What Copper Says About the Economy

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I’ll never forget visiting a Miami scrap dealer’s compound a few years ago. The proprietor showed me around his carefully tended lot.

On one end of the yard were piles of huge aluminum road signs. In another corner stood a wall of crushed-and-baled soda cans. But the owner’s proudest possession was kept in a secure little warehouse all its own.

He switched on the lights. There it was, gleaming a bright reddish glow in the middle of the room: one ton of “bare bright copper” — thousands of strands of unalloyed copper wire, pressed into the shape of a massive cube. Per pound, it’s the most highly valued grade of scrap copper around.

The owner was waiting for better prices before shipping it off to an Asian smelter. I hope he didn’t wait too long — copper prices have done nothing but go down in recent years.

And forbiddingly for the U.S. and global economies, copper prices still have all the shine of a dull penny.

At the end of 2015, copper was selling for about $2.15 a pound. Today, it’s selling for about a nickel less. And that’s with the tailwind of a weaker U.S. dollar, which helped boost oil prices by more than 30% and gold prices by 12% in the same period.

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copper prices

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Chile’s Antofagasta PLC, one of the world’s largest copper producers, recently estimated that the copper market has around 300,000 more tons of copper than it needs to move prices higher.

China’s slowing economy bears much of the blame. Its demand for the red metal slowed to a trickle in recent quarters. In past years, roughly 40% of all the red metal produced by the world’s miners was bought by China’s raw commodity importers.

But with copper prices down nearly 40% in the last two years (and more than 50% since the 2011 peak), copper traders have already discounted that information. It’s not “new” to anyone involved in the global marketplace.

So what else might be keeping prices at their lowest levels since 2009?

Paging Dr. Copper

The Federal Reserve, in dropping some big hints about a potential interest-rate increase in a few weeks’ time, is looking at measures of hiring and wages. Both are on the upswing.

Yet the overall economy is barely in motion. America’s GDP in the first three months of this year was an anemic 0.8% — just a fraction above the 0.6% gain registered by the economy in the same period last year.

Could it be that the American economy isn’t nearly as resilient as the Federal Reserve would like people to believe? (Sovereign Society members already know the answer.)

Could it be that the global economy remains very weak and at risk of still more pain?

There’s a reason why “red gold” is sometimes referred to as “Dr. Copper” among analysts and strategists. The price of the red metal is an EKG for the health of the global economy. When the economy is growing — buildings are being built and new products are being made — copper is in high demand. And when the economy has slowed, no one is demanding copper, keeping supply overflowing and prices depressed.

By that measure, the patient is still lying flat out on the table, with the timing of his recovery a very big question mark.

Kind regards,
Even the Fed Can’t Keep Gold Down
JL Yastine
Editorial Director