they may impose regulations and taxes on AI spending by tech giants, potentially slowing down the construction of data centers and reducing copper demand.
2. Local Election Impacts: For instance, Texas (a key state for AI data centers) is facing rising electricity costs due to heavy data center usage. The upcoming gubernatorial election in Texas (between a Republican incumbent and a Democratic challenger) reflects the conflict between AI expansion and rising living costs for residents. A Democratic win could lead to restrictions on data center development, directly affecting copper demand.
If these expectations change, the forward premium will disappear, and traders will stop hoarding copper, potentially destabilizing the U.S.’s massive copper reserves.
In Conclusion
The U.S. is playing a financial game where “expectations drive the market, and the market then moves physical assets.” The outcome of this game hinges on public confidence in future copper demand after the mid-term elections in November. As the article states: “It’s not the wind that moves, nor the flag; it’s the heart of man that stirs everything.” A change in people’s beliefs could lead to a complete shift in the situation.