Red (Metal) Alert Or A Pretty Penny? The Current State Of Copper

Sep. 23, 2015 1:36 PM ETJJCTF, COPX, CU, CPER, CUPM3 Comments
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DLP Investing
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Summary

  • The future Fed decisions will impact commodities prices.
  • Supply and demand laws are at work in the copper mining industry.
  • Reduced capex spending will eventually support copper prices.

Copper has long been regarded as a leading indicator of the state of the economy worldwide. Copper prices recently touched $2.25/lb., a low not seen since the 2008-2009 financial crisis, where it fell below $1.50/lb. before quickly recovering moving out of 2009 into 2010. I'll explore some of the factors currently at play and where the copper market may be headed.

Copper Pricing

Copper is priced in US dollars and so is sensitive to interest rates. The Federal Open Market Committee (OTC:FOMC) voted last week to keep the fed funds rate at historical lows, with a target of 0%-0.25% - but the overwhelming expectation is that easy money won't last long. If the Fed doesn't raise rates in October, it is highly likely to do so in December or early 2016 at the latest.

So, what does this mean for copper? Low interest rates theoretically result in inflation and a weaker dollar. Since copper is priced in USD, less of a foreign currency is needed in a weak dollar environment to purchase the same amount of copper. Say, for example, the USD/JPY (Japanese yen) exchange rate is about 120 (yen per 1 USD) in today's environment. Copper, at $2.30/lb, would cost a citizen of Japan $2.30/lb x 120 JPY/USD = 276 yen. Now the dollar continues to weaken due to low interest rates and the USD/JPY drops to 110. It will only cost our same Japanese citizen 253 yen for a pound of our $2.30 copper ($2.30/lb x 110 JPY/USD = 253 yen). Copper is cheaper from a Japanese standpoint, and the law of demand states that when a good is cheap, demand increases. Scale this example to the overall world economy; higher demand depletes supply, eventually increasing the price of the good. And the cycle continues.

Since most commodities

This article was written by

DLP Investing profile picture
78 Followers
I am a civil engineer and individual investor. I spend a substantial amount of time reading and researching commodities, macro economic trends, and value investing strategies. With my background in the construction industry, I am able to analyze real world information compared to data provided by media outlets. I plan to eventually transition my career towards the financial sector.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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