I was running through my colleague Brad Briggs’ recent look back at the silver crisis of the 1970s. He described a cautionary tale about investors chasing the commodity when its price was no longer connected to any sort of fundamental value. Needless to say, the silver bubble was eventually pricked: “With prices so high, people began selling all the silver they could get their hands on. Prices plummeted 50.0% in four days,” Briggs wrote.

There is another metal that’s showing all the signs of a mania: copper. I don’t expect a sudden plunge as was the case with silver 30 years ago, but the price of this metal and of its key stocks are floating on a bed of complacency. This could all end soon thanks to a couple of occurrences that are happening offstage, but that may actually be advantageous in the short term.

Copper prices have been steadily rebounding for the last two years as global demand perks up. The metal has many uses in construction, from plumbing to wiring to refrigeration coils. China, with its inexorable thirst for new building construction, has been a key driver for copper. This increased demand helped boost shares of Freeport-McMoran (NYSE: FCX) from $22 to $60 in the 18 months that ended this past summer. Shares of Southern Copper (NYSE: SCCO) had a similarly impressive performance. Up until this summer, the clear upturn of the copper’s supply-and-demand ratio determined those improvements.

Since then, each of those stocks has nearly doubled. This time, however, something more nefarious is afoot. Speculation is driving copper prices even higher, as word circulates that one or a few key investors (all represented by JP Morgan (NYSE: JPM)) now control virtually all of the copper held in storage at the warehouses of the London Metals Exchange (LME).

Right now it’s not clear if this hoarding is meant to replicate the moves of the Hunt brothers in the silver market in the 1970s. Some suggest that the imminent launch of a couple of new copper exchange-traded funds (ETFs) has led to the stock-piling, as these ETFs plan to hold hard assets. Then again, before any such ETF is launched, that stockpile represents some real value now that copper prices are surging. In addition, any ETF backers could easily decide to postpone an ETF launch and simply liquidate holdings at a massive profit.

The China factor
 Yet for many, the rapid surge in copper prices is justifiable in light of China’s insatiable construction appetite. China accounts for 40% of global copper demand. Goldman Sachs, for example, believes that China will expand its housing supply by yet another 21% in 2011. Nevertheless, many reports from China imply an existing overhang of many finished, yet unoccupied apartment complexes. Much more to the point, China has been slipping in a series of small increases in banks’ reserve requirements, which is often a precursor to actual interest rate hikes. China’s policy planners would like to blunt the banking sector’s willingness to lend as many loans as it has been. Odds are increasing that China is closer to a construction slowdown than yet another leg to a housing boom. And make no mistake, if Chinese construction slows, copper prices will sharply plunge.

You see, it’s not just that copper is being hoarded at the LME. The metal is also being hoarded in China so that the country doesn’t run out of this key building material when structures are half-built. If a construction slowdown occurs, China will be sitting on ample reserves of copper and will likely throttle back imports.

Action to Take –> Freeport McMoran and Southern Copper have seen their shares soar as these developments have played out. But as investors start to digest the meaning and impact of China’s interest rate hikes, you may start to see chatter about a China housing bust (or at least a cool down). At that time, these copper miners would make for compelling shorts.