Will Copper Become the "New Gold?"

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The Statue of Liberty is one of the most recognizable American icons in the world.

And as she towers 305 feet above Ellis Island, what's Lady Liberty wearing? Copper – 60,000 pounds of it.

Clearly, copper's big in art. It's also a key metal that keeps the world economy humming. Copper consumption has grown at an average annual rate of 4% since 1900. China and India – which some analysts describe as the combined market of "Chindia" – where one of every three human beings resides, needs loads of this element to meet its modernization requirements for electricity and infrastructure.

Copper is also used in today's currency, where most U.S. coins are actually 92% copper, and 8% nickel.

But there's no denying that, given the choice, nearly everyone prefers gold. It's valuable, it's seductive and it's mystical.

Ancient kings fought wars to amass it. Yet, for thousands of years, its most enduring role has arguably been in the form of money – as a store of value.

That's because fiat-paper-currency experiments have never lasted, and always ended badly.

Increasingly, followers of the Austrian School of Economics are nostalgic for gold to regain its former glory, perhaps "backing" a new international currency.

But despite gold's much longer history as true money, some believe that copper – the much humbler metal – could be positioning itself to upstage gold.


China's Paper Mountain

If copper is to replace gold as the world's most-valuable metal, China will have to play a huge role. With all its uses – from hybrid cars to an electricity grid – copper may become both an inflation hedge and a strategic asset.

Today, China sits atop a paper Everest, with foreign-currency reserves worth more than $2.4 trillion. No public financial institution boasts that degree of financial-asset firepower. Of that total, more than $800 billion is held in U.S. debt.

A war chest of this size serves as a great insurance policy during tough economic times. The trouble is that China is painfully aware of the damage that U.S. dollar inflation will inflict on that massive hoard of greenbacks.

During a visit to New York last February, Luo Ping, a director general at the China Banking Regulatory Commission said: "We hate you guys. Once you start issuing $1 to $2 trillion… we know the dollar is going to depreciate, so we hate you guys, but there is nothing we can do."

That's not completely true – there are some things that China is already doing. When that Asian giant recently announced an increase in its official gold reserves, it said the total had catapulted by 76% since 2002, reaching 1,054 tons. China accomplished this without a single purchase on global bullion markets. How? By quietly becoming the world's largest gold producer, then buying up all that it produced.

Red Gold to Back a New Currency?

I expect China will continue to covet gold. But with such a large reserve in dire need of both diversification and securitization, this emerging global superpower of 1.3 billion citizens has set its sights on other tangibles. Let's face it, the gold supply is small, and China needs resources of all kinds.

So it makes perfect sense for Beijing to trade holdings it has too much of – like U.S. Treasuries, for example – for assets China needs more of, like copper. There are multiple benefits to this strategy, too: Not only is China swapping a holding whose value is declining (dollar-based holdings) for a tangible asset whose value is on the rise (copper), it's also getting (in copper) an asset that's central to its ongoing infrastructure build-out.

Yet some believe that China's actions reflect a new strategy, since this acquisition binge goes way beyond national consumption requirements. And with a full war chest, that buying could be sustained for some time.

Copper could be used to back a currency, but it's also necessary for the modernization of China, and even in the next wave of automobile technologies – both electric and hybrid – an industry this nation could lead.

China's share of the copper market is a world-dominating 38%. Clearly, its 2009 record import levels helped vault the copper price by 226%, from its January slump of $1.50 per pound to a recent high near $3.40 per pound.

As China was buying hand over fist in early 2009, copper prices began to rebound. London Metals Exchange (LME) statistics underscore that copper stockpiles were raided from February until mid-July.

What happened next, however, was both surprising and counterintuitive.

As copper stocks continued to rise in the second half of 2009, the price of copper rose, as well – zooming from $2.50 a pound to about $3.40. The last time copper stockpiles were above 500,000 tons, the metal's price was $1.50. So copper at $3.40 was looking quite overbought considering current stock levels.

Dr. Copper's Diagnosis

Commodities traders often refer to this all-important non-ferrous metal as "Dr. Copper." Its price and supply/demand characteristics are widely assumed to reflect the health of the world industrial economy, hence its "Ph.D. in Economics."

Given that reputation as an excellent barometer, it's tough to understand just what's keeping copper prices high at a point in which the risks of a double-dip recession worldwide are exceeded only by the fears of one.

So what's propping up copper prices? For one thing, hedge funds are taking physical positions in the metal, rather than through futures contracts, due to concerns the Commodity Futures Trading Commission (CFTC) will bring in position limits.

What's more, China's State Reserves Bureau has purchased large amounts of copper, pushing the nation's year-over-year imports up by 63%.

The Longer-Term View

I am convinced that we are still relatively early in a secular commodity bull market. In fact, with the modernization of Chindia and numerous other less-developed nations, I expect this bull market will be one for the record books. Fundamental demand coupled with inflation will push resource prices to unimaginable heights.

But that doesn't mean – in the intermediate term – that copper hasn't gotten ahead of itself. Look for its price to weaken somewhat before the price of the metal resumes its upward trajectory.

Even if a new international commodity-backed currency were to emerge, it's likely that copper will only be one of its underlying components.

For now, copper will continue to be overwhelmingly used in industry and infrastructure, with 75% of output going into electrical applications.

From my vantage point, gold will remain the ultimate form of money, while copper will retain its Ph.D. in Economics.

That's why I'm not expecting copper thieves to steal Lady Liberty's dress and melt it down, but I do expect copper to become increasingly valuable as our secular commodity bull rages on.

The last question investors need to answer is a simple one: How do I profit from this trend? If you're looking for a simple way to play copper directly, check out the iPath DJ AIG Copper TR Sub-Index (NYSE: JJC) Exchange-Traded Note. This ETN tracks the price of Copper High Grade Futures Contracts traded on the New York Commodities Exchange.

[Editor's Note: Peter Krauth is a contributing editor to Money Morning and is also the editor of the Global Resource Alert advisory service. A highly regarded market analyst and expert in metals and mining equities, Krauth specializes in energy- and resource-related investments.

A one-time portfolio advisor, Krauth is now headquartered in resource-rich Canada, where he focuses exclusively on his research. He last wrote about gold's potential to be "The Greatest Trade Ever," and detailed how super-investor John A. Paulson could use his gold holdings to vault himself to the top of the Forbes billionaire's list.

For more information on profit opportunities in gold and other commodities, check out the Global Resource Alert.]

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About the Author

Peter Krauth is the Resource Specialist for Money Map Press and has contributed some of the most popular and highly regarded investing articles on Money Morning. Peter is headquartered in resource-rich Canada, but he travels around the world to dig up the very best profit opportunity, whether it's in gold, silver, oil, coal, or even potash.

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  1. rich | February 9, 2010

    THanks for this informative piece.

  2. R Jensen | February 10, 2010

    "Copper is also used in today's currency, where most U.S. coins are actually 92% copper, and 8% nickel."

    And which coin is that??

  3. John | February 10, 2010

    Only pennies before 1982 were made mostly of copper. Form mid 1982 forward they are made of mostly zinc. So – keeping memorial pennies made from 1959 through 1982 is a wise way to hoard copper at WELL below spot price. And if something goes wrong, you can always use the pennies as pennies and get your money back. Zero risk, and good upside. PLus fun to do.

    I have about 1.5 tonnes of copper so far form sorting pennies. And a bucket full of wheat pennies that came in the batches too. I'm going ot keep sorting until they disappear from circulation. Then I'll sell in bulk, as I see others doing on ebay even now. Hopefully for about 4 cents per penny. NOt a bad investment, with zero risk. :-)

    hoard pennies. 1982 and older!

    • drsanto | February 15, 2010

      RE: "PLus fun to do"- Completely agree!

      RE: "keeping memorial pennies made from 1959 through 1982 is a wise way to hoard copper at WELL below spot price"- You're absolutely right. In fact (and for some time now), the Chinese are buying up pennies and shipping them to China to melt. Its much cheaper to mine them from circulation, than from rock and dirt.

      RE: "I have about 1.5 tonnes of copper so far form sorting pennies"- Good Lord! Where the heck do you store all those? I've got a few milk (and other plastic) containers filled with coins and its like… Umm… these suckers are heavy and~ where the heck do I put them?

      RE: "And a bucket full of wheat pennies that came in the batches too."- Very cool. I'm a coin collecter and hoping to fill a book with coins I find this way. Sounds like you have a better start than I do!

      Respectfully, I would suggest that people also hoard nickels. Not long ago, the metal content was worth about $.08. It's down to about $.0485 (http://coinflation.com/), but depending on the fluctuating costs of metals and effects of inflation, could be worth significantly more as time goes on.

      As a divorced dad dealing with custody issues, I don't have the money to hold that much of anything, but (as pathetic as it sounds) this is kinda my current "savings" plan. It's really all I have a chance to put away now and if I can, I'm going to hold onto them like some held onto silver (back in the day).

      Best wishes.

      DRS

      • Andrew J. Smith | October 8, 2013

        Dear Sir, I have enjoyed reading your article on copper. However, the US cents were 95% copper up until 1982(transition year). Today, our cents are not made with copper. Andy Smith

  4. paul | February 11, 2010

    Interesting, but there is an error in the 4th paragraph talking about the composition of a US penny. The penny actually contained 95% copper with 5% impurities (mostly zinc or tin) up until mid-1982. After that point, the composition was changed to 97.5% zinc with a copper plating making up the remaining 2.5%.

  5. Von S | February 11, 2010

    Excellent article and you better believe Copper and other base metals will rise significantly over the next 10 years. Don't even mention rare earth metals- China is cornering and dominating this market….many of these rare materails are used in advanced weaponry and satellite technology.

    The US needs more mines and it's people need to save their copper pennies (no joke).

  6. BullionTracker | February 11, 2010

    Start collecting the pre 1982 pennies.

  7. Chipper | February 11, 2010

    The author is referring to modern Dimes, Quarters, and Halves.

    http://www.coinflation.com/coins/1965-2007-Washington-Quarter-Value.html

  8. Adam | February 11, 2010

    Yes, Investing in copper pennies is defintly the way to go. Limited downside since they are worth a minimum of 1 cent. Best part is that you have unlimited upside too!

    If you don't have time to sort or don't know how here is a company that sells copper in bulk! http://www.portlandmint.com

  9. A/M/G | February 11, 2010

    Some of the 1982 pennies are made of 97.5 % zinc also. The only way to know the difference is to weigh them.

    • drsanto | February 15, 2010

      You can also drop them on a counter and listen for the distinctive sound difference. The copper pennies have a ring sound, while the zinc almost have a "thud" sound.

      Take the questionable (1982) penny, along with one pre-1982 (i.e., 1981 and before) and another post 1982 (i.e., 1983 and later) and drop them on the counter, one after the other.

      Drop the 1982 penny on the counter and compare the sounds. It's easy to tell, once you know the difference.

      In fact, we've done it so many times, my 11-year old can guess what it is without even seeing the penny. :-)

      DRS

  10. A/M/G | February 11, 2010

    The 1982 copper penny weighs 3.1 grams the zinc weighs 2.5 grams.

  11. Paul | February 13, 2010

    The author mentions that that our currency is 92% copper and 8% nickel – that is true! Our clad coinage (dimes, quarters, half dollars) are 91.67% copper and 8.33% nickel overall (see coinflation.com). There is no mention of the penny in this article…

  12. Joe Stewart | June 10, 2013

    Interesting post. I never thought to look into copper because the cost is so low, but there could be a huge potential over the long haul. I have personally been stocking up on silver because we all know there is less silver in the world than gold.. plus with all the electrical and medical uses for silver I think demand will be very high.

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