Metals have so many uses. They have tons of industrial applications, they’re aesthetically pleasing… and they can tell us a lot about the current state of the economy.
Gold is the best-known example of “metal price as economic indicator.” The yellow metal’s reputation as a safe-haven asset often sends its price to new heights during periods of investor pessimism.
But did you know that there’s a metal whose price tends to spike during periods of economic optimism?
Copper is one of the most widely used industrial inputs in the world today. It’s in everything from laptops to skyscrapers to car engines — so when economies expand, people use more of it.
Wanna see how the global economy is doing in a single chart? Check out the copper-gold ratio.
As you can see below, it’s currently pointing to an interesting opportunity.
After touching an all-time low in the spring of 2020, the copper-gold ratio is rebounding — and is now attacking a key resistance level at 0.00016.
So why is copper breaking out? Can we expect the rally to continue? And what stocks can investors use to profit from this trend in 2022?
This report will answer the above questions in the order they were posed…
This Industry Could Push Copper to New Heights
As we mentioned above, copper is used in a variety of machines — including vehicle engines. But electric vehicle (EV) engines are really loaded with the stuff.
While most internal combustion engines contain about 55 pounds of copper, a Tesla Model S engine contains about 165 pounds of copper. That’s three times more!
With that in mind, it’s worth considering what the recent explosion in the valuation of the EV industry means for copper. Over the last five years, no less than five EV stocks – Tesla, Lucid Motors, Rivian, Li Auto and XPeng – have achieved returns of more than 1,000% each.
And this growth isn’t expected to slow down in the 2020s. A December 2021 KPMG survey of auto executives found that on average, respondents expected 52% of new vehicle sales in the U.S., Japan and China to be all-electric by 2030.
The recent growth of the EV industry is certainly a bullish sign for copper, but the metal would be worth investing in even without it. In fact, the broader economy is flashing a buy signal for it…
The Metal With a PhD in Economics
Copper’s tendency to track global economic fluctuations has given rise to a jokey nickname for the material among commodities traders and economists: “Dr. Copper, the metal with a PhD in economics.”
Below is a zoomed-out version of the copper-gold ratio chart from the beginning of this report.
As you can see, Dr. Copper’s predictions have a pretty impressive track record. The metal peaked in value relative to gold at the very beginning of the late-2000s subprime mortgage crisis — well before the 2008 crash — and then bottomed about six weeks before the Dow bottomed in the spring of 2009.
It was similarly accurate in finding the bottoms of the early-2000s bear market and the 2013 “taper tantrum” downturn.
After each of these relative minima in the gold-copper ratio, copper entered a multiyear period of sustained growth relative to gold — making copper investors very wealthy in the process. And based on the chart at the top of this report, we appear to be at such a minimum again.
So which copper stocks are best positioned to take advantage of this rally? Two stood out enough to merit inclusion on our watchlist…
Turquoise Hill Resources (NYSE: TRQ): An Undervalued Copper Play
Founded in 1994 and based in Montreal, Turquoise Hill Resources owns a 66% share of the Oyu Tolgoi copper-gold mine in southern Mongolia, one of the world’s largest copper mines. It also controls smaller mining operations in Australia and Kazakhstan.
Turquoise Hill’s share price took a tumble in late 2019 amid uncertainties about how it would fund a planned expansion to Oyu Tolgoi. Investors sold out of the stock for fear that it would be forced to undertake another equity offering, but the firm has since figured out how to close the funding gap through a combination of gold streaming and borrowing.
That sell-off, however, has left the company with a very low valuation. At the time of writing, Turquoise Hill shares trade for less than 5.5 times earnings and less than 0.3 times book value. The firm also has a low debt-to-equity ratio of 47.20%.
But if value investing isn’t your thing, there are plenty of growth stocks in the copper industry as well. In fact, one such stock caught the attention of our analysts…
Ero Copper Corp. (NYSE: ERO): A Copper Stock for Growth Investors
Founded in 2016 and based in Vancouver, Ero Copper is a mining interests holding company which owns, among other possessions, a 99.6% interest in Brazil’s Mineração Caraíba S.A., a 40-year-old firm with an integrated mining-processing complex in Bahia State in eastern Brazil, and one other mine in the northern Brazilian state of Para.
The firm’s shares have nearly tripled in value over the last five years. And its income statements show good reason for that price action.
Ero has grown earnings per share (EPS) by a dizzying 885.6% year-over-year as of the fourth quarter of 2021, on an impressive 51.1% increase in revenue.
Given the bullish climate for copper, we can expect this growth to continue this year.
Wealth Daily’s watchlist: Turquoise Hill Resources (NYSE: TRQ), Ero Copper (NYSE: ERO)
As we’ve discussed, copper has a long history of making its investors very wealthy in the aftermath of major economic downturns. And given that the post-COVID-19 recovery prominently features a host of new EV companies with lots of demand for copper, the metal’s future looks bright.