Written by Steven Hansen
There is a general belief by investors that holding copper can protect portfolios from rising prices, and copper’s price trends are a bellwether for economic growth.
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Copper’s long history of predicting economic movements has famously earned it a nickname as the metal “with a Ph.D. in economics”
In other words: when construction and manufacturing are growing, so do sales of copper products. But this link as an economic gauge has other important implications, especially to investors looking to build a robust portfolio.
Rising prices come from an overheating economy with strong consumer spending – the same factor that is an influence on copper prices. As a result of this connection, tor every 1% annual increase in consumer prices since 1992, copper’s price jumped almost 18%.
In an analysis by Bloomberg Intelligence, copper outperformed every major asset class aside from energy as an inflation hedge – and during periods of rising consumer prices, copper had triple the 5.2% gain logged by gold.
While copper’s link to economic trends is interesting, it’s power to shield a portfolio from inflation is even more compelling.
Then according to common beliefs, 1) you watch copper price trends as an economic indicator, and 2) you can use copper as an inflation hedge.
Inflation and Investing
In my view, copper is 20th Century. Copper (blue line on the graph below) has underperformed inflation (red line on the graph below) for significant periods pre-2005 so it appears far from an inflation hedge. Copper price growth is also currently underrunning growth of GDP (green line on the graph below).
And since 1990:
| element | percent price growth since 1990 |
| copper | 240% |
| inflation | 200% |
| GDP | 360% |
| Dow Jones Average | 1060% |
Copper As An Economic Indicator
Back in the 70s and 80s, it was common practice for industry to monitor copper prices and volumes as copper WAS a great indicator of global economic growth. But since then, the advanced economies have migrated from goods based economies to service-based. Copper is firmly an industrial commodity – and only 13 % of employment and 15 % of GDP in the USA comes from the goods-producing sector (primarily construction and manufacturing). And from the graph above, one can see that GDP trends and copper price trends do not correlate.
Conclusion
Dr. Copper no longer has a Ph.D in economics.
Economic Forecast
The Econintersect Economic Index (January 2020) forecast fell again this month and continues to show the lowest level of growth since the economic slowdown in 2016. The current reading is now marginally below the 2016 minimum. The ongoing weakness of manufacturing, transport, and imports continues to weigh on our economic forecast. It is interesting that other economic forecasts are all over the map in the direction of the economy.
Although our index is now in negative territory similar to 2016, this penetration into negative territory is not yet severe or persistent – and our opinion is that our index is not suggesting an economic contraction at this point. But another month of decline might be enough to suggest it is possible a recession is coming.
Our employment forecast is forecasting POOR employment growth.
Economic Releases This Past Week
The following table summarizes the more significant economic releases this past week. For more detailed analysis – please visit our landing page which provides links to our complete analyses.
Overall this week:
Coincident indicators are not showing a soft economy
Manufacturing surveys continue to show weak growth
December home sales saw significant growth
Chemical leading indicator forecasting economic improvement
Transport continues weak and in contraction
| Release | Potential Economic Impact | Comment |
|---|---|---|
| December Chicago Fed National Activity Index | the economy remains below the trend rate of growth | The economy’s rate of growth marginally improved based on the Chicago Fed National Activity Index (CFNAI) 3 month moving (3MA) average – but the economy continues well below the historical trend rate of growth. The three-month moving average of the Chicago Fed National Activity Index (CFNAI) changed from -0.31 (originally reported as -0.25 last month) to -0.23
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| December Existing-Home Sales | n/a | The headline existing home sales improved relative to last month with the NAR stating “Conditions for buying are favorable and will likely continue in 2020.”. The rolling averages for existing home sales have been improving since early 2019. The rolling averages are now well into expansion. This report is much stronger than last month. Housing inventory (homes for sale) has dropped to 21st-century lows.
|
| December Chemical Activity Barometer | forecasts the economy may improve | The Chemical Activity Barometer (CAB) jumped 0.6 percent in January on a three-month moving average (3MMA) basis following a 0.1 percent gain in December. On a year-over-year (Y/Y) basis, the barometer rose 1.4 percent.
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| December Sea Container Counts | Still indication a slowing global economy | The 2019 data for the Ports of Los Angeles and Long Beach shows exports down 5.8 % and imports down 5.5 %. A significant reason for the soft container trade data for West Coast ports is the trade war with China. However, it is not the only reason as the global economy was weak – and China’s previous trade could be assumed by other countries. Simply looking at this month versus last month – this month was an improvement over last month for exports but worse for imports. The year-over-year rate of growth declined for imports and improved for exports. Year-to-date growth for both imports and exports remain deep in contraction. The three-month rolling averages for exports and imports are also in contraction. Some pundits think that the new Panama Canal locks have affected the West Coasts container counts – our analysis is that there is little impact. Many do not understand that the new locks are more expensive per ton. HOWEVER, a new trend is developing where the Suez Canal is being used more for shipments to the U.S. east coast.
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| December Trucking Industry Growth | indicates a weak economy | Headline data for the American Trucking Association (ATA) and the CASS Freight Index are providing opposing statistics – is trucking up or down? The CASS index is inclusive of rail, truck, and air shipments. The ATA truck index is inclusive of only trucking industry member movements (ATA’s tonnage data is dominated by contract freight). Even so, CASS breaks out trucking and claims it is down 3.3 % year-over-year and down 1.9 % month-over-month. I tend to put a heavier weight on the CASS index which is consistent with rail and ocean freight. It is not logical that truck freight goes up when industrial production and ocean freight decline.
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| Surveys | manufacturing surveys remain weak | Kansas City Fed Manufacturing Index – Of the three regional manufacturing surveys released for January, two were in expansion and one was in contraction. Kansas City Fed manufacturing has been one of the more stable districts and their index even though below the range seen in the last 12 months. Note that the key internals were in contraction. This should be considered similar to last month.
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| Weekly Rail Transport | Definitely not positive news | Rail, beginning early in 2019, has changed from a reflection of a strong economic engine to contraction. Currently, not only are the economic intuitive components of rail in contraction, but the 52 week rolling average is in contraction.
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Links To All Of Our Analysis This Past Week
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