Since the start of September, one commodity is down 6 percent. Going back to August, it’s down nearly 17 percent.
The commodity is copper. And its falling price has traders worried.
That’s because copper, used in construction and manufacturing, is a key metal to understanding the global economy. When its price rises, the economy is typically growing. When its price falls, the economy tends to slow down.
Copper’s price movements are so accurate in this regard that it’s been granted an honorary doctorate in economics by traders. When “Dr. Copper” warns you about the economy, it’s time to sit up and pay attention. Your financial health is at stake.
Indeed, since the start of 2011, the overall trend for the metal has been down. For most market participants like traders, it’s really only the trend that counts when investing in a commodity.
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Although the price is trending down, the supply and demand picture is telling a different story. Let’s take a second opinion on Dr. Copper’s diagnosis by briefly looking at these two components:
In China, demand for copper is surging. The country is the world’s largest buyer of copper. It’s estimated that China can only supply 40 percent of their copper needs domestically.
Some analysts point to a major stockpiling effort in China as part of the reason for the metal’s rise. Demand for copper in China has increased nearly fourfold since 2000.
It’s no surprise that China’s growth has been force-fed with make-work projects that would make FDR blush. The country has built entire empty cities. High-rise buildings are built, demolished, and rebuilt. Shopping malls with the capacity for hundreds of stores hold only one or two tenants.
China’s bizarre, economically destructive behavior may indicate that the picture for global copper demand is worse than current prices indicate.
On the supply side, Peruvian miners just ended their strike. That’s good news for global mining titan Freeport McMoRan (FCX), but the miners might head back to the picket lines soon.
Global supply is at a record high. Copper producers are on track to beat 2010’s record by about 3.4 percent.
Supply and demand tell us that Dr. Copper’s diagnosis may be correct. Supply is on the rise, and demand may be artificially inflated by stockpiling.
Either way, there are a few “what if” scenarios that could send prices higher.
For now, it’s just one more sign that the economy is slowing down, and may even be in a recession.
From an investment standpoint, avoid copper investments. When copper prices correct another 10-15 percent, however, there may be a good entry price for a long-term investment. A company like Freeport McMoRan, currently near a 52-week low, would fit the bill.
The diagnosis is in, and this doctor has a perfect track record. Stay cautious, and stay safe.