The Reflection Effect and Copper: Decoding Investor Psychology in a Volatile Market

Copper, the "red metal" that underpins modern infrastructure, has become a barometer for global economic sentiment. Over the past five years, its price trajectory has been shaped not just by supply and demand fundamentals but by the psychological biases of investors. Behavioral economics, particularly the reflection effect—a phenomenon where individuals act risk-averse in gains and risk-seeking in losses—has emerged as a critical driver of copper market volatility. For investors, understanding this dynamic is essential to navigating a landscape where sentiment often outpaces fundamentals.

The Reflection Effect in Action: Copper's Bull and Bear Phases

From 2020 to 2025, copper prices surged to record highs of $5.28 per pound in March 2025, only to retreat amid geopolitical tensions and policy shifts. During the bullish phase, investors exhibited classic risk-averse behavior, locking in profits as prices soared. This was amplified by speculative restocking in U.S. warehouses, driven by fears of impending tariffs. The result? A 16% premium on COMEX copper futures over LME prices—a stark deviation from historical norms.

When prices began to correct in April 2025, the reflection effect flipped. Investors who had suffered losses adopted risk-seeking strategies, doubling down on positions or viewing dips as buying opportunities. This duality created a volatile feedback loop: panic selling in one sector, aggressive buying in another. For example, junior copper mining equities saw a surge in speculative capital, with investors betting on long-term structural supply deficits despite short-term price declines.

Structural Factors Amplify Behavioral Biases

Copper's role in the energy transition—critical for electric vehicles, solar panels, and AI infrastructure—has elevated its strategic importance. This has transformed it from a mere industrial commodity into a geopolitical asset. The U.S. government's invocation of the Defense Production Act to fast-track domestic mining projects, for instance, reinforced investor perceptions of scarcity, even as physical supply constraints tightened.

Low global inventories (143,700 metric tons as of July 2025, down from 388,600 in July 2024) further amplified the reflection effect. Traders began treating copper as a hedge against policy uncertainty, with even minor inventory drawdowns triggering disproportionate price swings. This psychological sensitivity is evident in the LME's recent consolidation around $9,500–$10,000 per metric ton, where technical indicators and sentiment-driven buying collide.

Strategic Framework: Timing Entries and Exits with Behavioral Biases

To profit from copper's volatility, investors must align their strategies with the psychological triggers that drive price movements. Here's a framework for doing so:

1. Identify Sentiment Shifts via Policy and Inventory Signals
2. Policy Catalysts: Tariff announcements, trade negotiations, and supply chain interventions (e.g., Chile's tariff exemption bids) act as psychological triggers. For example, the 50% U.S. tariff threat in 2025 prompted early inventory-building, creating a self-fulfilling price surge.

3. Inventory Levels: Monitor LME and SHFE inventories. When stocks fall below 200,000 metric tons—a historical threshold—buying pressure intensifies.

4. Leverage Probability-Weighted Outcomes

5. Bullish Scenarios: If the Federal Reserve cuts rates in 2025 (as priced in futures markets), industrial demand and speculative flows will likely push copper above $10,000/mt.

6. Bearish Scenarios: A global economic slowdown or oversupply from new mining projects could trigger a correction. However, structural deficits in the energy transition sector may limit downside risk.

7. Use Technical Indicators to Time Entries

8. Support/Resistance Levels: Copper's consolidation near $9,500/mt (support) and $10,000/mt (resistance) offers a framework for position sizing. Breakouts above $10,000 could signal a new bullish phase, while a drop below $9,500 may indicate risk-seeking behavior in losses.
9. Relative Strength Index (RSI): Overbought conditions (RSI >70) often precede profit-taking, while oversold levels (RSI <30) may signal buying opportunities for long-term investors.

Investment Advice: Balancing Psychology and Fundamentals

1. Dollar-Cost Averaging in Volatile Periods: Given copper's susceptibility to sentiment-driven swings, spreading purchases over time can mitigate the risk of overpaying during speculative spikes.
2. Hedge Against Supply Shocks: Use copper futures or ETFs to hedge against geopolitical risks (e.g., U.S. tariffs) while maintaining exposure to long-term demand growth.
3. Options for Risk Management: Buy call options during bullish phases to capitalize on upside potential without overexposure. Conversely, put options can protect against sudden corrections.

Conclusion: Copper as a Behavioral Barometer

Copper's price movements are no longer just about ore grades or mine output—they are a reflection of investor psychology. The reflection effect, combined with structural supply constraints and the energy transition, has created a market where sentiment and fundamentals are inextricably linked. For investors, the key lies in recognizing these behavioral patterns and using them to time entries and exits with precision. As the world electrifies and copper's strategic value grows, those who master the psychology of the market will find themselves ahead of the curve.