Making An Appointment with Doctor Copper

The other day, we had an interesting conversation with a bright and inquisitive young investor.

She knows a fair amount about investing and has invested actively in technology stocks and cryptocurrencies. Her trading in both areas is quite sophisticated.

She has recently been looking to expand her knowledge about different investment areas.

Not that she has become bearish on technology or crypto (nor have we), but like many investors, she wants to expand her investment universe. She also (like us) senses that, at some point, we may see the stock market led by other groups.

The topic of our conversation was copper.

She had read how copper was crucial for many (most) industries globally, including the hottest technology areas.

She was in luck on this subject as we have invested in copper actively across my investing career.

My home state of Arizona is called the “Copper State.” This is because there was much copper in the state, and the most significant US copper producer – Phelps Dodge – was based in Arizona.

The reason that copper is so valuable is because of its unique combination of physical properties. It is an excellent conductor of electricity and heat; copper can be shaped easily without breaking, is resistant to corrosion, and doesn't heat up quickly.

Copper is so valuable for the global economy that an old Wall Street saying refers to it as “Doctor Copper.” The idea (joke) is that copper has a “Ph.D. in economics” because of its ability to reflect the state of the global economy.

Recently, Doctor Copper has been on a bit of a wild ride. Here is the chart from the last few years…

This is the chart of the actively traded copper futures contract that tracks the price of copper. It is in cents, so the current price of $449 per contract is $4.49 per pound of copper.

The chart shows that copper traded in a range of $2.00 to $3.25 for the first five years of this period. The global economy was in decent shape during this period, but the copper industry was still working off the heavy supply additions in the previous decade.

After COVID, though, the price took off. Supply was impacted as the COVID restrictions hurt physical mining. We also saw a quick surge in demand in various areas in the COVID world.

As restrictions relaxed, the supply increased as mining returned to normal, and the price fell somewhat until recently. Copper surged to a new all-time high in the last few months after having traded in a range for the previous two years.

Here is the chart of copper prices going back to 1959…

What do we think of the price of copper right now?

We don’t have a strong opinion. This is why we don't have any open recommendations on companies or ETFs exposed to the copper price.

We DO think that the outlook is constructive. We believe we are entering a period of heavy industrial, electrical, and technological investment in the next decade.

Supply can (and will) expand, but the structural demand outlook will more than absorb that supply.

This issue of HX Daily, though, does not recommend buying copper. It explains how – if you wanted to – you COULD buy it!

The first way to buy exposure to copper is through the copper ETF called the United States Copper Index Fund (Ticker – CPER).

"ETF" stands for "exchanged traded fund" and is a pool of capital set up to track the price of copper. CPER was launched in 2012 by USCF Investments – a leading operator of commodity-focused ETFs. They mirror the price of copper by buying futures contracts.

Here is a chart showing the price of CPER against the commodity's future contract…

You can see from this chart that they track pretty closely. The correlation is over 90%. CPER is a reasonably good proxy if you want to trade the price of copper.

The only drawback is that a fee (0.88% of assets) will detract from performance, but this isn’t all that high.

The ETF also doesn’t have many assets – only $225 million. This shouldn't impact retail investors, but it is not ideal.

Another common way investors invest in copper is through an ETF called The Global X Copper Miners ETF (Ticker – COPX). It is more significant than CPER, with a market capitalization of more than $2.5 billion.

It represents the performance of the Solactive Global Copper Miners Index. This is an index of 50 different copper mining stocks.

Here is the same chart showing the price performance of the index versus the future contract for copper…

Directionally, COPX roughly tracks the price of copper but less closely than CPER.

Looking back through time, they are only about 60% correlated. This means that COPX only tracks the price of copper more than half the time.

This is because the 50 stocks in the index include companies with many other businesses besides copper mining and many smaller (and riskier) companies.

Despite the better liquidity, we would not recommend COPX as a good proxy for investing in copper.

The final option is the stock of a company based in my home state of Arizona – Freeport-McMoran Inc. (NYSE: FCX). This global diversified mining company (that bought the old Phelps Dodge) is the leading copper mining company in the world, producing more than 2 million metric tons.

Here is the chart of its stock price versus the futures contract…

Despite being a more diversified mining company, you can see that the share price of FCX tracks the price of copper quite closely. It has a greater than 80% correlation.

It is the most liquid of the three options, with a market capitalization of almost $70 billion.

This is one of the reasons why it tracks the price so closely despite being a diversified mining company.

For large institutions, the liquidity is not there for the direct commodity ETF (CPER), and liquidity tracking is not for the ETF tracking the miners (COPX), leaving them with FCX as the best option.

This is where retail investors sometimes have a real advantage over institutions. The liquidity doesn't matter as much for the retail investor, so buying the best tracking ETF (CPER) is easy to do.

We think having this strategy in your arsenal could help electrify your future returns!

Have you made any investments related to the price of copper? Tell us more in the comments section below or at [email protected]