Is Copper the New Gold in Hedging Against Inflation?
Lots of things are new these days — 40 is the new 30, orange is the new black, bitcoin is the new gold.
But there are signs that copper is the new green, as it may just be the world’s new hot metal.
There’s no denying that gold is certainly the more desirable material, especially when it comes to wearing jewelry. But despite its long history as true money, gold might eventually be less valuable than copper as an inflation hedge now that Bitcoin is the latest fad with a value that has surged more than 80% so far this year.
We see three key incremental drivers underpinning this bullish projection for copper prices:
China’s policy announcements related to its 14th 5-year plan. China accounts for at least 50% of the world’s copper consumption.
Peak base copper mine supply is fast approaching at the end of 2023. This means a 10-year supply gap.
The green electrification agenda and potential US infrastructure plans.
Copper Got the Shaft
Copper was depressed for a long time while everything else got high on tech, and the cure for low prices is...low prices.
In response to a slowdown in Chinese growth and therefore lower copper prices in 2014-2015, the mining industry as a whole saw sharp declines in capital investment from 2014-2018.
Low average copper prices at a paltry $2.80/lb. led to underinvestment in new copper mines. Meanwhile, technology stocks took off as the digital revolution allowed for greater productivity and meant fewer workers were needed.
Technology allowed for greater scale, higher operating leverage, less employment and disinflation, which led to NASDAQ reaching incredible new highs.
Meanwhile, inflation hasn’t been an issue for 12 years since the Global Financial Crisis, and no one really cared about copper.
Let’s Go Shopping! Money is Free!
There is a ton of talk about inflation as Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen lower interest rates to near-zero so we will buy more cars and dishwashers, refinance our homes and borrow more money to buy more stuff.
Recent Purchasing Managers’ Index readings, which give a glimpse into prevailing economic trends, were the strongest in six years. Construction spending also exceeded expectations, rising almost 5%.
Clearly, the backdrop is getting better, which also means inflation poses more of a risk and a threat.
But We Also Need to Go Back to Work!
The weaker-than-expected jobs report at the beginning of February may actually be viewed as a positive if it serves to enhance the possibility that President Biden’s $1.9 trillion stimulus bill gets passed. To put the size of this bill in context, Bloomberg noted that it could be close to 25% of GDP against the roughly 10% decline seen at the depths of the pandemic.
An infrastructure bill might finally be in the cards, but there are a lot of unknowns about the size and scope and what it would include.
Many economists think it would create more jobs for programs like erecting new bridges, repairing and expanding highways, and work on ports — all of which require goliath machines to do the job.
Copper indirectly touches many of these improvements, so any infrastructure program would have an impact on demand.
Green Energy Relies on Copper
Green electrification investments to achieve emissions reduction goals, and that directly benefits copper because it’s used in many solar/wind power machinery and electric vehicles.
According to the Earth Institute at Columbia University, due to the demands of modern technology and the growth of populations and economies, the need for base metals in the next 25 years is projected to outpace all the base metals so far mined in human history.
Copper is used in basically all electronics wiring, from cell phones to generators, high-voltage cables, batteries and supercapacitors.
One recent study suggests that in order to develop a sustainable global economy, we need 1 billion electric passenger vehicles by 2050, compared with about 1.2 million today. We also need battery capacity to reach 12,000 gigawatt hours (up from just 0.5 gigawatt hours today) and photovoltaic capacity of 7,000 gigawatts (up from 223 gigawatts today).
Even as electric vehicles become more prevalent, demand for copper will still grow. The average new car contains 60.72 pounds of copper. Electric cars require up to twice that amount for the extra cabling and windings in the motors.
The growing demand for electric cars will in turn grow demand for copper, and the rule of supply and demand tells us that this will cause the price of copper to go up as a result.
China Drives Copper Growth
China is also one of the leading copper markets in the world, and is expected to increase copper holdings as part of its ongoing infrastructure build-out.
China’s newest 5-year plan will increase demand due to urbanization, transportation and infrastructure investment, and new technology manufacturing capacity.
According to Goldman Sachs Equity analysts, China’s recently announced 2060 net-zero target will require huge amounts of investment in renewable power, clean hydrogen and carbon capture predominantly. Those goals total US$16 trillion of infrastructure investment that could create approximately 40 million new jobs and drive economic growth.
Green infrastructure is 1.5x to 3.0x more capital and jobs-intensive, so shifting the priority of policies to green energy inherently drives extra growth.
Keep an Eye on Copper Prices
It’s hard to say exactly when, or even if, copper will upstage gold.
But taken together, the underlying facts driving copper’s rise adds to our conviction that copper is about to get its day in the sun and heavy metals and industrials should have a bigger place in your portfolio.
Watch the price of copper, since copper is said to have a "Ph.D. in economics" because it has historically been a predictor of turning points in the global economy.
Because of copper's widespread applications in most sectors of the economy — from homes and factories to electronics and power generation and transmission — demand for copper is often viewed as a reliable leading indicator of healthy economic recovery.
Copper’s continued rise is a good sign.