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Investing in Copper 101

Yes, we know, it’s already up 60% this year (but it fell quite a bit last year..). However, supplies are becoming more costly and problematic (Peak Copper, anyone?) and demand, well..

We are very bullish long-term, but in the short-run, there might be some correction to the already large price increases, as it is difficult to disentangle the effects of the monetary stimulation and the increased fear of inflation and market liquidity these bring (bullish for commodities), and the longer-term demand and supply situation (see here for an article about that, albeit mostly on oil, but the dynamics are very similar). Before you dive into commodities (especially futures) trading, take the following to heart:

  • An inexperienced commodity trader will normally miss the first move, but he will probably get excited once he hears about a big move. By the time the general public is aware of a hot market, it is usually time for a correction or a top. The new trader usually jumps in at this time, only to see a correction in an overbought or oversold market. The new trader will probably get stopped out of his position or maybe he bought overpriced options in the euphoria. [Chuck Kowalski]

Here are the arguments.

Why?

General

  • People don’t trust paper investments like Treasuries
  • People don’t trust the dollar, commodities are a natural hedge
  • The barriers to invest in commodities has come down significantly the last couple of years (see below)

Supply

  • The largest producers of copper are Chile, Peru, South Africa, North America
  • Increasing difficulty of finding good quality
  • Efficiency of exploitation diminishing: Rio Tinto’s ratio’s (Tons of copper / Dollar investment) is declining significantly: 1995-2000: 18.9MT/$765M; 2000-2005: 13.6MT/$802M
  • In the boom years, companies took on too much debt, now they respond by cutting exploration and the credit crisis isn’t exactly helping either
  • Development of a new mine takes 7-10 years, so cutting back exploration now will have a delayed effect

Demand

  • Mainly from construction (wiring and plumbing) and therefore considered a good indicator of economic activity
  • Between now and 2025, there will be 50,000 new skyscrapers built in China..
  • China has 33 cars per 1000 inhabitants, The US has 800..

How

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