Copper is making a big move … what history suggests about its performance after rate cuts begin … why it’s a strong trade even if the Fed doesn’t cut rates … how to play it
Gold set yet another all-time high earlier today – its seventh consecutive record peak.
Ignore it.
There’s another shiny metal that’s also soaring today. And if the Federal Reserve follows through with rate cuts in 2024, history shows its returns could outshine those of gold.
But let’s say the Fed doesn’t cut rates even once. After all, this isn’t out of the question.
For example, last Thursday, stocks sold off sharply when Federal Reserve Bank of Minneapolis President Neel Kashkari questioned whether there will be any interest rate cuts in 2024 due to the strength of the latest economic data.
Well, if no 2024 rate cuts materialize, then the metal we’re discussing today still has enormous demand from global manufacturing, not to mention AI. Gold can make no such claim.
So, are you bullish on the yellow metal today? Is so, then you need to be extra bullish on the red metal…
Copper.
To unpack this, let’s begin by rewinding to the summer of 2020
That was when our macro expert, Eric Fry, made the call that a new commodity supercycle had begun.
Given his research, he positioned his subscribers in a handful of related commodity investments which exploded higher. For example, in July 2021, Eric’s Speculator subscribers closed their option trade on copper mining giant, Freeport-McMoRan (FCX), for a 10X return.
To make sure we’re all on the same page about these supercycles, let’s go to Eric:
Unlike stocks, which tend to move higher over time, commodity prices cycle through powerful multiyear booms, followed by spectacular multiyear busts.
These are called “supercycles.”
No two supercycles are identical. But they all share two distinct traits:
1. In their youth, they produce huge investment gains.
2. In their advanced years, they produce huge investment losses.
That’s why it’s so important to pay attention to them early on. They grow up so fast.
The easiest way to monitor a commodities supercycle is through the TR/CC CRB Commodity Index (CRB), which holds a basket of global commodities.
Below, we look at the CRB Index over the past 20 years, noting the exceptional timing of Eric’s “buy” recommendation based on his identification of a new supercycle.
But as you can see in the chart, after hitting a local peak in 2022, commodities began falling
So, is that it? Is the supercycle over?
No. As we’ve pointed out before in the Digest, extended price lulls do not mark the end of supercycles.
Here’s a Goldman Sachs Commodity Outlook piece from last year with some helpful perspective:
Commodity supercycles never move in a straight line; rather, they are a sequence of price spikes, with each high and low higher than the previous spike.
Commodity prices, unlike financial markets, perform an economic function of balancing supply and demand, so once high prices have rebalanced the market in the short term, the high prices are no longer needed, and prices come crashing back down as we witnessed [two years ago].
But ending one spike doesn’t mean the end of the supercycle – long-run supply issues take years to resolve.
This brings us to last fall, when Eric suggested that his readers should prepare for the “commodity comeback.”
From our October 30th Digest, quoting Eric:
The “commodity comeback” could begin its reign as soon as 2024, which is only a few short months away…
And that could mean big things for a long-struggling corner of the market… and soon…
Based on Eric’s analysis of copper that we profiled in that Digest, we highlighted a trade: the Global X Copper Miners ETF, COPX.
As you can see below, COPX has jumped 34% since then, beating out the S&P’s 26% climb.
This brings us up to today – so what’s the case for a copper investment now?
Well, first, we have strong, bullish momentum.
Since early-February, the price of copper is beating the S&P. It’s up 8%, edging out the S&P’s 7% push. But COPX which we just highlighted has jumped 23% over this period.
Second, if the Federal Reserve cuts interest rates, history suggests that copper will outperform just about every other commodity, including gold.
Below is a chart from Mosaic Asset Company, highlighting what it calls the “bullish case for commodities.”
It shows how various commodities have performed in a non-recessionary environment when the 2-year Treasury yield is falling (which we would expect following interest rate cuts from the Fed).
As you can see, copper (on the left) crushes all other featured commodities.
Third, even if the Fed doesn’t cut rates, the demand outlook for copper is enormous
If you believe in a soft landing (or no landing) in 2024… if you’re a tech/AI bull this decade… if you support the green energy transition… then you’re bullish on copper by proxy.
That’s because copper is one of the most important industrial metals in the world.
It’s critical for a healthy, growing global economy… it’s a “must have” for tech/AI advancements (due to massive computing needs and copper’s role in computing hardware) … and it’s a lynchpin component of green energy technologies.
Yet studies show that our current copper supply is insufficient to meet coming demand.
From CNBC last fall:
Naturally conductive copper is one of the critical minerals…in the manufacturing of electric vehicles, EV batteries, solar panels, wind turbines and the power grids that connect renewable sources to homes and businesses.
Yet the prognosis for the industry to supply enough copper to meet that rapidly growing demand is not particularly rosy…
…while demand for copper could nearly double by 2035, mining companies are having a hard time keeping up.
And let’s also make very clear the additional strain that AI will place on copper supply. This new demand is beyond what our global economy has been used to in recent years.
Here’s Finimize from last Thursday:
…In the US, demand for copper has been surging alongside a new – soon-to-be-relentless global trend – the construction of AI-related data centers.
The red metal provides the lowest-cost and highest-performance solution in data center racks – compared to the more expensive optical cable alternative.
Man Group estimates that the US data center build-out alone could increase global copper demand by 0.5% to 1%. That may not seem a lot – but it’s enough to throw the copper market out of kilter.
And when you consider the fact that these data centers are set to be rolled out globally, AI-driven demand is about to seriously shake things up.
Finally, don’t forget about China
In Eric’s newsletter Investment Report, he’s highlighted the symbiotic relationship between copper prices and Chinese demand. Three weeks ago, Eric’s analyst Tom Yeung pointed toward bullish news about this relationship.
From Tom:
In a surprise announcement, [China’s] government looks set to ramp up demand for these essential metals…
…The Chinese government [recently] targeted an aggressive 5% growth rate. They also hinted at a liquidity boost from looser monetary policy and deficit spending.
The surprisingly bullish announcement is a phenomenal signal for cyclical commodities, especially copper.
The essential metal is used in everything from plumbing to electric vehicles and has a particularly close relationship with the Chinese economy.
China consumes roughly 60% of the world’s copper, and about a third of that goes toward its construction industry. The country’s electronic, electric vehicle, and manufacturing industries take up much of the rest.
Putting it altogether, we have…
- surging price momentum…
- supply/demand imbalances…
- a new source of demand from AI data centers…
- a resurgence in the Chinese economy and its copper demand…
It all points toward one thing…
Higher copper prices.
So, how do you play it?
Well, if it isn’t broke, don’t fix it.
COPX remains a good option. It holds a basket of the world’s top copper miners.
If you want to invest in a specific miner, Freeport McMoRan (FCX), which we referenced earlier, is a top-shelf option.
While Eric’s Speculator subscribers cashed in on their FCX call options for 1,000%+ returns, Eric’s Investment Report subscribers still own the stock outright. They’re sitting on 295% returns as I write Monday morning.
Whichever investment vehicle is right for, the bottom line remains: There’s a big bullish story unfolding with copper. Make sure it’s on your radar.
Have a good evening,
Jeff Remsburg
