Copper: Between Bears and Bulls

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The decline and fall of the empire of gold through 2015 has taken up so much attention from precious metal investors that smaller headlines of base metals have gone unnoticed.  Aside from the occasional grousing about the slowdown of the Chinese construction industry, the copper market has been quiet, if not terribly optimistic, for the past six months as the red-gold metal has slowly and sadly dropped by about twenty percent in value.  Goldman Sachs, long an opponent of complacency or peace and quiet, dropped a bombshell on the metals market in July by issuing a report stating that copper sits smack in the middle of a long-term bear market without hope for the near future.  The claim provoked a firestorm amongst investment economists, with positions staked anywhere from full bear to full bull and all the lengths of fence to sit on in between.  What do we know about copper through the second half of the year?

The Foundation of a Weak Foundation

Much like any person never sits more than three feet away from a spider, odds suggest you never sit more than a few feet away from a length of copper.  From the pipes running water through a building to the conductors of a car battery, copper's strong insulation in tandem with its electrical conductivity and light weight make it a godsend for all matter of construction and engineering.  High demand keeps copper from rusting on the shelves (that and the fact that copper can't rust) but a plethora of supply keeps the price from rising anywhere near that of precious metals.  Not only do South American nations like Argentina and Chile export so much copper that the metal accounts for one out of every two export dollars, but new copper rushes in Mongolia and Indonesia create ample supply that costs relatively little in terms of labor costs.  The great quantity of copper makes for poor market relations, where buyers can sit on their heels and wait for the price of the metal to drop during periods of high price tags.  Compare the availability of copper to that of gold, which enjoys a market deficit of about 800 tons per year to keep prices afloat, and it's clear that copper stands upon a weak leg to begin with.  Goldman Sachs decided that this weakness wasn't enough and had to knock the cane out from under copper as well.

A Critical Report

Goldman slashed their price forecasts by copper in the middle of July, citing the likelihood of sitting in the midst of a four-year cycle of poor growth that investors would need to sweat out until 2018.  With 3-, 6-, and 12-month price forecasts dropped by $300 to $400 per ton, or just under ten percent of the metal's value overall, the investment banking conglomerate paints a decidedly unflattering picture of copper's future.  Goldman Sachs noted that the ongoing trend reflects the end of the Chinese economic boom, having peaked in 2010 when copper sold at ten thousand dollars per ton, over twice today's figure.  The impact won't just hit a few months down the line either: previous forecasts saw copper rebound to hit anywhere from seven to eight thousand dollars per ton by 2018, but Goldman now believes the metal will have no net gain by that time.  The cherry on top of the report stated that copper will not rise above the marginal cost of the metal for another five years.  Their news spread over the world economic market and quickly created ripples.  Deutsche Bank, the eighth-largest lending institution on planet Earth, cut their copper forecasts in turn after receiving the prompt from Goldman.  The report from the German metals researchers indicated that anti-corruption measures instituted by the Chinese government on state businesses would restrict overall purchasing power as companies either hoard their cash or delay putting in the orders for raw supplies until the moment has passed.

Opinions Against

If Goldman Sachs served as the last voice in investment, however, perhaps they could have better survived the 2008 financial crisis.  The release of the copper projections stirred up a hornet's nest of economic hot air.  Standard Chartered and CitiBank are leading the charge on behalf of copper, claiming that the past five years of steady downward prices in tandem with non-cyclical prices make copper a strong vehicle for growth.  Standard has been the most bullish of all the investment banks, believing that copper will surge to no less than $7,250 within a single year, effectively undoing the past three disastrous years for the metal.  With new spending in power grids all over the world, claims Standard, the copper market (in tandem with the aluminum market) will experience a renaissance as developing nations plug in to power stations while first-world nations unplug in order to rely on solar power.  Both types of electricity require a steady beating copper heart in order to transfer volts and amps into lightbulbs and blenders.  Citi believes the copper market will enjoy a deficit of some 100,000 tons within only two years, compared with the current surplus of about 90,000 tons.  While this may seem like a lot, it unfortunately represents merely a margin of error for the global copper market of some twenty-five million tons.  As such, the arguments have only as much power behind them as investors choose to permit.

Copper: Fish or Cut Wire

  • Goldman Sachs has the second-best track record of market analysis in all the world since 2011.  That does not guarantee their predictions will prove correct, but means that investors should take their advise very seriously.  A bad forecast, however, does not mean a bad investment decision.
  • Since copper reacts to broad macroeconomic trends more than its sister precious metals, the European, Brazilian, Australian, and Chinese recessions appear to harm the metal more than the US' economic recovery can alleviate it, but only for the moment. 
  • Copper represents a risky commodity that can fit in particularly well with a portfolio that doesn't have much volatility.  Invest in managed copper futures with the aim of selling eight to twelve months out: by then the worst of the global recessions will have passed while the US passes an infrastructure bill that will drastically ratchet up construction spending.  Copper's low point makes an excellent value buy.  Don't invest in mutual or index funds, since the profits will be spread too thin along other investments.

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