copper bars on top of US dollar bills
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Economic predictor, inflation hedge or investment idea — copper has something for everyone.

Move over, gold and silver — the humble copper has emerged as a potential hedge against inflation.

Copper’s credentials come from its wide use in the global economy. In 2020, 43 percent of the copper produced was used in the building and construction sector, 21 percent in electronics, 19 percent in transportation, 10 percent in consumer goods and 7 percent in industrial machinery.

Every single major sector of the economy uses copper, and because of that, its fate is tied closely to general economic growth, to the extent that the metal can be used as a bellwether for investment purposes. If the price of copper is rising, that means demand for copper is increasing and the economy is growing. If it’s beginning to fall, demand is sinking and the production of goods and services is being scaled back.

Copper and inflation: Inflation nation

But this isn’t copper’s only superpower. Because of how copper is tied into the world economy, it provides an excellent hedge against inflation. This happens for two reasons. Firstly, copper prices tend to rise before general consumer prices rise, and so the commodity can be bought as a proactive inflation hedge.

Secondly, since copper is used in many products, its price increases can be passed down into final consumer products, which will then undergo inflationary pressures. As copper is used across the economy, these pressures can be felt in every sector, once again leading to consumer price rises.

A Bloomberg analysis completed in 2017 shows that for every 1 percent rise in the Consumer Price Index from 1992, copper prices rose an equivalent 18 percent. The red metal outperformed all other major asset classes (excluding energy) and impressively rose twice as much as gold.

Another benefit of using copper as an inflation hedge is that it’s much cheaper than both gold and silver, allowing retail investors to use it without burning too much of a hole in their pockets.

For a number of ways retail investors can invest in the metal, check out number six on this guide.

Copper and inflation: The risks

Copper's benefits are tied closely to economic growth, but there are risks as well. During economic downturns copper is generally the first to be affected — for example, at the beginning of March 2020, as COVID-19 lockdowns all over the world started to be initiated, copper prices fell rapidly, just managing to stay above US$2 per pound, the lowest level since 2016. During the 2008 recession, copper prices dropped to US$1.30.

This is compounded by the larger cyclical nature of the economy, which also applies to copper. The red metal experiences deep waves and troughs as it mirrors general economic growth or contractions.

Additionally, copper is not seen as the store of wealth that gold and silver are. There is no historical precedent of copper being valued for itself, and copper is in fact is often used as a substitute in inexpensive jewelry. It’s not considered a “safe” investment, and its volatility with regards to price movement can explain why investors would rather use a stable investment, like gold, as a hedge.

Another key risk is how world copper consumption is heavily tilted towards China. In 2020, China consumed more than half of the copper produced in the world. Europe, Asia and the Americas made up most of the other half. Any big changes in the Chinese economy will change demand — and prices — for copper. In 2016, copper prices fell to a six year low as the Chinese economy underwent a slowdown.

Copper and inflation: The green economy

Despite copper’s cyclical risks, there’s a growing argument being made for more secular demand for the metal. That thesis rests on the advent of the green economy. Copper is one of the fundamental cornerstones of switching to net-zero emission commodities because of its excellent conductivity.

As countries around the world pursue electrification and other forms of renewable energy, copper demand is going to increase. The UK-based Copper Alliance estimates that copper demand will grow by 50 percent by 2050.

Research from Calamos Investments shows that renewable energy generation is five times more copper-intensive than a conventional power grid. Wind turbines, for example, are a huge copper sink; indeed, one onshore wind turbine uses as much as 4 tonnes of copper. For offshore turbines, this could increase to up to 15 tonnes of copper per megawatt of installed capacity.

And then there’s electric vehicles, which require four times more copper than internal combustion engines. Additionally, these vehicles need places to charge, and each charging station requires 10 kilograms of copper.

On the other side of the coin, copper production has been stable for the last 15 years, growing by less than 1 percent every year, and new copper mines take years to develop, according to Nick Niziolek, co-chief investment officer and head of international and global strategies at Calamos Investments. He told Barrons, “We think copper is a great commodity because its supply hasn’t been developed in a significant way in the last 15 years."

Stable — and in some cases, constrained — supply, plus growing demand, make for an appealing investment.

But coming to back copper's potential as another option for managing inflation: The red metal's price went from US$5,000 per tonne in April 2020 to US$10,000 in May 2021, doubling in value. In the same period, US inflation came in at 5 percent. If inflation is expected to continue, one can expect the copper comeback is here to stay.

This is an updated version of an article first published by the Investing News Network in 2011.

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Securities Disclosure: I, Pallavi Rao, hold no direct investment interest in any company mentioned in this article.


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