What Does the Price of Copper Tell Us About the Economy?

Copper has become a renewed subject of interest, as some market prognosticators view copper as a leading indicator of the economy as a whole. This results from the fact that copper is used in a wide variety of businesses -- industrial products, semiconductors, infrastructure, etc. -- and thus changes in copper prices can signal big changes in sectors that are copper-dependent. Currently, copper prices are rising, which could be interpreted as businesses showing an interest in buying copper because of an increased willingness to assume risk and invest in certain sectors of the economy.

The transportation and semiconductor sectors tend to be particularly dependent upon copper, and thus included ETFs that track them (XSD for semiconductors and IYT for transportation) in the chart below; we may be able to learn more about which sectors in particular are moving.

While semiconductors have been rallying since mid-November, the transportation sector continues to be devalued. Moreover, the overall demand for copper is declining around the world, as this Bloomberg article notes, and has decreased copper mining efforts.

As platinum, silver, and gold continue to rise while Treasuries continue to fall, copper's rally may signify greater inflation concerns. As metals have rallied while commodities have remained stagnant, the market may be signaling greater concerns about inflation in the midst of a lack of investment opportunities.

Thoughts on Trading

Copper has taken a particularly harsh beating thus far, as the chart above illustrates. As such, the bottom identified in the chart may be a critical level to watch to gauge broader macroeconomic trends; a break of that level could signify the next leg down for equities.

Conversely, copper may be a better play for those looking to profit from reflation of the money supply. As copper has fallen more than many other metals since falling asset prices set in in August of 2008, it may be due for a larger correction.

Comments

[Ian R. Camp...:]

I believe that copper indeed is a good indicator of the state of the U.S. and world economies, both current and prospective. In this economic environment I only own one copper company - although as I get time to research more base metal stocks I may buy positions in some of them given how badly their prices tend to have been beaten down.

The company whose shares I do own is an explorer with world class NI 43-101 resources in a politically stable country, has excellent grades and deposit metallurgy, has excellent access to external infrastructure, and as yet there seems to be no end in sight to its ultimate resource tonnages - things I consider particularly important when I analyze mining companies for personal investment purposes. Its stock price has been badly beaten down and I have purchased incremental shares to average my cost down – and may purchase more. That said, given my views on a further deteriorating world economy I see this particular investment as a (perhaps very) long-term hold and have simply ‘parked it’ for the time being.

I am not a trader of copper, or anything else for that matter.

Anyone interested in do so can click on my 'website' shown above, and research all the mining and oil & gas stocks listed for trading on Toronto and Toronto Venture stock exchanges.

Feb 05 10:20 AM

[Jim Hawthorne:]

Thanks, Simit!

For some time now I have been following the spot copper, lead, zinc, nickel and aluminum prices at this URL:
www.kitcometals.com/ch...

Copper especially seems to be playing the role of 'canary in the mine' of late, and gives an both early warning of market moves and serves as verification of trends.

Until we see BOTH the financials and spot copper prices moving higher, we will see no sustainable rally in this market!

Feb 06 12:53 AM

[doubleguns:]

Copper value seems to be creeping up. Treasuries are tanking, might not sell that 2 trillion in bonds this year.

Watch treasuries to see if we are tanking and not taking off. If we are tanking treasury prices will fall substantially and rates will soar.

Copper up and treasuries down is confusing to me. Are we going in both directions at the same time.?

Could it be a run to safety of something physical that holds value. Gold and silver are up a lot too. Doesn't bode well for the econmy from my perspective.

These are interesting times!!!! Every day is another event. I never know what to expect. 380 points yesterday anyone see that coming?

Feb 11 03:23 PM