By: Costas Bocelli — December 8, 2016
Is Old Copper the New Gold?
Inflation (a general increase in prices and fall in purchasing power) can wreck your finances if it rises too fast.
In fact, many financial advisors specifically recommend that investors maintain a five percent exposure to gold in their portfolio.
Some even advise ten percent.
Then there are the “doom and gloomers” who believe the U.S. Dollar is about to turn into to the next hyper-inflated Zimbabwe dollar. They recommend more of an “all in” approach when it comes to gold.
That said, it bears remembering that, over the past several years, inflation has been rather subdued.
In fact, it is actually outright deflation (a general decline in prices) that has been the greatest risk to economic stability, if you believe all those global central bankers in charge of monetary policy in countries that are up to their eyeballs in debt. (That is, all of them.)
So in an effort to combat deflation and boost prices, central bankers have turned to massive money printing and a policy of artificially low interest rates.
But to their frustration, flooding the banking system with unlimited liquidity and driving interest rates into negative territory on trillions of dollars in government debt has not exactly produced the swift results they’ve been hoping for.
However patience and persistence can be virtues because finally there’s evidence of a reacceleration of inflation.
Take the most recent reading in the Consumer Price Index (CPI). The Bureau of Labor Statistics reported that consumer prices rose by a stronger-than-expected 0.4% in the month of October. And the current 1.6% annualized inflation rate is the fastest rate we’ve seen in more than two-years.
And stay tuned: The BLS will report the next CPI next week.
(Consumers are seeing prices rise at the fastest rate in 2-years)
And it’s not just inflation that’s showing signs of life.
Wages are on the rise too.
In October and November, the government reported that average hourly earnings rose at an annualized rate of 2.8% and 2.5% respectively.
And earlier this week, the government revised third-quarter unit labor costs sharply higher from 0.3% to 0.7% from the previous quarter, implying worker pay is on the rise.
More notably, we’re also seeing higher inflation expectations because of the perceived pro-growth policies of an incoming Trump Administration.
With all that going on, you’d think gold prices should be skyrocketing, right?
Since November 1, gold prices have actually fallen 10% -- from $1,310 an ounce to about $1,180.
(Gold prices have been on the decline despite signs of increased inflation)
Investors were more concerned about rising interest rates, a stronger dollar and buying faster growing assets like cyclical industrials.
But although gold didn’t respond to the signs of rising inflation, another type of metal did.
I mean copper--the industrial metal.
Copper prices have exploded since November 1st, rising 23% from $2.20 a pound to $2.70 recently.
(Copper prices have been surging on higher growth and inflation expectations)
You see, copper is an economically sensitive raw material with wide spread applications in most sectors of the economy.
And besides being a very important industrial material, investment banks and global commodity traders sometimes warehouse massive quantities of the metal and hold it as a store of value, just like gold.
Going long copper has been a very profitable way to play rising inflation expectations.
Here’s your prescription from “Dr. Copper”:
If you’re looking to add copper or securities that benefit from rising copper prices, here are a few ideas for gaining exposure:
Probably the “purest” play on the direction in copper prices (aside from directly trading copper futures) is the iPath Bloomberg Copper Subindex Total Return Exchange Traded Note. (Symbol: JJC).
The fund is designed to reflect the potential returns available through an unleveraged investment in the futures contract of copper. And from the chart on JJC below, and the copper futures chart shown above, you can easily see that the price correlation is in fact very strong.
(iPath Copper ETN: JJC—a good alternative to directly trading commodity futures on copper)
Another way to get exposure to increased demand and rising prices of copper is to look at individual companies levered to the metal.
Copper happens to fall in the Metals Non Ferrous sector, a narrow sector of the market that we happen to track rather closely. And currently, the sector sits near the top of our relative strength matrix rankings.
Within the sector, three companies that are demonstrating positive relative strength that you could consider taking bullish positions on are: Freeport McMoRan (Symbol: FCX), Southern Copper (Symbol: SCCO) and Global Brass and Copper (Symbol: BRSS).
For now it appears that while gold has lost its luster, copper remains the metal that’s become the shiny standout.
Until next week!