Copper traders are becoming increasingly bullish on the speculation that copper demand will increase in the world from the United States to China.  The world’s largest metal exchange says that stock piles of copper are at a two and a half year low, which would boost the price due to increased demand.

Analysts are becoming increasingly bullish on the metal saying that positive sentiment combined with high levels of liquidity will propel the spot price higher.  As the London Metal Exchange prepares to announce a fifth consecutive monthly drop in inventory, money managers are ramping up their bets that the price will continue higher.

Copper has risen 12% to 8,515 metric ton this year so far, which is the best start since 2008 for copper.  The S&P’s GSCI index of twenty four commodities is up 10% for the year while the MSCI All-Country World Index (equities) is up 11%.

China is a huge driver of demand.  China consumes 40% of the world’s copper while North America only accounts for 11%.  However, due to increased demand by these regions, Barclays is estimating a shortage of 376,000 tons this year and they expect the shortage to continue into 2013.

Hedge funds are rapidly becoming more bullish as money managers raise their long positions in copper by 20% in mid-February, highest level since August 2nd.  However, bets on copper have more than tripled since mid-January.

Goldman Sachs is not as bullish as everyone else, however.  The investment bank believes prices will fall to $8,000 within three months before rallying to $9,000 in a year.  In addition, the bank cut predictions on expected return from 15% to 12%.

Copper isn’t the only hot commodity right now, gold is also surging.  The demand for gold is up big time as well mostly due to the risks in Europe.  Central banks and money managers are looking for protection while Europe sorts out their debt issues.

Overall, commodities and equities are strong so far this year.  I expect the rally to continue with a small correction along the way to further legitimize the rally.  The world is gaining ground on an economic recovery and finally equities and commodities are starting to rally as investors see the need to up their risk appetite.  However, we are not out of the woods yet.  Europe is poised to dip into a mild recession this year as debt rids the country.  This could dampen investors’ moods on the state of the recovery.  Until then, ride the rally but be cautious of a correction.