How to Profit as Poor Man’s Gold Surges Into a New Super Cycle
The chart below looks like some blistering new technology company.
It’s blowing the stock market’s performance away like a pile of dry leaves before a leaf blower.
So … to whom does this slick ticker belong?
Zoom? Tesla? Apple?
It belongs to one of a select group of companies whose products make those technology superstars possible. Without the former, there’d be no electric vehicles, no cell phones and no video calls.
You’ve probably heard me say that I prefer the “pick-and-shovel” companies to any one gold miner. Not every gold miner strikes it rich, but every one of them needs tools.
Now this one group of companies is poised to soar like never before … thanks to the multiple technology revolutions about to takeoff.
If tech is gold, these companies are a trunk load of shovels.
And if there was ever a good time to initiate a position in this sector, it’s right now…
The Hidden Treasure All Around You
A while back I overheard my sister-in-law on the phone with my wife. She was spitting mad, and I know enough Setswana to know it wasn’t due to any sisterly strife.
Rather, thieves had disabled the train station near her house in Cape Town. So she had to take a minibus taxi to work, arriving an hour late.
Despite the risk of instant death by electrocution, the thick cables connecting the trains’ overhead electrical line to trackside transformers contained enough copper to feed the thieves’ families for weeks.
The theft that disrupted my sister-in-law’s commute is a frequent occurrence in South Africa. That’s not surprising, considering copper prices have risen by nearly 27% in just the last six months:
Essentially, copper is the poor man’s gold.
But what’s driving this increase in copper prices?
More importantly, how can you profit from this trend?
Technology = Copper Demand
From a copper perspective, we can divide modern technology into two groups.
The first comprises companies that sell intangible products like software. They depend on the flow of electrons to power the devices on which they run, so they depend on copper somewhat. But they don’t use any copper themselves.
The second group is very different. It’s populated by companies making physical products that use a lot of copper.
Electrical vehicles (EVs) are a perfect example.
A conventional car uses about 20 pounds of copper.
An electric vehicle needs 183 pounds.
So for every EV that replaces a regular car, the demand for copper goes up by 815%.
In a recent market survey, Deloitte estimates that EVs will rise from 5% of global auto demand this year to 30% by the end of the decade.
The 5% EV share of 2020’s global auto market is 3.25 million.
By 2030, it will grow to 30% and 30 million.
That means the global EV-derived demand for copper is going to rise from 0.5 billion pounds today to 5.5 billion pounds in 2030. That’s a 1,000% increase!
Copper is absolutely a pick-and-shovel commodity for the electric vehicle market.
Like most pick-and-shovel investments, it doesn’t matter which EV manufacturers dominate the market … they will all need copper.
So while the share prices of your favorite EV maker may rise and fall, the demand for copper will just keep rising.
Instead of a series of speculative bets on the latest EV brand, you can make a safe bet on the one input that makes them all possible.
How to Turn the Red Metal Into Gold
Copper is a typical cyclical commodity. Like corn or soybeans, producers tend to react to projections of strong coming demand by increasing capacity.
But it’s tricky. It’s easy to overshoot, leading to a glut and falling prices.
Copper is also one of the most recyclable materials around. It can be reused endlessly with no degradation in performance. The copper scrap market contributes about 35% of global demand annually, and can have a big impact on prices.
That said, China’s decision earlier in the year to ban the use of scrap copper in its infrastructure projects should keep the demand pressure for the metal high, keeping the price momentum in our favor.
One way to play the market for the metal itself is to invest in an exchange-traded note like the iPath Bloomberg Copper Subindex Total Return ETN (OTC: JJCTF). It holds copper futures contracts, which tend to be volatile since they reflect shifting short-term market conditions.
The alternative — and to my mind the best — way to play the copper market is to invest in an exchange-traded fund like the Global X Copper Miners ETF (NYSE: COPX). It focuses on the major copper miners around the world.
Like their brethren in the gold market, copper mining stocks have two advantages over trading the metal, both of which you can capture with COPX.
First, the share prices of established miners are less volatile than the metal itself. Investors know that at the start of an upswing in the copper cycle, miners’ share prices will go up steadily despite ups and downs in the price of the metal. That leads to strong money flows into the sector.
Second, the price of copper mining stocks tends to reflect production, revenue and profits over several years in the future. As soon as investors realize that the copper cycle is on an upswing, they pile into mining stocks to position themselves for that. That leads to rapid gains in share prices.
Given the enormous demand coming from the EV market alone, I’m convinced that we’re heading into the mother of all copper cycles. Senior miners have seen price increases from 25% to 35% in just the last month.
So if you want to profit from copper, put some money into COPX now to ride the upward trend.
It’s a lot easier — and safer — than stealing somebody else’s cables and selling the copper for scrap.
Editor, The Bauman Letter