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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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Sheeple definitely seem to be having a good time at the show bar in Blade Runner. Only 19 years away to my very own Pris!!
That's a classic straw-man tactic. Claim that the issue being discussed is something that it ain't, then demolish your own construct. Any article which uses this rhetorical device is immediately suspect.
Well said. It becomes more and more apparent every day that the Hope Junkies are beginning to see their utopia fading away. I think that some of the constant TEOTWAWKI b.s. coming from them, is that they truly fear it. It is the complete opposite end of their ideological spectrum, and for the first time, somewhere in the back of their brains, they are acknowledging that shit could actually hit a fan. They are utterly unprepared in EVERY way shape and form, so they ridicule what they fear most. Like a paper bug, who has no gold, but fears the goldbugs are turning out to be right.
Thing is akak, to your average pointy headed, granola crunching liberal, the thought of having to kick somebodies ass to keep them from cutting ahead of you in a gas line, or from taking your dinner..... equals Mad Max. I look at it more like for the first time, I'm no longer an angry sociopath.
+100
and we seem to be seeing more and more of this "either/or" attitude. must be a broad-stroke 'move-on.org' blog push or something. or maybe too much fox-tv/Glenn Beck :^) (fwiw - i like Genn Beck - in a mostly sort of way)
because i have life insurance certainly doesn't imply that i have plans or expectations to 'collect' on it in the immediate future, yet this is the attitude of folks who critique gold...
gold/PMs are simply a low-premium wealth insurance. one that the government hates. period.
it's OK though, akak - when you realize how these folks vote, and how they think, the last thing you really want is them to understand and follow you.
should that be their choice in the future, feel free share your lead.
I wont argue whether copper, gold, or oil is a better investment. If I could buy all the oil I needed for the rest of my life, and store it, I would. But, there is no practical way to locally store oil. Similarly, it is hard to buy and hold physical copper. I guess one could buy copper wire, but it would take lots of space to store it, and then when you wanted to sell, I am not sure how to sell it. The purpose of Gold is to eliminate counterparty risk by owning it under your control. The other two you would end up with a paper voucher, and would not eliminate counterparty risk.
old pennies....if you really have the urge. Still legal tender. Again, there is a storage space issue.
True. The biggest factor in gold is how people feel about it. Enough people believe it is valuable and that makes it so. When you want it and can't have it then it really seems valuable.
+1. I have been keeping a very close eye out lately, and I can honestly say that my lead holdings are outperforming all my other PM's. Who woulda thunk it? ;)
On "The Wire" Bubbles would haul his copper in a shopping cart to a local scrap metal dude. I figure that's how that goes down.
+ 500 Rebel.
I have thought about physically buying copper, but it is too bulky to store cheap for an individual. Oil, forget it.
I have looked at Rare Earth Metals as well (various non-substitutable hi-tech uses), but they are hard to get and probably illiquid.
Brings me back to Au, Ag, and Pt. Soon I will have some $FRNs coming in, I hope I can get more of each PM to add to my pitifully small mounds of each...
The major fault with your argument is that gold is not primarily a commodity but a store of value. And the second problem with your arguments is that there is no worldwide recovery, only a temporary blip up due to massive stimulus spending.
Is it wrong to think that copper is much more of a
commodity? In which case, the value of copper is
more heavily dependent on the world economy.
If a depression is in the cards (and most world
gov'ts seem to be going in the wrong direction in
terms of solving problems) then the value of copper
is not likely to rise much.
"Gold, on the other hand, is not as essential to keep the everyday world running seamlessly"
Have we learned nothing from the financial crisis, and the coming sovereign crises. It is essential to have a rock to stand on in the ocean of economic witchcraft
Oil will be a great investment, until it becomes a national security issue. Good luck cashing in after that.
good point but gold can be confiscated too as done by FDR during the Great Depression and all other governments in trouble. The only exception is countries where it is part of the culture like India but even in these countries the holding can be severely limited. So the only way to store value is to hold gold, silver and maybe even platinum as part of a portfolio of physical stock of valuable metals
FDR didn't get much gold when he confiscated. It's too easy to hide. But I agree it's worth having mining stock because it will be make you a lot more paper money, and even in Wiemer Germany good shares were better than paper money. We don't know what's going to happen. I've got real metal and shares. About half and half.
I traded some stuff today for Gold and Silver today.
I needed Health and Mana potions and new armor.
There went all my Gold.
1) Good luck changing peoples perception to gold as a store of wealth. That mindset is only millenia old....
2) Copper and oil can never be a true safe haven for investors and their ecominc useage will be decimated in a Depression , which is what we are fast approaching
3) Silver would probably be a better comdty to use as a hedge due to its industrial use. Do you know what one of its key industrial uses is? Its used in missles. And there are going to be alot more of them flying around.
4) If there are more missles flyingh around and less credit , what do you think will happen to corporate and consumer spending? Im not talking about Kosovo or Iraq conflicts here. Im guessing that globalisation takes it up the ass. Not conducisve to growth.
5) Which government are you working for?
6) Raw material commodities have an incredibly high beta to market growth. Good luck if you are wrong.
7) Basically , good luck with that.
I'll need to start working out more if I'm going to have to carry around 250lbs (that's assuming copper were to quickly appreciate considerably from here) to replace 1 oz of gold. And I'm going to need a bigger truck.....and a forklift to haul those barrels of oil around.
This is the first non-useless comment to this thread... Cost-of-storage is being neglected here... but it's likely trumped by governments' willingnesses to build massive reserve-storage facilities (see China's version of the SPR) to be able to maintain control over what they feel they need.
Yes; it's a very foolish article.
+100
You couldn't be more right. The entire article sounds like written by a pusher.
Back in 1930s, the USA and Europe were in a depression but Germany and Soviet Union had an industrial boom.
A depression in the USA and EU might only marginally reduce an explosive economic growth in China, India, Brazil, and other countries. Consequently, a strong commodities demand by growing economies may continue. Finally, a move from fiat currencies into commodities and PM is inevitable.
>"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)"
OK, I was playing along fairly well right up to this part at which point I realized that you are not really from this planet. Damn, hate it when that happens.
Yeah, those happy-go-lucky interlopers from the alternate universe where Keynesianism actually works really frost my balls!
and if i remember the c.f.a. exam correctly, you're not supposed to use the word "guarantee" in these kind of pieces (as in "guaranteeing higher prices in the future").
it seems we are thirty months into the deflationary depression, lucky thirteen months of which were spent in the initial (by far longest and strongest) bear market rally, giving barely (!) a year and a half of contraction. something as epic as this wave has got to have a lot more to go (it's still getting darker and taller, no sign of white water yet).
commodities will have their inflation play (and probably a big one) but it may be five or ten years hence. gold is it now, not as a commodity but as the monetary asset.