Gold and silver continue to receive the lion’s share of press headlines and investment writers’ attention. [While] our team believes this theme will continue, there are other assets which benefit from a weak dollar, especially if a weak dollar is combined with some decent economic activity. [One such asset] is copper, a base metal that, like gold and silver, [that will] appreciate with inflation and has tremendous potential for increased demand given the theme of 2012 – economic growth. [Let me explain in some detail why we think that is the case.] Words: 1150
So say the team at Pinnacle Digest (www.PinnacleDigest.com) in edited excerpts from their original article*.
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The article goes on to say, in part:
Key Copper Features[Here are some features of copper which support our contentions:]
- Copper’s price and demand is not necessarily tied to short-term monetary policies. As stated, copper does not need inflation for it to rise in value. Real demand, which we have been seeing of late in China, the United States, India, Brazil, Korea and Russia, will not only maintain, but continue to outpace supply in the years ahead of us.
- Copper is a more stable commodity than gold and more of a long-term trade in our view. At some point the gold bubble will burst and demand will simply vanish for a long period. With copper, [however] we doubt that will be the case for at least the next decade [given] the fast paced urbanization of China, India and Brazil. We believe the long-term established industrial uses for it, both domestically and abroad, justify cause for investors to be allocating a portion of their portfolio to the base metal.
Copper in the Early Stages of the Commodity Super Cycle
Commodity super cycles [such as] we are [currently] in, generally last between 16 and 20 years (roughly) historically speaking. If we entered a new commodity super cycle in 2002 or 2003, following the tech bubble, we still have a long way to go [as the April 2011 chart from an Xstrata Copper presentation shows below].
Copper Demand Should Remain Strong – and Prices High
What the above graph so perfectly illustrates is that it takes time for emerging countries to build out their infrastructure. This continued infrastructure build out, in China, India and Brazil, should justify sustained high prices and high demand for copper. China and India have more than 20 times the population the U.S. did it when it industrialised in the early 20th century. Demand has [never] been fiercer and could last even longer in this 21st century super cycle commodities boom.
Copper Imports by China Surging
On January 10th 2012 it was announced that copper imports by China surged to an all-time record in December. This was reportedly due to pre-holiday stockpiling (China’s New Year is January 23rd) amid low domestic inventories for the world’s largest consumer of the base metal.
What’s interesting to note is that China’s imports, as a whole, are down (2 year lows), but its copper imports have increased 7 months in a row, according to data on the General Administration of Customs’ website…[and] this is setting off alarm bells within the copper industry.
Tight credit conditions, after China raised bank reserve ratios six times in 2011, spurred metal imports as a means to secure trade financing. Unprofitable arbitrage between London and Shanghai in the first half caused a 29 percent drop in inventories as users ran down domestic supplies.
China has some catching up to do in its bid to secure and stockpile copper for future use. With copper off its April highs of close to $4.50 per pound, China is clearly buying up all it can get its hands on. The Chinese are bargain hunters, and just like in 2009, when copper prices were cheap, they are buying it up rapidly.
Copper Prices Going Higher
As you can see from the below graph, copper entered 2011 near an all-time high of over $4.50 per pound [and] has since declined some 30% (nearly $1 per pound).
Goldman Sachs analysts, Max Layton and Allison Nathan, wrote in a November 20th report that market jitters in Europe have led traders to take their focus off the fact that copper supplies are under pressure [and that] strikes by workers in Latin America have created a copper deficit which will trigger a “strong rally” in the second quarter of 2012.
China consumes 39 percent of the world’s copper, according to estimates by Morgan Stanley. There is no question that China is the very tip of the demand spear for copper. Where future copper supply will come from, outside of Chile, is a question on a lot of minds these days.
Future Copper Demand Growing Rapidly
Copper production has literally increased every year for 100 years (similar to oil). This simply cannot continue. Copper, although recyclable, is a finite resource. The United States has seen its copper production fall for a decade as Chile and Peru are leaving it in the dust.
It is our strong belief that, as world class deposits in mining friendly jurisdictions of the United States become ready for production, large companies will seize the opportunity. If the United States wants to increase its exports to balance its trade, copper is one metal it can achieve that goal with. Our team will discuss this in more detail in a future volume.
Copper Consumption Going Higher
Global copper consumption continues to inch ever higher…India, Korea, Russia and Poland combined will consume more copper than China over the next couple years. The amount of demand from the rest of the world, including the US, is [and will continue to be] staggering. It is the heartbeat of economic activity. China is leading the world in economic growth and is once again buying at a record pace, despite the price doubling since its last copper binge in 2009, in the expectation of increased economic activity…
What does this tell you about its forecasts for future demand and future valuations? What does it tell you about China’s thoughts on future inflation? With our team fully anticipating continued inflation and China confirming copper to be a bargain at these levels, we are bullish on the long-term outlook for copper and believe all these factors could create the perfect storm for copper companies and investors. [As such,] we believe…investors [should] be allocating a portion of their portfolio to this base metal.
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About two years ago, I looked through a BHP Billiton presentation which listed the number of years remaining for particular commodities. It was not an analysis of “peak” commodities as such, just a report on when various commodities would be completely, 100% depleted based on current usage rates and reserve assumptions. Copper in that report was determined to be scarcer than oil! [What does that mean for the future well-being of the U.S. – and the world?] Words: 1380
While the 2010 gold rush is making a lot of headlines, it’s important to not overlook other hard assets [such as silver, copper, platinum, palladium and rare earth metals] that are good investment alternatives to gold and have all rallied to fresh highs recently as well. While each of these offers its own strengths and weaknesses they are ways to diversify your holdings away from gold if you are worried about a crash. Words: 1561
I am convinced that we are still relatively early in a secular commodity bull market. In fact, with the modernization of Chindia and numerous other less-developed nations, I expect this bull market will be one for the record books. Fundamental demand coupled with inflation will push resource prices to unimaginable heights. Words: 805