Forget Short-Term Volatility: Copper Has Nowhere to Go But Up

by Jeff Reeves | May 29, 2012 7:00 am

Copper recently hit its lowest levels since January and is off about 25% from its 2011 peak. Some technical analysts are sounding the alarm based on the charts, too, warning of a breakdown in copper prices[1] that could signal not just another leg down in copper but a very ugly summer for the market in general.

But despite the volatility that is typical for commodity markets, some copper industry experts are nothing but bullish on the base metal. Yes, the EU is struggling. Yes, demand numbers from China are fuzzy. But the bottom line is supply cannot keep up with demand.

I recently talked with a mining exec who thinks copper prices have nowhere to go but up for the next five years, regardless of short-term volatility.

“The world has underinvested in supply for decades, and therefore whether China grows at 5% or 10% per annum, the world still has a problem in that it just doesn’t have enough copper mines coming on stream,” said Harry Adams, managing director of EMED Mining. “When you look at the balance between the depletion of existing reserves in existing mines and the demand for copper in annual consumption, there’s a problem.”

According to Adams, the next five years are going to be critical if supply is going to keep up with demand from the industrial revolutions in China and India — regardless of the exact growth rate these regions see.

Also driving up the demand side is the emergence of copper as an investment, not just a base metal used in manufacturing. In fact, one of EMED Mining’s backers isn’t looking to get paid back in dollars or euros — but in the metal itself.

“Interestingly, Goldman Sachs (NYSE:GS[2]) is our project financier and it wants to get paid in copper,” Adams told me.

(You can read more about EMED’s business and how it’s tapping into forgotten mining opportunities in Europe in my recent post here.[3])

He went on to say that copper is “the new gold” and that securitization is becoming more common as manufacturers or governments want to manage risk by holding reserves in copper instead of U.S. dollars or Chinese renminbi.

That certainly seems to be the case, as just this week there were reports that JPMorgan Chase (NYSE:JPM[4]) is making hay with plans to launch an ETF linked directly to copper[5]. Manufacturers and merchants already have started complaining about the potential of such a commodity fund disrupting pricing.

It all adds up to a bullish market for copper and copper stocks.

Investors looking to profit off copper who don’t want to wait for the JPM fund to launch can play around with the First Trust ISE Global Copper Index Fund (NASDAQ:CU[6]), which is tied to publicly traded companies in the copper mining industry, or the Global X Copper Miners ETF (NYSE:COPX[7]).

Other alternatives include the individual miners in the space — including big boys Freeport-McMoRan Copper & Gold (NYSE:FCX[8]), Rio Tinto (NYSE:RIO[9]) and Southern Copper (NYSE:SCCO[10]).

Jeff Reeves is the editor of and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[11] Write him at editor@investorplace??.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves did not own a position in any of the aforementioned securities.

  1. a breakdown in copper prices:
  2. GS:
  3. in my recent post here.:
  4. JPM:
  5. plans to launch an ETF linked directly to copper:
  6. CU:
  7. COPX:
  8. FCX:
  9. RIO:
  10. SCCO:
  11. “The Frugal Investor’s Guide to Finding Great Stocks.”:

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