|  | | | | | Copper and gold break precedent |
| As metals go, copper and gold are somewhat similar in appearance and tend to be present in similar areas. In fact, one of the largest gold mines in the world was set up to mine gold merely as a byproduct of a larger copper mining operation. We refer to the Grasberg minerals district in Indonesia, which is owned by Freeport-McMoRan (FCX), the Inflation Protection Model Portfolio holding that we profiled here in mid-March.
Despite some common physical properties, including electrical conductivity, copper and gold usually behave quite differently from a market perspective.
Copper, sometimes referred to as “Doctor Copper,” is viewed as a leading indicator of economic growth. As an industrial metal, used in construction, automobiles and other manufactured products, copper prices tends to rise in response to broad economic strength.
Gold, by contrast, has few practical industrial applications. It is a precious metal that is accumulated largely for financial reasons. Gold is regarded as a haven investment in times of financial insecurity.
Historically, bond investors have looked to the “copper-gold ratio” for guidance. As the price of copper rises relative to gold, Treasury yields are expected to follow.
While copper and gold often move in different directions, thus far into 2024, both have performed quite well. We discussed both metals, and the investment opportunities surrounding them, in a recent livestreamed conversation. The relevant segments are below. |
| |  | COPPER IS BACK! Tech-fueled Demand and Constrained Supply |
| |  | What Makes This GOLD RALLY Different |
| | The synchronized strength in copper and gold we are currently witnessing is interesting in that both metals are responding to factors that defy historical patterns. |
|  | Copper and Gold, versus the S&P 500, year-to-date |
| While copper has been and to a large extent remains a cyclical base metal, tied to construction and industrial markets, the demand we are currently witnessing is increasingly structural. As we emphasized in our 76report profile of FCX, copper is desperately needed as an input required for data centers, electric vehicles, electrical grids and renewable energy installations.
Copper demand is becoming less about broad-based economic activity and more about specific applications that to a large extent sit outside usual economic activity. Data center growth, for example, is being driven by innovations in artificial intelligence, which have little connection to the economic cycle. Copper prices are rising because copper mining capacity, which can take more than a decade to add, cannot easily respond to the emerging sources of demand.
How far can copper run?
In the aftermath of the Global Financial Crisis, China embarked on an enormous infrastructure and residential construction binge. This required a lot of copper. Copper peaked at just under $10,000 per ton in April 2011. As of May 23, 2024, copper is approximately $10,500 per ton. |
|  | With new supply highly constrained for years to come, and no real cost effective substitutes available for use in electrical wiring, high prices may be required to destroy demand for copper.
As a reference point, the Consumer Price Index has risen approximately 40% since April 2011. On an inflation adjusted basis, in today’s dollars, copper peaked back then around $14,000 per ton. For several years before and after the financial crisis, copper lived north of $7,000 per ton, which is roughly equivalent to today’s current prices in real terms.
These historical benchmarks suggest the economy can tolerate meaningfully higher copper prices, especially given the way incremental demand is linked, as never before, to the technology sector.
FCX has performed well since we first wrote about it here on March 15, 2024. The shares have largely tracked the recent upside in the copper price. We continue to like the investment as the “electrification amidst supply constraints” thesis plays out. |
|  | Gold, like copper, is moving in ways that defy precedent. With interest rates high, equity markets surging and the U.S. dollar relatively strong, one might not expect to see gold hitting all-time highs. Gold typically performs well in “risk-off” environments.
Here again, there are structural demand drivers that are taking precedence over cyclical patterns. In the aftermath of the decision of the United States to freeze Russian assets and Treasury holdings, central banks around the world have gotten the memo that U.S. is willing to weaponize its government bonds. Central banks continue to accumulate gold reserves, especially BRICS countries, who continue to aspire to a gold-backed trade settlement system.
By flexing our economic muscles in this way, the U.S. is potentially abusing its power as the de facto printing press of the world’s reserve currency. Emerging market countries have long resented American monetary hegemony, as their economies have been whipsawed by volatility in U.S. monetary policy.
A casino that sometimes takes away its customers chips, or doesn’t let them in, may lose popularity over time. De-dollarization is going to be an uphill battle for these countries, but it seems clear that gold will be an important element of whatever strategies are pursued.
Doubts about the prevailing fiat money system are also driving global private demand for physical gold, from the aisles of Costco in the United States to the malls of China. Chinese retail demand has been particularly impactful to the global gold market, as private investors there have soured on the poorly performing stock and real estate markets.
Younger people in China are especially interested in accumulating gold beans, which offer them an affordable entry point into the asset class. These small beans can still be purchased for less than $100 each. |
|  | While retail gold demand can be fickle, and volatile in either direction, central bank demand should be persistent and limits potential downside from private investor demand if it happens to wane. Gold may also benefit from any potential resurfacing of the traditional drivers of gold demand, such as a decline in interest rates or equity market volatility.
Any intensification of the NATO-Russia proxy war in Ukraine, or worse yet, a military confrontation over Taiwan, remain as other highly compelling reasons to maintain a reasonably sized portfolio allocation to gold. |
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