In the arena of metals trading, the popularity of copper typically takes a backseat to gold and silver. Traders and investors often turn to gold in times of uncertainty, while the public habitually stockpiles physical silver as a more affordable store of wealth. However, during periods of economic expansion, few metals outperform copper.
Copper: The Economic Barometer
It’s no secret that commodity prices are greatly influenced by the prevailing economic cycle. During periods of contraction, commodities can stagnate as inflation levels are low and the demand for raw materials is static. Conversely, expansion often spikes consumption and the need for viable hedges against inflationary pressures. In either instance, businesses, consumers, and producers all play key roles in determining the price of everything from crude oil to cattle.
The safe-haven appeal of precious metals often challenges the traditional tendencies of commodity pricing. Times of economic uncertainty and strife can produce rallies in gold and silver as investors seek security. In addition, these assets may also appreciate in value in response to the devaluation of the USD. At the end of the day, the bullion and sterling markets are dynamic. They sometimes appear to have a mind all their own.
As a base metal, copper is unique. Its value is largely dependent on industrial demand rather than safe-haven appeal. In fact, as economic growth increases, copper typically follows suit. This is due in part to the following market drivers:
- Housing market performance: The applications of copper in the housing industry are extensive, with electrical wiring being the leading product. As home sales and new construction levels heighten, demand for copper increases.
- Substitute pricing: The pricing of substitute metals such as aluminum can have a dramatic impact upon copper. If alternatives offer consumers and producers a significant benefit, the price of copper is likely to adjust in concert with evolving market conditions.
- Supply: Government regulation, worker strikes, and armed conflict in producing regions can greatly influence the supply-side of the copper market. These issues have historically plagued leading copper-mining operations in Chile, Peru, and China.
In reality, the pricing mechanism of any commodity is inherently complex. However, in terms of copper, values generally rise in tandem with growth, output, and general prosperity. It’s due to this relationship that many financial industry professionals view copper as being a key indicator of economic strength.
Trading Copper During Periods of Boom and Bust
If you’re an active commodities trader, then you understand the impact that a boom or bust economic cycle can have on asset pricing. Panic selling and euphoric buying can bring windfall or catastrophe, depending upon your exposure. Copper is no different. Knowing when to limit risk or pour on the leverage is the key to success.
The global financial crisis of 2008 to 2012 brought severe pain to many industries, with the hardest hit being housing. Amid the subprime mortgage collapse and shrinking jobs market, 2008 brought a record 18% year-over-year drop in U.S. housing prices. With new home construction all but sidelined, commercial demand for copper dried up. For the year of 2008, spot copper pricing fell from all-time highs above $4.00 per pound (April) to below $1.75 per pound (October). Parties with the foresight to short CME copper futures (HG) stood to realize exorbitant profits throughout the crash.
After the victory of Donald Trump in the 2016 U.S. general election, a robust two-year period of economic expansion ensued. Pledges of tax cuts and pro-business policy boosted equities valuations, capital investiture, and, in turn, GDP growth. In concert with the strong performance, HG entered a bull market. From 1 November 2016 to 1 June 2018, September 2019 copper futures rallied from $2.27 per pound to $3.20 per pound. This rally represented a 40% gain in a just under 18 months. Traders who were long in copper futures reaped the rewards throughout the initial stages of the “Trump Rally” in U.S. equities.
Getting Started with Copper Futures
Although most futures traders are familiar with gold and silver products, many are less aware of the benefits of copper. Featuring consistent liquidity and pricing volatility, CME copper futures are a popular destination for professional metals traders the world over. For more information on how copper can become a valued part of your portfolio, schedule a free consultation with a metals expert at Daniels Trading today.