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Copper Turns Into Gold.

During my misspent youth, I spent a lot of time riding freight trains. I didn’t set out to do this. But when I was hitchhiking from Vancouver to Montreal to get a job at Expo 67, I got as far as Saskatchewan, and found they had no cars. So I headed over the Canadian National freight yard in Winnipeg and started riding the rails, as my grandpa did during the Great Depression.

It wasn’t hard. One rail, two directions, and I headed east. There is no better way to travel than in a box car with open doors, the winds blowing through your hair, the scenery devoid of billboards. One time the engineer spotted me, stopped the train, and waved to me to join him in the engine where he let me drive. How cool is that!

A hobo taught me the trick of jumping on a moving train. You run the same speed as the train, latch on to something, and swing your way in. Do it wrong and you get pulled under and become road kill.

Today, I’m contemplating jumping on a moving train of another sort, the financial kind. There is no ignoring copper, which punched through to an all time high last month to $4.66 a pound. I have been in and out of the red metal since it bottomed at 80 cents a pound dearly a decade ago, much to the delight of my investors.  Ditto with Freeport McMorRan (NYSE:FCX), which you will find in my model portfolio, and which I have ridden from $10 to $60.

Today, Federal detention centers in the San Francisco Bay area are slowly filling up with a new type of criminals. Illegal immigrants and petty drug dealers are being joined by a rising tide of copper thieves raiding abandoned government facilities for their heavy gauge copper electrical wire. At current prices a decent night’s haul can net crooks up to $30,000 at recycling centers.

Long known as “Dr. Copper”, because it is the only commodity with a PhD in economics, the red metal has long been an excellent forecaster of economic activity around the world. Hedge fund managers have been impressed by copper’s ability to hold up, and even advance in the face of “double dip” threats from the US economy. While demand for American home construction remains in the basement, this weakness is more than offset by surging demand from China, whose own construction industry remains on a tear. Now Japan’s tsunami creates an entire new source of demand.

It also helps that they’re not making copper anymore. Some of the world’s largest mines are reaching the end of their useful lives, with increasing amounts of capital being poured into ripping a declining grade of ore from the earth. Global production has fallen 12% during the first half of this year. This is a problem because the opening of a new mine can take as long as 15 years, once the time required for government approvals, infrastructure, water supplies, transportation, and yes, bribes, is added in. What’s in the pipeline is all there is for the next five years.

Copper is also benefiting from its accelerating “monetization.” International investors, disgusted with the choices available in global stock and bond markets, are increasingly diversifying into the red metal, as well as other “hard” assets like gold, silver, coal, oil, nickel, iron ore, and others. This is one reason why the big metals exchanges are finding their inventories at a low ebb. It’s anyone’s guess, but perhaps half of the current $4.42/pound in the copper price is accounted for by investor, as opposed to end user demand.

I have some hedge fund friends who have discretely stashed thousands of copper bars in warehouses around the country, expecting the red metal to hit $6/pound within the next three years. If this doesn’t work out, I guess they can always eat their inventory by pursuing a new career as an electricians. Hey, a good union, a steady $70/hour paycheck, and a health care plan that covers Viagra, what’s so bad about that?

The obvious plays here are in the dedicated copper ETN (NYSEARCA:JJC), and the base metal ETF (NYSEARCA:DBB). Another candidate is Chile’s ETF (BATS:ECH), which has tacked on a blistering 44% since I recommended it in August (click here for “Chile is Hot” ). And you can look at Freeport McMoran (FCX), the world’s largest publicly listed copper producer. And yes, you can even buy .999 fine copper bullion bars at Amazon.

My favorite of the lot is the First Trust ISE Global Copper ETF (NASDAQ:CU), which closed yesterday at $42.80. This will not be my favorite trade of the year, as jumping on a moving train carries some risks. If you do get involved, make sure you keep a stop at $36 in case things go horribly wrong, or you too will end up as road kill.