Copper is one of the world’s most popular metals. It is used in everything from water pipes to radiators to air conditioning systems. Some will say that the industrial metal possesses a Ph.D. in economics ... it is that critical to world GDP growth.
One country alone is responsible for about 40% of the world’s copper reserves and roughly 35% of copper exporting. That country is Chile.
In 2011, with emerging nations battling inflation and the European Union fending off member country bankruptcies, copper prices dropped into the septic tank. The perceived weakening of demand for industrial commodities weighed heavily on Chile’s economic prospects and the share price of Chilean stocks.
In recent weeks, however, copper has made a startling comeback. The iPath DJ Copper ETN (JJC) has risen 25% off October lows and it is currently sitting atop a long-term 200-day trendline.
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Why is copper suddenly surging? Give credit to China’s recent shift from monetary and fiscal tightening to more stimulative economic policies.
Of course, not everyone wants to invest in volatile commodities, let alone a non-diversified commodity note. It follows that a safer way to invest in copper may be through the country (Chile) that benefits most by an increase in demand.
The iShares MSCI Chile Investable Market Index Fund (ECH) tracks the collective performance of 40 companies that trade on the Santiago Stock Exchange. In 2011’s strong dollar environment, this unleveraged exchange-traded vehicle experienced bearish declines of -25.3%. That said, the Chilean peso appears poised to rebound against the greenback, benefiting those who invest in ECH here in 2012.
It should be noted that the domestic economy in the Latin American nation remained vibrant in 2011, due to an exceptional labor market as well as strong external investment. Even with more moderate GDP anticipated for 2012 (3.5%-4.0%), investors should benefit from ECH’s diversification across sectors. Specifically, utilities account for 22% of the fund’s make-up, while materials, financials as well as industrials each account for 18%.
From mid-2009 through the end of 2010, ECH was one of my top holdings for clients. Interventions by the Chilean government to keep the Chilean peso from excessive appreciation as well as efforts by China to fight inflation resulted in a need to take profits. Nevertheless, I’m once again intrigued by the relatively modest emerging market beta risk associated with ECH.
Keep in mind, Chile ranks in the world’s Top 10 on "Economic Freedom." In addition, China appears set to resume a remarkable level of raw material consumption. Chile (ECH) is likely to be a major beneficiary.
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Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.