This page has been archived and commenting is disabled.

Is Copper the New Red Gold?

madhedgefundtrader's picture




 

Federal detention centers in the San Francisco Bay area are slowly filling up with a new type of criminals. Illegal immigrants and petty drug dealers are being joined by a rising tide of copper thieves raiding abandoned government facilities for their heavy gauge copper electrical wire. At current prices a decent night’s haul can net crooks up to $20,000 at recycling centers.

Long known as “Dr. Copper”, because it is the only commodity with a PhD in economics, the red metal has long been an excellent forecaster of economic activity around the world. Hedge fund managers have been impressed by copper’s ability to hold up, and even advance in the face of “double dip” threats from the US economy. While demand for American home construction remains in the basement, this weakness is more than offset by surging demand from China, whose own construction industry remains on a tear.

It also helps that they’re not making copper anymore. Some of the world’s largest mines are reaching the end of their useful lives, with increasing amounts of capital being poured into ripping a declining grade of ore from the earth. Global production has fallen 12% during the first half of this year. This is a problem because the opening of a new mine can take as long as 15 years, once the time required for government approvals, infrastructure, water supplies, transportation, and yes, bribes, is added in. What’s in the pipeline is all there is for the next five years.

Copper is also benefiting from its accelerating “monetization.” International investors, disgusted with the choices available in global stock and bond markets, are increasingly diversifying into the red metal, as well as other “hard” assets like gold, silver, coal, oil, nickel, iron ore, and others. This is one reason why the big metals exchanges are finding their inventories at a low ebb. It’s anyone’s guess, but perhaps half of the current $4.40/pound in the copper price is accounted for by investor, as opposed to end user demand.

The obvious plays here are in the dedicated copper ETN (JJC), and the base metal ETF (DBB). Another candidate is Chile’s ETF (ECH), which has tacked on a blistering 13% since I recommended it a month ago (see “Chile is Hot” at http://www.madhedgefundtrader.com/august-2-2010.html ). And you can look at Freeport McMoran (FCX), the world’s largest publicly listed copper producer. And yes, you can even buy .999 fine copper bullion bards at Amazon by clicking here at http://www.amazon.com/Morgan-Copper-Bullion-SGS-Certified/dp/B003QASIR8/ref=sr_1_11?ie=UTF8&s=miscellaneous&qid=1283375380&sr=8-11 .

 I have some hedge fund friends who have discretely stashed thousands of copper bars in warehouses around the country, expecting the red metal to hit $6/pound within the next three years. If the doesn’t work out, I guess they can always ea their inventory by pursuing a new career as an electrician. Hey, a good union and a steady $70/hour paycheck, what’s so bad about that?

To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Fri, 09/17/2010 - 12:53 | 588080 Waterfallsparkles
Waterfallsparkles's picture

Problem is when there are too many people on the Boat the Boat sinks.

Fri, 09/17/2010 - 12:28 | 588023 Rogerwilco
Rogerwilco's picture

Peak copper! Peak copper!

LOL -- sure, like that makes sense. Cu is an abundant element and the mines in Chile will easily supply the world for decades.

But the Chinese economy is growing 15% a year, they will use it all up!

I love looking at 1000 foot trees, don't you MHFT? Isn't it a marvel how everything just grows to the sky, seemingly without limit?

Fri, 09/17/2010 - 14:28 | 588291 MrSteve
MrSteve's picture

Why, back in the day, I remember when silver was gonna skyrocket to Mars when everybody in China exposed just one roll of film per year, only one roll per person! Yes, indeed, the way you made a small fortune in silver was to start out with a big one. Now here, I see the same is true for copper.

There has been a huge reverse demand for copper since the US Mint stopped making cents with it. With a lot of gold coming as a byproduct of copper mining, sometimes the liar on top of the mine says the gold is free and sometimes they say the copper is free. Real men know it is rare earth metals that are in critical strategic demand. When the USSR takes over south african mines via trade union skullduggery, Oh wait, that was the 1980's story on minerals in Africa...is it different this time?

Fri, 09/17/2010 - 16:56 | 588573 Strongbad
Strongbad's picture

Its not 1980.  Things rarely happen the same way twice.

Fri, 09/17/2010 - 12:14 | 587997 D-Falt
D-Falt's picture

You undercut your essential thesis.  If they aren't making copper anymore, than it's essential value as a commodity is impacted by scarcity.  Any so-called "Peak Copper" hypothesis reduces its value as a market indicator because people are now investing in its scarcity as much as they are using it as a barometer for economic demand.

Fri, 09/17/2010 - 11:30 | 587914 Gromit
Gromit's picture

Copper is produced and stored as cathodes rather than bars, I think.

Images for copper cathode - 

I visited the largest copper mine (SE Arizona) in USA last year, took the tour.

Copper sulfate is leached out of the ore in liquid form, then electrolysed to create pure copper cathodes, maybe 3 feet square by half an inch, each weighing maybe 80 pounds.

So check those "bars" carefully!

Fri, 09/17/2010 - 10:58 | 587829 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

My parents live next to a closed copper mine. Yeah, the copper is just flying out of the ground making their neighbors wealthy. You are so full of sh*t MHFT.

Fri, 09/17/2010 - 10:58 | 587827 TrulyStupid
TrulyStupid's picture

For an undervalued copper/polymetal play try out NIB on the TSX

Mega due dilligence required..Draw your own conclusions

Fri, 09/17/2010 - 10:43 | 587788 DR
DR's picture

"Hey, a good union and a steady $70/hour paycheck, what’s so bad about that"

lol...like you can come back to the real economy and easily get a job for $70..

 

Investment in commodities is water cooler talk at work-remember the middle class can now play WS broker. If Joe cube drone is talking metals where are we at?

Fri, 09/17/2010 - 10:47 | 587803 ATG
ATG's picture

Bingo.

MHFT = Joe Sixpack?

Fri, 09/17/2010 - 10:46 | 587759 ATG
ATG's picture

What would a MHFT post be without extensive self-promotion near the end of a giant move?

Based on Fed performance, a PhD in economics is about worthless for free markets. $70 an hour jobs are few and far between today thanks to US Central Planner policies that exported American brains, capital and labour.

Remembering the US GDP is three times that of PRC may somewhat modify the analysis. China may no longer be building one or two coal power plants a week as the shibboleth goes. There is another explanation for declining production, and that may be declining demand.

Which leads to the next point: it wasn't all that long ago that Sumitomo had a rogue copper trader pumping the Hg market, which dumped ferociously after he was caught, losing between $1.8 and 4 billion for Sumitomo in 1996. One may be forgiven for wondering why Sumitomo did not quietly hedge short after they found the unauthorized speculative longs. Perhaps the Sumitomo analyst was talking the Sumitomo trader's book and it was a question of face and honour, something currently in scarce supply now back in the good old USA and UK as we saw with BP, GS, LEH and a few others.

http://www.highbeam.com/doc/1G1-18621984.html

Ditto Palladium, which cost Ford almost a billion after it bought Pd at $1500 from Englehard at the top of the market, like Gray Davis, governor of CA, bought energy at the top of the market from Enron. The smart inside money profits at the expense of those less-informed.

http://www.russiajournal.com/node/5795

Bottom line: there is a big difference between conducting business profitably and speculative hoarding. Hedging can become the latter, as we saw with ABX last year, and AU this year, buying back production hedges trapped at the top of the market. Thinking we are smarter than the market can epitomize the failure of hope over experience.

http://www.theglobeandmail.com/globe-investor/barrick-wipes-out-its-gold...

http://everythinggold.blogspot.com/2010/09/anglogold-nyseau-closing-hedg...

Anyone with access to COT can ascertain 40.2% of the open interest in copper is managed (speculative) money.

http://www.cftc.gov/dea/options/other_lof.htm

Although Chile's Codelco may be the world's largest copper producer, treating a country like a company, ECH, may be hazardous to wealth, particularly near its trading target of 76.

http://stockcharts.com/charts/gallery.html?s=ech

The Controlling PhD equivalent in Copper free market economics may be SCCO, which, despite +50% potential, appears to be way ahead of itself at 33.

As often, people get bored near the bottom and excited near the top...

Fri, 09/17/2010 - 10:05 | 587699 count_de_monee
count_de_monee's picture

Hmmm, I don't agree with your thesis and your "facts" seem questionable.

You say "This is one reason why the big metals exchanges are finding their inventories at a low ebb. It’s anyone’s guess, but perhaps half of the current $4.40/pound in the copper price is accounted for by investor, as opposed to end user demand"

 

Not so. Actually copper inventories are pretty damn high at the moment. I do agree however that much of its current price is derived from speculators, much like oil in the go go days of 2007/2008. what happens if/when the stock market takes a dive and all those speculators need to unwind those positions?

http://www.kitconet.com/charts/metals/base/lme-warehouse-copper-5y.gif

 

If anything I think copper is a good short right now.

 

 

Fri, 09/17/2010 - 09:52 | 587664 Bearster
Bearster's picture

Don't confuse buying on credit/margin with monetizing the metal.

The ratio of stocks to flows for copper is nowhere near what it is for silver, much less for gold.

The tide of speculators can wash out as quickly as it rolled in.  Caveat emptor.

Fri, 09/17/2010 - 09:01 | 587570 orangedrinkandchips
orangedrinkandchips's picture

My last post should have included this little ditty....thanks to Tracy...she's spot on..

 

http://www.youtube.com/watch?v=2Xi8NvSetZc&ob=av2n

Fri, 09/17/2010 - 08:59 | 587564 orangedrinkandchips
orangedrinkandchips's picture

I was in Florida this April waiting for a pizza watching the news....

 

..these guys basically backed up a big truck to an electrical station or something like that and tied up the truck to the huge copper lines...about 120ft long each IN THE GROUND....IN THE GROUND..and they ripped it up...just took off WITH THESE COPPER LINES!!!

That is on top of the predatory warnings for old folks about people who want to check your Air Conditioning...yeah, they check it on their truck and off they go JUST FOR HTE COPPER.

I live in Chicago and about 9 mos ago I heard about someone who stole BLEACHER SEATS FROM A HIGH SCHOOL...cause they are aluminum...Just ripped them off the screws....

 

BUT EVERYTHING IS JUST FINE.....THE MARKET WILL NOT GO DOWN! WHY SHOULD IT....

 

Fri, 09/17/2010 - 21:21 | 588974 nmewn
nmewn's picture

"I was in Florida this April waiting for a pizza watching the news....these guys basically backed up a big truck to an electrical station or something like that and tied up the truck to the huge copper lines"

That was us. We noticed alot of people from Chicago eyeballing our stuff.

Fri, 09/17/2010 - 23:31 | 589132 Trial of the Pyx
Trial of the Pyx's picture

+1

 

lol, scrap theft is news?  really?  where have you people been?

Fri, 09/17/2010 - 21:01 | 588946 1fortheroad
1fortheroad's picture

Hey, they were stealing man hole covers off the streets not that long ago.

Fri, 09/17/2010 - 09:54 | 587670 Hunch Trader
Hunch Trader's picture

That reads just like Soviet Union after the collapse. Metal thieves stole anything they could get their hands on.

If the US downturn is getting that bad, it means stocks are some 75-80% too high now.

 

Fri, 09/17/2010 - 08:47 | 587537 eigenvalue
eigenvalue's picture

The analysis relies on the assumption that the Chinese economy will be ok in the coming years even if the US collapses. Well, most of us agree the US will collapse because of too many dollars being printed.  Since the bulk of the assets of the Chinese central bank is UST, what do you think the RMB will become while the dollar becomes arsewhipe? A hard currency? So gold and silver are better choices than copper to bet China.

Fri, 09/17/2010 - 08:26 | 587501 swanpoint
swanpoint's picture

1982, penny.

Fri, 09/17/2010 - 21:16 | 588969 nmewn
nmewn's picture

Ping!

Fri, 09/17/2010 - 08:18 | 587492 Moric
Fri, 09/17/2010 - 08:07 | 587478 eigenvalue
eigenvalue's picture

Copper? No!!If you want to make a fortune from the so-called "China Factor", you should buy agriculture products, especially cotton!! For years, the Chinese farmers have been moving from the countryside into sweatshop in cities because it's extremely unprofitable being a farmer in China!! More and more arable land in China is either used for real estate developement or being deserted or being seriously polluted. If you go and visit a Chinese village, you will find people living there are either above 60 or below 16.  Who's gonna feed the 1.3 billion Chinese?

The bottomline: Go agriculture products!!!

Fri, 09/17/2010 - 08:23 | 587497 GoldSilverDoc
GoldSilverDoc's picture

Are all the exclamation points some kind of secret code?

Fri, 09/17/2010 - 08:53 | 587552 eigenvalue
eigenvalue's picture

Yup, a form of secret code to communicate with a KGB agent, known as Annie Chapman.;-)

Fri, 09/17/2010 - 10:57 | 587825 dark pools of soros
dark pools of soros's picture

you are feeding people with cotton??  that sucks

Fri, 09/17/2010 - 20:21 | 588881 eigenvalue
eigenvalue's picture

Just look at how the ICE cotton has been performing these days. It sucks? Cotton has the strongest fundamentals among all! Buy cotton!

Fri, 09/17/2010 - 08:21 | 587495 GoldSilverDoc
GoldSilverDoc's picture

Are all the exclamation points some kind of secret code?

Fri, 09/17/2010 - 07:55 | 587461 Treeplanter
Treeplanter's picture

I sold off some copper mining shares in 09 in favor of gold and silver juniors.  Copper has risen about 30%.  Makes me curious about where those copper miners are today.  However, the PMs are headed for moonshots, copper is just going to the top of the mountain. On the other hand JPM and GS are not likely smacking down copper. It's worth looking at.  But the futures market is a suckers game unless you are very good at it.

Fri, 09/17/2010 - 07:20 | 587420 wcvarones
wcvarones's picture

Speculators are driving up prices!  We have to make it illegal to invest in copper!

Fri, 09/17/2010 - 08:56 | 587558 Djirk
Djirk's picture

agreed and other essential commodities! It is a giant wealth suck from the people that produce and consume to the money manipulators. Serious drag on production.

 

Fri, 09/17/2010 - 08:44 | 587376 mrgneiss
mrgneiss's picture

Good article.  I believe China is bringing online one new coal fired generating plant something like every three weeks.  That in itself is a lot of copper for the plant and the power grid connections.  Copper miners should see some steady gains over the next couple of years compared with phenomenal gains by silver and gold miners, explorers.

Not to nitpick, but the current copper price is $3.40 per pound.  Does that change your assumption that currently half the price is speculative?  Or do you think that true non-spec demand should put it at about $2.20/lb?

Fri, 09/17/2010 - 04:23 | 587318 Testicular Cancer
Testicular Cancer's picture

Copper bitc.... oh I wont go there. But really, just how many metals can an average Joe get into. Not saying that Cu is not essential, god knows it is my guns' preferred projectile metal of choice. But gold & silver & may be a little platinum is about all I can digest for now. Unless they greatly outperform the precious metals & I dont need a storage unit to keep the physicals, whats the point?

Fri, 09/17/2010 - 06:08 | 587382 mrgneiss
mrgneiss's picture

Take a look at some copper producers and explorers.  Unlike many other industries where it is almost impossible to increase your margin unless you are a monopoly, miners in some industries can do this.  Say break even is at $2.00 per pound.  At $3.50/lb you're making a nice profit; copper goes to $5.00/lb you just doubled your profit.  What will that do to the share price?  Most companies have to spend money just to increase sales.  The only thing that may be more expensive if copper goes up is oil, and that will eat a little into the margins.  Eventually however, at those prices demand will slack off and/or more supply will come online (until we really run out!), the trick is to get in early and ride the wave, and know when to get out.

I think there are some producers on the AMEX, I know there are a lot on the TSX and most of the explorers are on the TSX-V.

Fri, 09/17/2010 - 12:29 | 588028 Augustus
Augustus's picture

There is no shortage of copper.  There IS a shortage of developed copper mines.  As noted, it does take time to increase production.  That is why the solution to shortages is High Prices.  There will be a great deal of supply added in a few years, paid for with the cas generated by today's high prices.  Such are the days of our lives.

Fri, 09/17/2010 - 06:14 | 587384 mrgneiss
mrgneiss's picture

I didn't really answer your question which was: "What's the point?"

Well, I did some research at 24hgold last fall, and found what I thought was a very undervalued copper explorer, Copper Fox, CUU (TSX-V), I got in at $.12 and sold when it was in the high 20's (cents).  Now it's in the $.80 range. 

Do NOT follow this link or you will be banned from the site!