Copper is back on the march.
It’s rallied 10% since hitting a short-term bottom towards the end of June.
At this stage in the cycle, there’s always an argument about whether we are in a cyclical or secular bull market.
It’s been over a year since the pandemic ripped markets apart. With so much money printed, stimulus doled out, and loans guaranteed since then, it’s not surprising that we’ve had a rip-roaring recovery in asset prices.
Some people believe this will be short lived and that copper’s higher price point can’t possibly be sustained. They think this recovery doesn’t have much further to go and it’ll simply be a short cycle.
Meanwhile, there are others who think this recovery is going to power on for years to come. They look at what’s happened after every other negative surprise and conclude a new secular (long-term) bull market is unfolding.
For example, after the tech bust and 9/11 many people thought the economy would never recover. It was around that time that copper broke out and ran ahead for years.
But, every new big bull market needs a few things to fall into place if it’s to truly reach its potential…
- You need a big source of new demand. There has to be a new market that opens up – which will buy the product for years to come.
- At the same time, there has to be enough money floating around in the system so anyone who wants to buy can do so.
- There has to be a shortage of supply. That keeps prices high and ensures the desirable product is hard to come by.
When all three of these characteristics fall into place, we can see prices rally for years at a time.
Today, I see that in the copper market.
The metal has traditionally been used for wiring and conducting electricity.
Today, and in the future, it will play a vital role in the energy generation and recharging sectors. Everything from wind turbines, recharging stations, and electric vehicles requires copper. These are all growing industries that will provide demand for years to come.
But it takes decades to bring a new major copper mine online. There’s just not enough of the metal around to meet the demand coming from new industries. A major round of investment in new mining exploration and infrastructure building will be required to bring a new copper supply online.
Fortunately, we’re still in one of the most liquidity rich environments in history. With so much uncertainty about the coronavirus variants, central banks will be very cautious about removing liquidity now.
That abundance of liquidity has inflated asset prices over the last year and continues to be a major factor in supporting bull markets.
That’s great news for existing copper miners. Freeport-McMoRan’s (FCX) Q2 earnings were up 82% from 2020, and Southern Copper (SCCO) reported a 259% jump in Q2 earnings despite a hit to production because of COVID.
Even though copper dipped in early June due to action in the sensitive dollar and Chinese markets, the market now reflects the positive earnings reports. And, copper has rebounded impressively over the last week.
So, how can you take advantage of copper before its next move?
Well, the Global X Copper Miners ETF (COPX) is a great way to gain exposure to copper. COPX hit a peak in May and spent most of the last three months pulling back. However, it recently found support last week near its 200-day simple moving average and has rebounded.
So, with governments lining up with clear energy plans for the post pandemic recovery, the continuing liquidity, and the natural scarcity of the metal… it’s a perfect time to buy copper. That’s what a secular bull market is made of, after all.
All the best,
Co-Editor, Market Minute