The Global Economy Gets a Checkup from Dr. Copper

From all the talk about gold in the financial media and among investors, you might think that the precious metal is the most important commodity in the world. It’s certainly one of the most valuable.

But in actuality, another metal has a much better claim to the title — copper. Like gold, copper has been valued for its beauty for millennia. But more than 5,000 years ago, humans also recognized copper’s practical uses. Prehistoric civilizations made tools and weapons from bronze, an alloy of copper and tin. In ancient Greece, copper’s reflective qualities made it ideal for mirrors. And in the Middle East, it may have been used as the conductor in the world’s first battery.

Today, copper is even more useful …

Because copper has a vast array of applications, it has become an integral part of the global economy.

No piece of industrial machinery, electronic equipment or automobile could be built without it. Every home throughout the industrialized world contains yards of copper wire, not to mention copper pipes, panels and fixtures.

Because copper has a vast array of applications, it has become an integral part of the global economy. In fact, copper is so instrumental in 21st Century life, its price on the global market has been shown to accurately predict the pace of worldwide economic growth. And because of this inherent diagnostic ability, the metal is often referred to as Dr. Copper.

Dr. Copper’s Price on the Global Market

Copper’s relationship to the global economy is reactive as well as predictive. In other words, the price of copper does not just tell you how quickly the economy will grow in the future; it also tells you how the economy is performing now.

In years past, copper largely took its cue from the U.S. economy. If the American housing market was strong and GDP was expanding at a steady clip, copper prices were likely to move higher, or at least stay firm.

But the United States’ influence on the copper market has weakened over the past couple decades, as China has grabbed an ever-increasing share of global economic output. As a result, China is now the primary driver of copper prices.

A glance at a chart of copper prices makes this relationship clear:

Click for larger version

As you can see, copper fell hard last week, just after the Chinese government announced production cutbacks to deal with a surplus of goods. In fact, China’s economic growth has slowed substantially over the past several quarters, weighing on copper prices.

But while China has usurped our primary relationship to copper, prices are still affected by the U.S. economy. And although it may not feel that way yet to many people, a recovery is under way here.

So while China’s struggles have put a ceiling over copper prices, the relatively strong growth in the U.S. has put a floor under them, at about $3 per pound.

The Prognosis for Dr. Copper and the Global Economy

This technical support in the $3 zone will be extremely important to watch in the coming months. If copper collapses through that level, it would signal another major economic slowdown on the horizon.

But I believe that global central banks, including the U.S. Federal Reserve, the European Central Bank, the Bank of Japan and the People’s Bank of China, will maintain enough monetary stimulus to keep the economy limping along. That should attract just enough buyers to keep copper prices above the key $3 mark.

However, we shouldn’t mistake a continued bounce along this support level as strength. Copper is still well below its 50-week moving average, indicated by the blue line on the above chart. It would take a sustained trend of strong economic news for prices to surpass, or even approach, that line any time soon.

Failing that, it seems like we’re in for a continuation of the sideways trend line in copper, and by extension, continued lackluster growth in the global economy. This pattern also implies an absence of inflation across the commodity complex for the foreseeable future.

So if you hear any dire warnings about imminent inflation, or even hyper-inflation, you can respond that Dr. Copper has a different prognosis.

Best wishes,

Douglas