Serious Warning for Copper Investors

Written By Geoffrey Pike

Posted March 30, 2016

copperpiThere is always a competition between the usefulness of raw materials and new technology.

Let’s take oil as an example. Some people worry about peak oil. Oil is obviously a very important commodity in our world today. We depend on much of our energy needs coming from the use of oil.

But we don’t know what the world will look like in several decades. Perhaps electric cars will become more efficient, useable, and affordable. Perhaps there is another technology that will come along that will replace all of this to make transportation inexpensive. Peak oil may not even matter.

As long as there is something of a functioning free market economy, then commodities will be allocated efficiently in accordance with consumer demand. If the world starts running out of oil, then prices will adjust. New alternatives will start to look more attractive and new research and investment will go into those alternatives due to the higher profit potential.

This obviously isn’t much of an issue with oil these days, especially as the black gold has sunk to less than half its price of a few years ago.

However, copper is seeing major competition from technology today – if you want to call it that. One of copper’s biggest rivals right now is plastic.

The U.S. is the second-larges user of copper (China is first), but demand for copper has been sinking over the last decade despite mostly falling prices.

It isn’t so much the supply of copper at issue, but whether it is the most practical material for things such as communications, electronics, and plumbing. When it comes to plumbing, demand for copper is way down, as plastic has become a more popular material for tubes and pipes.

Copper was part of a major boom in commodities in which the price reached new highs about 5 years ago. Prices have plunged since. But this period where copper was really expensive may have led people to seek cheaper alternatives. The problem for the copper industry is that many realized that the alternatives were just as effective as copper in many cases, and they still remain cheaper.

In other areas, such as telecommunications, fiber-optic cables have replaced copper lines in many cases. Again, technology changes and consumers will seek the most efficient and inexpensive technologies available to fit their needs.

Copper as an Investment

When compared with other commodities, copper is in a similar slump. Silver and gold went on bull runs up until about 5 years ago before giving up some of the big price gains. Oil peaked at the height of the boom in 2008, and then went up again until 2014. Since then, it has fallen like a rock.

Therefore, we don’t know how much of copper’s decline is due to changing technologies as compared to its correlation with other metals and commodities in general.

Copper is obviously an industrial metal. While gold and silver are used as industrial metals, they are also used heavily in jewelry and investment.

It is wise to always have some gold as part of a good and balanced portfolio. Gold is a hedge against massive inflation and disaster. Copper is not.

Copper tends to follow the general economy more closely. But while the economy hasn’t been great lately, it hasn’t been horrible either, at least in terms of growth. Yet copper has not been pretty for investors.

There is nothing wrong with investing in copper, but it is not recommended for the long term. It is more of a speculative investment. It is not a buy and hold forever type of investment.

Copper has been beaten down a lot, so it may have another run up for investors. Still, I don’t see now as being a good time. If the economy goes into a downturn, it will probably not be good for copper.

Meanwhile, China – which is probably the biggest factor right now – is not looking good. As the economy continues to slump in China, we should expect demand for copper to soften even more.

If the economy gets really bad and the central banks – particularly the Fed – get more aggressive in money creation, then copper may benefit just from being a hard asset. But in that situation, it is probably better to have gold and silver.

In the long run, there may be one hope for copper investors. As technology progresses even more, perhaps something new will come along that requires copper as one of its inputs. Just as plastic is now used heavily in plumbing, maybe copper will end up being used heavily in some new type of electronics or telecommunications that we cannot yet envision.

Meanwhile, stick with gold and silver as your core precious metal investments. Copper is for speculation when the time is right.

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