They call it Dr. Copper for a reason and it’s usually because copper prices can be a leading indicator for the market and for the economy.
The reason why is simple: Copper can be found in everything, from autos, housing and electronics. The more demand there is for those things, the stronger the economy tends to be. When copper prices (and thus usually demand) are in a state of free fall, it usually means economic hardship.
As for copper, the Federal Reserve’s crusade against inflation is also working to bring prices down. Copper prices have fallen for seven straight months and are down more than 32% from the high in March.
I don’t think it’s a coincidence that the Fed made its first rate hike in March either.
While inflation remains elevated, that doesn’t mean the Fed’s actions haven’t weighed on other assets. Across the board, commodity prices have come under pressure. It’s the Fed’s hope that that will remain the case, along with pressure on wage inflation, housing, groceries and rent.
Click to EnlargeSource: Chart courtesy of TradingView
Copper prices have been volatile since 2020, as disruptions and varying supply/demand swings have created swoons. Just look at the chart above.
Copper futures have fallen from just over $50 in March down to a low of roughly $3.13 in July. However, you can also see that it’s stabilizing at the 50-month and 200-month moving averages, while the $3.10 to $3.30 range continues to act as support.
Long-Term Look at Copper Prices
A recent energy report concluded that: “Between now and 2040, demand for copper will rise by more than 50%…By 2040, primary copper production may rise by around 16%. It goes without saying that the increase falls short of the demand.”
It goes on to say that companies like Barrick Gold (NYSE:GOLD), Southern Copper (NYSE:SCCO), Taseko Mines Limited (NYSE:TGB), and Vale S.A. (NYSE:VALE) need to increase production if they want to meet rising demand.
Goldman Sachs went on to publish a recent report called, “Green Metals: Copper is the New Oil.”
In the report, they made the case about copper’s role in greener energy, saying: “The critical role copper will play in achieving the Paris climate goals cannot be overstated… As the most cost-effective conductive material, copper sits at the heart of capturing, storing and transporting these new sources of energy.”
For instance, as InvestorPlace’s Eric Fry and Louis Naviller point out, the average EV uses roughly half the amount of copper that’s found in the average U.S. home! That’s a ton of copper for something — EVs — that’s growing so fast.
While estimates do not call for much price appreciation through year-end, that could change if and when the Fed does eventually pivot. That will lead to a lower dollar, which is a tailwind for commodities. Further, long-term demand for copper could keep a bid in copper prices, despite short- and intermediate swoons.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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