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.