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Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Will Copper Become the “New Gold?”

Commodities / Metals & Mining Feb 09, 2010 - 05:54 AM GMT

By: Money_Morning

Commodities

Best Financial Markets Analysis ArticlePeter Krauth writes: The Statue of Liberty is one of the most recognizable American icons in the world.

And as she towers 305 feet above Ellis Island, what's Lady Liberty wearing? Copper - 60,000 pounds of it.


Clearly, copper's big in art. It's also a key metal that keeps the world economy humming. Copper consumption has grown at an average annual rate of 4% since 1900. China and India - which some analysts describe as the combined market of "Chindia" - where one of every three human beings resides, needs loads of this element to meet its modernization requirements for electricity and infrastructure.

Copper is also used in today's currency, where most U.S. coins are actually 92% copper, and 8% nickel.

But there's no denying that, given the choice, nearly everyone prefers gold. It's valuable, it's seductive and it's mystical.

Ancient kings fought wars to amass it. Yet, for thousands of years, its most enduring role has arguably been in the form of money - as a store of value.

That's because fiat-paper-currency experiments have never lasted, and always ended badly.

Increasingly, followers of the Austrian School of Economics are nostalgic for gold to regain its former glory, perhaps "backing" a new international currency.

But despite gold's much longer history as true money, some believe that copper - the much humbler metal - could be positioning itself to upstage gold.

China's Paper Mountain

If copper is to replace gold as the world's most-valuable metal, China will have to play a huge role. With all its uses - from hybrid cars to an electricity grid - copper may become both an inflation hedge and a strategic asset.

Today, China sits atop a paper Everest, with foreign-currency reserves worth more than $2.4 trillion. No public financial institution boasts that degree of financial-asset firepower. Of that total, more than $800 billion is held in U.S. debt.

A war chest of this size serves as a great insurance policy during tough economic times. The trouble is that China is painfully aware of the damage that U.S. dollar inflation will inflict on that massive hoard of greenbacks.

During a visit to New York last February, Luo Ping, a director general at the China Banking Regulatory Commission said: "We hate you guys. Once you start issuing $1 to $2 trillion... we know the dollar is going to depreciate, so we hate you guys, but there is nothing we can do."

That's not completely true - there are some things that China is already doing. When that Asian giant recently announced an increase in its official gold reserves, it said the total had catapulted by 76% since 2002, reaching 1,054 tons. China accomplished this without a single purchase on global bullion markets. How? By quietly becoming the world's largest gold producer, then buying up all that it produced.

Red Gold to Back a New Currency?

I expect China will continue to covet gold. But with such a large reserve in dire need of both diversification and securitization, this emerging global superpower of 1.3 billion citizens has set its sights on other tangibles. Let's face it, the gold supply is small, and China needs resources of all kinds.

So it makes perfect sense for Beijing to trade holdings it has too much of - like U.S. Treasuries, for example - for assets China needs more of, like copper. There are multiple benefits to this strategy, too: Not only is China swapping a holding whose value is declining (dollar-based holdings) for a tangible asset whose value is on the rise (copper), it's also getting (in copper) an asset that's central to its ongoing infrastructure build-out.

Yet some believe that China's actions reflect a new strategy, since this acquisition binge goes way beyond national consumption requirements. And with a full war chest, that buying could be sustained for some time.

Copper could be used to back a currency, but it's also necessary for the modernization of China, and even in the next wave of automobile technologies - both electric and hybrid - an industry this nation could lead.

China's share of the copper market is a world-dominating 38%. Clearly, its 2009 record import levels helped vault the copper price by 226%, from its January slump of $1.50 per pound to a recent high near $3.40 per pound.

As China was buying hand over fist in early 2009, copper prices began to rebound. London Metals Exchange (LME) statistics underscore that copper stockpiles were raided from February until mid-July.

What happened next, however, was both surprising and counterintuitive.

As copper stocks continued to rise in the second half of 2009, the price of copper rose, as well - zooming from $2.50 a pound to about $3.40. The last time copper stockpiles were above 500,000 tons, the metal's price was $1.50. So copper at $3.40 was looking quite overbought considering current stock levels.

Dr. Copper's Diagnosis

Commodities traders often refer to this all-important non-ferrous metal as "Dr. Copper." Its price and supply/demand characteristics are widely assumed to reflect the health of the world industrial economy, hence its "Ph.D. in Economics."

Given that reputation as an excellent barometer, it's tough to understand just what's keeping copper prices high at a point in which the risks of a double-dip recession worldwide are exceeded only by the fears of one.

So what's propping up copper prices? For one thing, hedge funds are taking physical positions in the metal, rather than through futures contracts, due to concerns the Commodity Futures Trading Commission (CFTC) will bring in position limits.

What's more, China's State Reserves Bureau has purchased large amounts of copper, pushing the nation's year-over-year imports up by 63%.

The Longer-Term View

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.

But that doesn't mean - in the intermediate term - that copper hasn't gotten ahead of itself. Look for its price to weaken somewhat before the price of the metal resumes its upward trajectory.

Even if a new international commodity-backed currency were to emerge, it's likely that copper will only be one of its underlying components.

For now, copper will continue to be overwhelmingly used in industry and infrastructure, with 75% of output going into electrical applications.

From my vantage point, gold will remain the ultimate form of money, while copper will retain its Ph.D. in Economics.

That's why I'm not expecting copper thieves to steal Lady Liberty's dress and melt it down, but I do expect copper to become increasingly valuable as our secular commodity bull rages on.

The last question investors need to answer is a simple one: How do I profit from this trend? If you're looking for a simple way to play copper directly, check out the iPath DJ AIG Copper TR Sub-Index (NYSE: JJC) Exchange-Traded Note. This ETN tracks the price of Copper High Grade Futures Contracts traded on the New York Commodities Exchange.

[Editor's Note: Peter Krauth is a contributing editor to Money Morning and is also the editor of the Global Resource Alert advisory service. A highly regarded market analyst and expert in metals and mining equities, Krauth specializes in energy- and resource-related investments.

A one-time portfolio advisor, Krauth is now headquartered in resource-rich Canada, where he focuses exclusively on his research. He last wrote about gold's potential to be "The Greatest Trade Ever," and detailed how super-investor John A. Paulson could use his gold holdings to vault himself to the top of the Forbes billionaire's list.

For more information on profit opportunities in gold and other commodities, check out the Global Resource Alert.]

Source: http://moneymorning.com/2010/02/09/copper-new-gold/

Money Morning/The Money Map Report

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Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

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Comments

carlo
27 Apr 11, 01:06
copper and molybdenum: 2 peas in a pod

Molybdenum the new Gold ! 9 reasons why investing in this commodity makes sense:

 

#1 An investment will and should be in a precious metal needed for life to occur, plants and animals need Molybdenum to live. There is nothing more fundamental or basic than an element. We need elements to build or grow anything. We need Molybdenum (an element) to grow any plant or life form. There are 3 types of elements: poisonous, inert and life giving. Which elements would you want to be around? Which elements would you keep away? Gold does not support life. Silver does not support life. As for Platinum, Palladium and Rhodium you can probably guess what I will say next. Molybdenum is the finest metal to be a part of (literally). Molybdenum has many uses. Invest now while it is cheap!

#2 Molybdenum has the lowest abundance of the life giving elements in the Earth's crust (other than industry useless Selenium) at 1 ppm (0.0001%).

#3 Molybdenum has the 6th highest melting point of all the elements, and by far the highest melting point (4753 degrees fahrenheit) of all the metals needed for life.

#4 If I were leaving Earth forever, I would build the ship out of Molybdenum. I could grow hydroponic plants which need Molybdenum and other life giving elements to survive. I would not bring Gold with me.

#5 China has high rates of esophageal cancer and/or strokes because of low Molybdenum amounts in their soil. To fertilize farmland you need half a Pound of Molybdenum per acre (International Molybdenum Association)some websites suggest up to 6 pounds per acre, on a 1-3 year basis. There are about 1 billion acres of farmland in the U.S.A. and billions of acres of deficient farmland worldwide, which clearly means there is not enough Molybdenum for everyone.

#6 Nuclear power is not leaving, nor are oil and gas pipelines. Nuclear power plants need high Molybdenum content stainless steel cooling pipes (6.5% or higher Molybdenum) because it prevents corrosion. Salty ocean water is very corrosive to the water cooling pipes. All nuclear power plants are near large bodies of water and need lots of water for cooling the reactors. Pipelines use high amounts of Molybdenum and will be using higher percentages of Molybdenum content in the future to combat corrosion and reduce friction of crude oil delivery in the pipelines. Corroded infrastructure and new infrastructure will need Molybdenum for the Steel used. Molybdenum also greatly enhances Steel strength.

LUCKY #7 CHINA IS CALLING MOLYBDENUM A NATIONAL RESOURCE AND IS LIMITING THE MINING OF MOLYBDENUM BECAUSE THEY KNOW IT IS MORE VALUABLE LEFT IN THEIR MINES AND IN THE GROUND, THEY WILL BUY EVERYONE ELSES AT LOW CHEAP PRICES NOW. THEY WILL IMPORT THIS METAL. THE BIG NEWS ON HOW MUCH THEY WILL LIMIT THE MINING OF MOLYBDENUM IS DUE TO COME OUT IN 2011.

#8 The world total yearly amount of Molybdenum mined and CONSUMED is 500 million pounds. What does that amount look like? Well it's 150 meters x 150 meters x 1 meter high . That is not much at all! ONE huge project could easily consume this all.

#9 ONE investor could buy the whole planets yearly Molybdenum production for $8 billion dollars (Jan 2011). Molybdenum only costs $1 per ounce. In comparison, to buy all the Gold that is available and that has ever been mined, it would cost you $7.4 trillion dollars (Jan 2011) to buy the 375 million pounds of useless bling!

Carlo Biancardi (London, Ontario)

seeking alpha instablog for more info


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