As many of you know, copper is often seen as an indicator of economic health, historically falling when overall manufacturing and construction is in contraction mode and rising in times of expansion.
That appears to be the case today. Currently trading above $3 a pound, “Doctor Copper” is up close to 28 percent year to date and far outperforming its five-year average from 2012 to 2016.
These are among the reasons why Arnoud Balhuizen, chief commercial officer of Australian mining giant BHP Billiton, called copper "the metal of the future" in an interview with Reuters last month.
“2017 is the revolution year [for electric vehicles], and copper is the metal of the future,” Balhuizen said, adding that the market is grossly underestimating the red metal’s potential as BEV adoption surges around the world.
Cobalt Gets Its Day in the Sun
And let’s not forget cobalt. The brittle, silver-gray metal used to extend the life expectancy of rechargeable batteries is up more than 81 percent so far in 2017 and 109 percent for the 12-month period. Performance is being driven not only by growing BEV demand but also supply disruptions in the Republic of the Congo, where more than 60 percent of the world’s cobalt is mined.
“It’s a really bright future for cobalt,” Vivienne Lloyd, analyst at Macquarie Research, told the Financial Times. “There doesn’t seem to be enough of it.”
Before now, there was very little mainstream interest in cobalt as an investment, but that’s changing as rapidly as world governments are joining the chorus to move away from fossil fuels. One sign of that change is the London Metal Exchange’s (LME) upcoming cobalt contracts, one for the physical metal and another for the chemical compound cobalt sulphate. This will allow investors to trade the underlying metal and participate in the electric vehicle “revolution,” as Balhuizen calls it.
In the meantime, investors can participate by investing in a producer with exposure to cobalt - among our favorites are Glencore (OTCPK:GLCNF), Freeport-McMoRan (NYSE:FCX) and Norilsk Nickel (OTCPK:NILSY) - or a natural resources fund.
Gold Closes Above $1,300 an Ounce
Gold also looks constructive as we head into the fourth quarter and beyond, according to a number of new reports and analysis last week.
UBS strategist Joni Teves finds it “encouraging” that gold has managed to recover this year off its 2016 lows. Although a likely December rate hike could be a headwind, Teves points out that the metal performed well in the months that followed the previous three rate hikes. What’s more, gold has rallied in each January since 2014. We could see a similar bump in price this coming January.
Not only is gold trading above its 50-day moving average again, but for all of 2017 it’s been following a nice upward trend as the U.S. dollar dips further.
A weaker greenback, of course, is bullish for all commodities, including copper. According to Bloomberg strategist Mike McGlone, unless the dollar unexpectedly recovers in the near term, commodities, as measured by the Bloomberg Commodities Index, could gain as much as 20 percent between now and year’s end.
Meanwhile, BCA writes that major risks in 2018 - inflationary expectations stemming from President Donald Trump’s protectionism, tensions between the U.S. and China, and continued strife in the Middle East among them - could keep the shine on gold.
The research firm reminds investors that gold has historically done well in times of economic and geopolitical crisis, outperforming the S&P 500 Index, U.S. dollar and 10-year Treasury by wide margins. Because the metal is negatively correlated to other assets, it could potentially serve as a good store of value if equities entered a bear market.
Such a bear market, triggered by tighter U.S. monetary policy, could take place as early as 2019, BCA analysts estimate. Gold would then stand out as a favorable asset to hold, especially if inflationary pressures pushed real Treasury yields into negative territory.
A Fear Trade Lesson from Germany
This is the lesson Germany has learned over the past 10 years, as I shared with you last week. Before 2008, Germans’ investment in physical gold barely registered on anyone’s radar, with average annual demand at 17 metrics tons. The country’s first gold-backed exchange-trade commodities (ETCs) didn’t even appear on the market until 2007.
But then the financial crisis struck, followed by monetary easing and low-to-negative interest rates. These events ultimately pushed many Germans into seeking a more reliable store of value.
Now, a new report from the World Gold Council (WGC) shows that German investors became the world’s top gold buyers in 2016, ploughing as much as $8 billion into gold coins, bars and ETCs. Amazingly, they outspent Indian, Chinese and U.S. investors.
Analysts with the WGC believe there is room for further growth, citing a recent survey that shows latent demand in Germany holding strong. Impressively, 59 percent of German investors agreed that “gold will never lose its value in the long term.” That’s a huge number, suggesting that the investment case for gold remains attractive.
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The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.
The Bloomberg Commodity Index is made up of 22 exchange-traded futures on physical commodities. The index represents 20 commodities, which are weighted to account for economic significance and market liquidity.
The Purchasing Managers’ Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.
The U.S. Dollar Index measures the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies.
Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 6/30/2017: BHP Billiton Ltd., Glencore PLC, Freeport McMoRan Inc., MMC Norilsk Nickel PJSC.
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Disclosure: I am/we are long BHP, GLCNF, FCX, NILSY.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.