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.

Copper cut to sizeThis 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.

Copper Warehouse Level Feb2020

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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About the Author

Malvin Spooner is a veteran money manager, former CEO of award-winning investment fund management boutique he founded. He authored A Maverick Investor's Guidebook which blends his experience touring across the heartland in the United States with valuable investing tips and stories. He has been quoted and published for many years in business journals, newspapers and has been featured on many television programs over his career. An avid motorcycle enthusiast, and known across Canada as a part-time musician performing rock ‘n’ roll for charity, Mal is known for his candour and non-traditional (‘maverick’) thinking when discussing financial markets. His previous book published by Insomniac Press — Resources Rock: How to Invest in the Next Global Boom in Natural Resources which he authored with Pamela Clark — predicted the resources boom back in early 2004.

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