Copper Price Forecast: Why The Red Metal Is On A Long-Term Bull Run (JJC, COPX, CU, GLD, ABX, FCX)
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May 6, 2011 10:09am
Kerri Shannon: With metals and commodities on a long-term bull-market run, investors have recently turned their attention to copper.
The red metal’s price recently has fallen due to mixed economic data. Copper’s use as an industrial metal – it’s widely used in buildings, electronics, appliances and automobiles – makes it sensitive to economic growth prospects.
But despite the recent dip, many analysts and industry experts have a bullish copper price forecast.
Barrick Gold Corp. (NYSE:ABX), the world’s biggest gold company, announced a big bet on copper last week with a $7.68 billion offer for copper producer Equinox Minerals Ltd.
Barrick relies on gold for 80% of its revenue, but will double its copper position with the Equinox purchase. Barrick Chief Executive Officer Aaron Regent said Equinox’s copper reserves are a hard-to-come-by asset.
“Directionally, I would say that most of the long-term copper price assumptions that are being used right now are understating what’s going to happen,” Regent said.
Many Money Morning readers have been writing to the Mailbag asking about investing in copper. Money Morning Contributing Editor and natural resource expert Peter Krauth answered the following questions with his copper price forecast.
Question: What about the price of copper? Any idea if this red metal will be the next gold? I‘ve been hearing that China will be backing their currency with this metal in the near future – any truth to that? AndasJapan rebuilds they are going to need tons of copper, right?
I’d like to hear your thoughts on how copper will play out in the coming months and years. Is ittimetoload up the boat?
Peter Krauth: As I consider all commodities to be in a long-term secular bull market, copper should be a great place to invest for the medium and long term.
There’s little doubt that copper is an important, perhaps even strategic, metal. It’s widely used in industry, including electrical, engineering, building, and transport applications. And with the rise of Chindia (China and India), home to one third of the world’s population, demand for copper is likely to remain strong for many years still.
Despite the credit crisis, which saw the price of copper plummet to $1.25 per pound from $4.00 per pound, the all-important metal has come roaring back with a vengeance. Since its early 2009 lows, copper has easily surpassed its 2008 highs, reaching $4.60 in mid-February this year.
Copper’s price has been gradually trending downwards over the last couple of months. At this point, we’ve seen copper’s price back off to the $4.00 level. I suspect this is for two reasons: The price got ahead of itself despite strong demand fundamentals, and there’s continued uncertainty whether the U.S. Federal Reserve will follow up its second round of quantitative easing with “QE3.”
Also, copper’s recent highs were reached with copper stocks at historically high levels -near 450,000 tons. That also could weigh on the price for a while.
A potential floor for copper could well be around the $3.50 to $3.75 per pound area.
But I’d expect to see copper resume its rise after bottoming near those levels.
As far as copper being the next gold, there’s a key difference between these two metals. Though it’s used in coinage, copper is essentially an industrial metal. Gold is essentially used for investment and jewelry. So clearly these two metals have different fundamental drivers.
I doubt that China will use copper to back its currency, at least not copper by itself.
Remember that China is the largest holder of U.S. debt, and that debt is losing value daily as the U.S. dollar declines. It would make sense for China to shift significant portions of its $3 trillion in foreign exchange reserves into hard assets, like base metals, which it will need anyway to continue to build out its infrastructure.
In my view, it’s not outside the realm of possibility that China would want to increase its influence on the world stage by allowing its currency, the yuan, to float freely and be supported with hard assets. I can envision a time when China would use a basket of base and precious metals to back its yuan, thereby making it a highly desirable currency.
As for Japan, the country’s devastating earthquake, tsunami, and nuclear disasters will certainly add to the demand for copper. So I think these unfortunate events will help to keep a floor under the copper price going forward.
Q: Do you have any copper/copper mining stocks to recommend?
— John S.
Krauth: If you want to play copper directly, consider the iPath DJ-UBS Copper TR Sub-Index ETN (NYSE:JJC). It tracks the price of copper futures contracts less fees and expenses, but appears to be weighed down by those fees, thereby underperforming the spot price of copper.
My preferred option is the copper miners. Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) (profiled in a recent “Buy, Sell or Hold” article by Money Morning Contributing Writer Jack Barnes) is the world’s largest publicly traded copper producer. It’s currently trading at a very respectable Price/Earnings ratio of 11, while yielding a 1.8% dividend. Watch for it to bottom along with copper, then consider taking a long-term position and view with FCX.
Related Tickers: First Trust ISE Global Copper Index (NASDAQ:CU), Global X Copper Miners ETF (NYSE:COPX), SPDR Gold Shares (NYSE:GLD).
[Editor’s Note: Back in August, Peter Krauth recommended that subscribers to his “Global Resource Alert” advisory service add a silver exchange-traded fund (ETF). Silver was trading at $18 an ounce at the time, but Krauth’s research indicated that a major upsurge was imminent. That upsurge came, though Krauth chuckled, and admitted candidly in a recent interview that “even I didn’t expect this kind of run…” Nevertheless, Krauth’s subscribers are now up more than 145% in less than eight months – and that’s without having had to use risky leverage of any kind.
For more information on Krauth’s portfolio, or on the “Global Resource Alert” in general, please click here.]
Written By Kerri Shannon From Money Morning
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