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Crude Oil and Copper: Better Value Than Gold
By Dian L. Chu, Economic Forecasts & Opinions
There have been some nice pullbacks in commodities like copper and crude (Chart 1), which should trend significantly higher by year-end. Both crude oil and copper tumbled after the Labor Department May jobs report and the fear about Europe heightened by the total clueless-about-financial-markets comment from Hungary’s Prime Minister.
Crude oil declined the most in four month with July delivery dropping 4.3%, to $71.40 a barrel, while Copper for July delivery also lost 4.3%, to settle at $2.81 a pound. Meanwhile, gold for August delivery, bucking the trend, added $7.70, or 0.6%, to $1,217.70. (Chart 1)
Copper, Crude vs. Gold
Copper and crude oil are both base essentials heavily reliant upon by economies globally for everyday usage, with no meaningful substitution options. Gold, on the other hand, is not as essential to keep the everyday world running seamlessly, and could conceivably be substituted by other commodities with a change in global monetary standard or people’s perception.
From that perspective, I think there are a few recent trends pertaining to crude and copper that are being misinterpreted or overlooked by the market, and I will discuss some of them here.
China Destocking = Future Strategic Buying
One recent trend that worries the market is that China appears to be eating into some of its commodities reserves. Imports from China in markets such as refined copper, iron ore and lead have declined in the last few months, which could also be a factor behind the recent drop in prices for those commodities.
This has prompted several investment banks sending teams of analysts to China to gauge actual demand. Through field visits and data mining, the analysts have concluded that Chinese domestic demand still is strong. They surmise commodity imports are declining at least partly because the country and its industrial companies are tapping reserves, possibly because they expect prices to fall further, reports the Wall Street Journal.
It is conceivable that China could be taking advantage of its market position putting downward pressure on current commodity price levels through destocking. This tactic could set the stage for a fairly strong strategic buying from China in order to rebuild the stocks depleted over the last several years. Metals such as copper will be needed for China's aggressive infrastructure program and to hedge its foreign reserves against possible currency devaluation in the future.
Higher Cost Base by Tax & Restrictions
In addition, there are two recent events—the Aussie mining tax, and the expected future restrictions regarding deep-water drilling in the U.S. —that are currently being overlooked by the market.
These two new developments mean that costs for getting both commodities out of the ground/sea and to consumers are going up, miners now have higher profitability thresholds to meet in evaluating future projects, and the current drilling moratorium and future legislation is sure to increase the per barrel extraction costs, and decrease future supply, thereby causing the price of oil and copper to rise considerably in the future.
BDI Suggests Contango Trade
With this recent pullback in both of these commodities, coupled with low storage costs right now due to many available cargo ships and unoccupied warehouse space available, smart investors are going to buy these commodities and store them just like central banks store Gold causing the available spot market supply to go down, thereby raising future prices.
So, with such relatively low available storage costs, and new regulatory restrictions guaranteeing higher prices in the future, market players are putting crude oil and copper into storage, similar to storing gold in a vault, as an inflation and currency devaluation hedge.
This probably partly explains the recent run-up of the Baltic Dry Bulk Index (BDI), and the decoupling of BDI with the prices of crude oil and copper, as the BDI typically should have a positive correlation with the price of commodities. (Chart 2)
Red, Black and Gold – The Same Glitter
It seems highly probable that Crude Oil and Copper, although not as glamorous as Gold, are actually the better commodity plays going forward. Expect Oil to be well over $100 a barrel in 2011, and Copper to break the $5 a pound barrier as well.
Jobs Picture To Improve
This all assumes that we don’t have the end of the world depression scenario. But despite all the negativity and over-reactionary tendencies of modern culture, it seems that human civilization continues to improve processes, invent new technologies, and overall improve the quality of life of each successive generation.
As such, and to reiterate my previous article regarding the May jobs report, there will be plenty of future jobs required along the way as civilization advances towards greater achievements, so rather than the latest jobs report being viewed as a dismal failure on a short-term analysis, the overall jobs trend is quite bullish and the economic recovery is still intact (as confirmed by the majority of economic data for the week.)
Out of Treasuries, Into Oil & Copper
Once investors recover from their initial reaction to hide out in treasuries, the fed rate of zero percent for the rest of the year makes this an unattractive place to be unless the world is coming to an end, which I think is an unlikely scenario.
Since the Fed is incentivizing investors to take risks, to spur economic growth and move the ongoing recovery forward, it makes rationale sense to move out of treasuries into growth assets like Oil and Copper which remain critical components in any economic recovery, and are cheaper than ever on an inflation adjusted basis within this paradigm of unprecedented loose monetary policy.
(Note: Some of the commodity related investment options were discussed in my earlier article - Commodities: Time to Go Long nd Physical.)
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There is alot more oil, copper & tree's than Gold
QE to infinity !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
At $500 gold my old timer broker friends said gold was overowned, sell that bullion and buy stocks (stockbrokers dont make commish on bullion) then at $800 said it was really overowned but now at $1200 they just ignore me.
When will people who say gold has no utility like copper or oil realize that paper money is merely a sanctioned medium of exchange. Its like telling someone you can get more high off vodka than beer just because they are both legal, when probably everyone should at least be on weed. (Alcohol=overowned)
Now if someone can find me a better investment than gold that has an opposite sine wave to the market we can have a discussion, but the correlation between oil or copper and what most people have in their investment accounts too closely approximates one for my liking.
Probably just echoing other comments here, but how exactly do you store and secure physical copper and crude oil without significant resources at your disposal?
What's that you say? You meant paper commodities? How will I use those if I can't redeem them? Have you factored in the risk adjusted return on commodities futures leveraged at 50:1 or greater, when most of that is not actually deliverable? If you do manage to pull off delivery of a portion of the contract, again, what exactly are you going to do with a shitload of copper or crude oil?
I think this article is more relevant in today's circumstances:
http://www.gold-silver.us/what_silver_gold_buys.html
I see this article as making sense, depending on your time frames and how you are investing (all though I see no one else does).
As far as using ETF's to invest in copper, I think it's too soon on copper as that won't increase until contagion spreads across the seas and bonds are no longer a safe haven.
However, I have been accumulating a supply on physical copper from all the abandoned foreclosures around. It's perfectly liquid at the weights at any metal scrap yard, and I sold for good money after the late 07 crash, now I'm just accmuluating.
Oil - in the ETF's I do have a small and mostly hedged possition, but I do think mideast politic explosions are not unlikely and there also could be shortage fears if we start to realize how much of the oil the companies say we can depend on cannot actually be accessed safely as they claim.
I haven't found a way to feasably physically store oil yet, but I want to. In a situation of a complete failure of the US and worldwide governments, any supply of physical oil would become incredibly valuable and most likly one of the most liquid items in barter also.
I hold gold too, but no reason not to look at ideas to diversify.
Panglossian.
Deep water drilling, depths of 5000 to 12500 feet....its gone. Way too risky...forget Brazil, India, and China in their deep water hopes and dreams..forget even Alaskan shallow water (1000 foot or less) production, forget undoing the the long term offshore USA anywhere...reverberations of Santa Barbara 1970 spill....mark this time now as the definitive 'Peak Oil' scenario...invest accordingly..
Dear AsiaBlues- Knocking Gold is not allowed on this siste. Freedom of speech etc doesn't hold sway on zh. They like "gold bitchez".
lol, what's the fun if everyone agrees on everything at zh?
That was a strawman.
We welcome your moon-bat ideas, for the material is very entertaining to shred.
c'mon AR, the market is broken, not the article's logic.
let the insults go. you usually contribute much better stuff.
george porge
nothing here about freedom of speech
its about the ability to talk and chew gum these folks do plenty of the talk,, when it comes to chewing gum they are way off.
and your about a 29 year old zit head .. off to work . at the local rendering plant ,
. with two pots to pizz in .. one with a hole in it.. the other shared with the area dogs
all the posts are about the content of the speech,, nothing about freedom of speech , .
of course you have no idea about the the remarks and the points of difference and just post drivel ..
And please do your rendering at a higher temperature so that we don't continue to experience this epidemic of Creuzfelt-Jakob disea--er, Alzeimer's, ahem.
in a relatively normal market, your premise makes sense in the context of a recovery.
this market is bent beyond recognition and is being held together with dental floss. probably used dental floss.
your logic is worth saving for 10+ years down the line. 'til then... hold on, folks.
"Gold, on the other hand, is not as essential to keep the everyday world running seamlessly, and could conceivably be substituted by other commodities with a change in global monetary standard or people’s perception."
Bullshit.
raise and make it a double bullshizky
People want to keep their wealth long enough through crisis (financial crisis, or even war). Gold is obviously a better choice. When financial system collapse, wealth kept as crude oil or copper in warehouse will have very high transaction cost to exchange for something you need. Trading gold don't need a financial system. People just take it without hesitation.
CRUDE and COPPER still have bearish charts.
http://stockmarket618.wordpress.com
http://www.zerohedge.com/forum/latest-market-outlook-1
This all hopes rather than assumes, right?
The deflation scenario is baked in, the world oil price is about 60% too high to allow any sort of profitable real world enterprise, particularly within a massive and expanding consuming infrastructure that is profitable only with extremely cheap inputs.
High prices allocate (deflation) rather than stimulate (inflation).
I won't go through the mechanism again. Maybe later.
In real terms (measured against output) oil is expensive and becoming moreso. Period. It's been increasing in cost since 1998. It is about 600% more expensive that it was then. Why are we in a depression (already) again?
What is in question is the outcome; high nominal prices cause economic heart attacks. High nominal prices mean that oil is 'expensive' and the dollar that buys it (or other currency) is not worth very much. Low prices under the current constrained supply situation measn oil is expensive but the increase in value is transferred to its dollar proxy.
As the dollar becomes increasingly valuable it disappears from circulation amplifying its own value while it degrades the value of all other assets. In deflato- world, oil is cheap but nobody has any cash.
Priced in oil, dollars are worth something.
Public perception matters, but in (finance) markets the trader's perception matters more. As more traders realize - as has the smart money already - that the dollar has value, other assets will be dumped in markets so as to gain dollars. See what the Iranian government decided to do a few days ago.
The long term outcome of this dollar preference stuff is a LOT smaller economy- a cash economy.
Gold: leveraged institutional holders of gold will be margined out of their positions as the dollar preference gains a further grip on the world's neck (economies). In panics, large gold holdings will be liquidated. Plus, central banks will sell gold for dollars. Be nimble, hold cash (dollars) and you can buy some gold, cheap.
We'll speak about selling the gold, later. (Notice how nobody ever talks about selling their gold?)
No dollars, no crude oil. No crude oil, no 'modurn' economy.
another guy goes bullish on a 30 year market top.....
if you couldn't see the housing bubble then you cant see the treasury/dollar bubble
Strong Dollar = Low oil prices. Simple.
Steve, I sense there is real value in what you have to say, but feel I'm too dense, albeit rational, to really get it. Perhaps your style is just to dense (compact) for me. I even copy your postings for later perusal. I don't presume you are here to educate people, but merely voice your point of view; nevertheless, I will show you how I am understanding or misunderstanding your post.
First, I can see how since oil is priced in dollars, that makes the price go up for those whose currencies are declining against the dollar. But for Americans or Chinese, I would assume ceteris paribus that the price remains the same. But you seem to be saying that oil is too expensive for Americans as well, because we have deflation.
The deflation idea seems to be that as people lose their jobs and their investments collapse, they have less money to spend and therefore, even if prices drop, the rate of dropping cannot keep up with the loss of money experienced from these factors. Conversely,with inflation, the rate of price increase exceeds the increase in incomes.
I've heard this clever notion that the dollar becomes valuable by becoming scarce. But how is the dollar scarce with all the printing by Benny? Are FRN's all that count? Or does the velocity of money have something to do with it? How are dollars being taken out of circulation? I would assume that this is the inverse of what occurs in inflation. I assume with inflation that--aggravated by fractional reserve banking with its "multiplier"--as assets increase nominally in value they become collateral for increasing borrowing, which leads to further asset price increases. So in deflation, this process is inverted and the multiplier of fractional reserve banking gets transmuted into a divisor?
When you use the figure 600%, here's what I think you are saying. Taking the average rate of inflation into consideration since 1988, and using that to discount the price/barrel of oil back to 1988, we would arrive at a figure that is six times higher than the actual price at that time. (I'm sure I'm not getting this!)
Anyway, even if you don't reply to this post, thanks for your insights!
Claws,
The deflation/inflation thing seems to be the debate of the decade. As I understand it, the deflation is not in your cost of living, but rather in the air going out of the debt bubble.
Example: Suppose I lend you $100. You take the money and put it in your account. I now have an asset with a face value of $100. Now suppose you default. My asset disappears. I pressure you to get something back, and you scratch around for cash. So, in that sense, dollars are getting scarcer, even though they buy fewer and fewer of life's necessities. What deflates is those assets (houses, cars, strip malls, bonds, stocks) that were pumped up by easy money.
The bennie bux being printed mostly stay out of circulation, as the Fed pays interest on the 'reserves' that it holds for banks. This is easier money for the banks than lending into a declining economy.
Some say de-, some say in-flation. Others say deflation followed by inflation. I don't know; it may depend on political choices which have yet to be made. It's a hall of mirrors. A genius could play this market, but regular slobs like me go for the heavy yellow.
Goldbricker, thanks--I can see some similarity in what you say regarding deflation to what I was striving toward. Looks like your instincts are being confirmed at this moment regarding that yellow stuff.
The last 2 years the market has been flooded with newly build drillships. All these where ordered in the years 2006 and 2007 because of ever rising oil prices. Oil to 200$ remember?
Now there is a oversupply in America alone of 97 drillships and about 250 worldwide.
They can't put all those on idle because of the high finance costs, so they all start (or try to) drilling and oil prices will go down even more because of it.
Also the middle east is still in need of cash. The only thing they've got to sell is oil. And when oil prices go down, they'll try to sell more to cover the loses.
I see oil arround 52$ before the end of the year, and not 100$.
Now peak oil will get another meaning: "The supply was never bigger then in 2010".
oil
put the oil in you hair
burma shave
You simply don't understand that gold IN THE HAND, under one's possession is better than oil or copper because oil and copper are PAPER.
Oil at $100? That would tank any recovery.
That's crazy talk... Copper and crude are recovery plays, pure and simple. They are about to fall through the floor.
dumpster sold gold at 800 in 1980
have listened to this crap since gold 300 this time
little zit heads ,, with no experience talking book .
this song and dance is as old as the hills and means squat 'gold to 1600 then to 2500 and above ,
gold is money and will replace the paper ,, in spite of the dumb remarks..
its like these people have theri head firmly in the wrong place and read nothing else..
or are on the take ,, with a under"lie"ing hope for some sort of monetary gain .
Fuck this, thanks to low interest rates, we probably have burned 10 years worth of oil in 5 and dug up 10 years worth of copper in 5.
Gold bitchez
threads like these are almost as dumb as those buffoons on CNBC a few weeks ago who were saying "you have to buy oil, oil is money" while they tried to bash gold as a "purely speculative gamble"
while the chart on gold may look a little top heavy I'd buy gold before I bought any of those overly abundant industrial commodities
Don't count on the oil going much above $70 or so anytime in the foreseeable future. We and everyone has tons of oil. Use is down and that will deepen as the world's economy falters and as economies are moving as fast as they can from oil.
As for copper, I am checking pennies to see if they were minted before 1983and if so, I am putting them in a jar. Copper pennies are still around but are becoming fewer as copper pennies are being taken out of the system. Eventually they will be rare and collectible. BTW a penny is worth 3 cents in bouillon.
sybil. you may be mistaken about that oil. Its getting more expensive to retrieve and china is in the car and road building stage with an enourmos amount of people. They are just coming into their own and will prosper while we go down. Sorry, its written in the wind(and their planning)
GLD ETF...the people's Central Bank
Yeah right buddy, and it's also fractional reserve.
Bottom line: the gold isn't there.
isn't that what he just said?
Copper and Oil will both do well, however you really should view gold as no different than having cash because it is money and we are in a deflationary spiral compared to real money.
From the research I have done it very well could turn out that copper will go up as a larger % gain than gold in the end. Remember it took only 4 pennies to buy a loaf of bread, in the 1930's copper was 9 dollars a lb. 9 dollars was roughly 9 ounces of silver which would put it at 180 dollars a pound making 1 cent worth roughly 1 dollar in today's standard which would actually buy you a loaf of bread. But all that doesn't take into account yearly supply and population growth comparisons so it is hard to say what its real price should be. But if I had to guess copper should be at least 10x what is worth today, after all copper maybe one of the less valuable metals it still has been used as currency for just as long as gold and silver as well.
Edit:
I was just looking again for a link to the paper I found quating the price, I believe it was 1933 but found a bunch of other articles dating 1920 saying 14cents a lb. So maybe I was wrong, i'll keep looking.
the only way gold crashes is if there is a debt jubilee - currency is fucked worse than the fish in the gulf
Fish in the Gulf? You still live in the year 2009?!
Nope, I picked up a good stash of CMD at $15 a month ago, this baby's got some room to run as this depression really gets going. Commodities will have their time, but it's going to require a whole lot more currency destruction, QE, probably riots and civil unrest, before they become a worthwhile play.
whos your choice chu asia blues .. a few years of reading tea leaves .. how much experience 10 .. 15 years ?
sinclair ,, dumpster takes sinclair 50 years experience in gold
how old are you asia blues .either or chu . sounds like a statement some one with no experience in the world would make
and what say you as the nations back their currencies with gold ..
Richard Russel thinks different so you fade him.. Jim Sinclair you fade him Jim dines fade/// dozens of Australian economist, mises .. fade them
some wisdom of john wooden
to be well over $100 a barrel in 2011, and Copper to break the $5 a pound barrier as well.
gold will be going on 1650 . 60% gain
oil and ten tank trucks 70 going on 100 gains 40%
the value of anything is distorted by the presence of leverage until there is much less leverage in the system one will never have any idea what the true value of something is.
More phantom job improvement? There is NO DECOUPLING--if Europe goes, we will be lucky to escape a depression.
Right, Europe and America are both the Western World.
It's us against the yellow menace.
What's bad for Europe is Bad for America, and what is bad for America is Bad for Europe.
It's not a game from who's worst off.
Mistake number one, treating gold as a commodity.
GOLD IS MONEY AND NOTHING ELSE.
Words of wisdom.Well said.
And mistake #2 was once again positing the false and ridiculous dichotomy of either:
1) Blue skies, lollipops and rainbows, or
2) Mad Max Armageddon, i.e., "The End of the World"
Any so-called "analyst" who cannot see beyond this wildly limited and simplistic self-imposed dichotomy ---- either everything is up from here, or else the cannibalistic zombies begin to march ---- has fully discredited themselves from making any meaningful forecast or economic analysis as far as I'm concerned. I neither believe in blind wishful thinking and pollyannish feel-good hopium, nor in the Mad Max, TEOTWAWKI scenario --- there are an infinity of possible outcomes between those two extremes which will certainly encompass the eventual reality.
This is nothing but Nadlerism at its worst.
+1
Too many people watching too many grade c apocalyptic films...and/or, too many people listening to end of the world 'Revelations' sermons.
Be prepared but don't be ignorant. Reading/comprehending history is better than a provisioned bunker most of the time. Doing both is not impossible.