Perhaps the (quiet) rally in gold has been telling us something. Commodity prices typically rise with inflation, and it shouldn’t be a surprise that they tend to be leading indicator – since actual real-time demand tends to occur before the reporting of final demand (weeks or months later).  The U.S. Bureau of Labor Statistics just announced the following:

Prices for final demand less foods, energy, and trade services advanced 0.4 percent in January, the largest increase since a 0.4-percent rise in April 2019.

This amounts to a 4.8% annualized rate of inflation.  There are no doubt temporary blips explaining the high reading, but nevertheless it is high. To date, the threat of inflation has been negligible, which is why central banks have kept interest rates so low – to actually encourage some inflation.  The good news for resource and basic industries is that inflation translates into rising prices for various commodities.

I’ve written about the rally in gold, but experience has taught me that other metals usually follow suit.  And indeed, it seems like copper prices have bottomed, which makes me interested in the stocks that – like most commodity stocks – have been ignored and are therefore oversold and under-owned.

China’s output of copper cathode declined sharply in January, due to environmental protection-related curbs and as some smelters scaled back operations after fulfilling the production targets for 2019. (Metal News – Published on Tue, 11 Feb 2020).

What I expect to see is a draw-down of inventories around the world (reduced supply) ahead of a slow rebound in the price of copper (same for nickel, aluminum etc.)  This seems to have been the case.

I’d also like to see the price of the commodity drifting gradually higher in recent weeks.  Although volatile (all commodity prices are due to hedge fund trading and other interference with physical markets) the price of copper seems to have bottomed nicely and is trending upward.

My next post will discuss a couple of stocks that are likely to benefit from the evolving dynamics of the copper market, as well as a rotation (which I expect) out of former market leadership (FAANG stocks) and into real economy industries (resource and other).

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