Dr. Copper’s Wild Ride

It’s been a difficult year if you have been investing in certain commodities. That’s especially true if you bet on natural gas, sugar and cattle. All of those are down more than 10% this year.

Look at the Bloomberg Commodity Index (black line) below. You can see that commodities, as a basket, are down 4.8% so far this year.

The almost-5% decline might not seem too bad. But when you compare that to how U.S. equities have performed this year, it’s quite painful.

Commodities, as a group, have underperformed the S&P 500 Total Return Index (purple line) by a whopping 15%.

But not all commodities have taken it on the chin this year. Some, in fact, have far outperformed U.S. equities.

Take some of the industrial metals, like copper, aluminum, zinc or nickel. As a group, they are quietly having their best run in 11 years. And last week capped the longest metals rally since a nine-week run in 2006!

Here are some highlights:

• Copper trading on the London Metals Exchange is up nearly 23% this year. Dr. Copper hit its highest price level since November 2014, and is on pace for its eighth weekly gain in a row.
• Aluminum is also trading over 22% higher this year. It’s now the most expensive since February 2013.
• Zinc spiked to a decade-high of $3,231.75 a ton last Wednesday. And it’s up over 19% this year.
• Nickel rallied to the highest level since November. It’s now trading more than 15% higher on the year.

Overall, these metals have more than doubled the performance of U.S. equities.

So, what’s driving copper and other industrial metal prices higher?

You guessed it. It’s demand from China.

China is already the world’s top consumer of copper, but demand keeps growing. In fact, July imports of refined copper to China rose 13% to 283,468 tonnes, while ore and concentrate rose 3%.

I expect strong demand from China to continue as large-scale infrastructure projects from the “One Belt One Road” initiative continue to progress.

But, copper might have temporarily run a little too far ahead of itself. And the sustainability of this current rally might be a bit overdone. So in the near term, I expect copper prices to ease back a bit and work off some of these short-term overbought market conditions, before making another run higher.

The bottom line: Industrial metals like copper (my favorite of the bunch) have had a great run this year. And I expect that trend to continue over the next few years.

However, I believe that a better longer-term buying opportunity is right around the corner for industrial metals. So be patient and wait for a better entry price to come our way.

The best part — there are many ways you can play this longer-term move higher in copper prices.

The most direct way is buying an ETF like the iPath Bloomberg Copper Subindex Total Return ETN (JJC), which is designed to rise in value along with the rise of copper futures prices.

Another option is to invest in a high-quality large-cap copper mining company. I recommend considering companies BHP Billiton Ltd. (BHP) or Southern Copper Corp. (SCCO).

But if you want to get a little more speculative, you can go with a well-capitalized junior copper miner that offers tons of growth potential. I suggest considering companies like Taseko Mines Ltd. (TBG) or Western Copper and Gold Corp. (WRN) in the junior-mining space.

As always, remember to understand the risks associated with each type of investment before jumping in.

Best wishes,
David Dutkewych