At the end of last year I expressed my nervousness about the copper markets and how the price at that time of $3/lb. was incredibly expensive. Since then copper fell to a low of $2.40 before rebounding to $3.75. Currently, it’s selling for $3.34 and I am more bearish on copper now than I was before.
My negative outlook on copper is based on a slowdown in the US economy and the likelihood it will drag the other economies of the world down along with it, which should reduce demand for base metals.
I believe that copper along with other commodities are 5 years into a secular bull market that typically lasts for 10 to 20 years. However, no asset price rises in a straight line and copper along with other base metals will eventually enter a cyclical bear market (or may have already entered one given copper prices are down 10% since May 2006) within a secular bull market.
A chart I like to look at to put the current real value of copper into historical perspective is the copper-gold ratio.
It can be misleading to determine copper’s real value by looking at its US dollar price. The US dollar and all fiat currencies decline in value over time, which makes everything priced in them more expensive. If instead we price copper in terms of gold we can get a better understanding of copper’s value since gold’s real value is stable over time.
I could only find a chart dating back to 1995, but looking at data since 1980, the ratio reached its highest value of 0.6 last year. Currently, the ratio is not far off at 0.5. This is well above its historical average of 0.3.
It is warranted that copper should be trading above it’s historical average given that the world is experiencing a period of synchronized growth like never before. However, if the global economy slows down the copper-gold ratio might decline to around 0.3. At current gold prices, that means copper could fall to $2. If gold declines to $550, then copper could collapse to $1.65.
Copper isn’t the only metal that looks risky. Aluminum, nickel, and zinc prices are all dependent on a strong global economy. If you are also worried about a looming US slowdown, now may be a good time to sell your base metal stocks.
By the start of this year, I had liquidated all of the stocks in my portfolio which had exposure to base metals. In fact, a collapse in base metals prices has me worried that it could temporarily affect the gold price; therefore, I have been selling some of my gold stocks, too.
