Why Copper and Oil?
  • August 03, 2017 09:11 am
  • by Bill Cara

Why invest in Copper and Oil? It’s the economy, stupid.

Economic growth is a driver of consumable commodity prices of which Oil and Copper are the most important. And as I see it, the China PMI Manufacturing Index is an excellent leading indicator of global economic growth.

The graph of the China Manufacturing data compared to movements in the Copper price shows a high correlation between the two.



As the China PMI index jumped in 2H2010 from a reasonably healthy 51.20 to a red hot 55.20, the price of Copper soared from about 2.85 to about 4.45, a gain of over +55% in the same six month period. Economic growth concerns then hit China so that the PMI Index dropped to an alarming 49.0 level shortly after the price of Copper had plunged to the 3.00-3.40 range in the 3Q2011. After a 1H2012 improvement in China’s PMI where the price of Copper rallied somewhat to around 3.75, the 3Q2012 PMI dipped again below 50 and the price of Copper dropped below 3.40 again. Moving ahead to 3Q2014, after the price of Copper weakened again, the China PMI once again dropped below 50. After briefly rising above 50 in 2Q2015, the China manufacturing data grinded lower for eight consecutive months with readings between 49.0 and 49.9. The price of Copper sunk to a low of 2.00-2.10 during this time. In 2Q2016, with three consecutive months of PMI readings barely above 50, the price of Copper then managed a rally to barely 2.30 before settling in the 2.10-2.20 range in 3Q2016. Then in September and October 2016, the PMI Index strengthened to 50.4, which cleared the overhang in copper contracts so that when the November PMI jumped to 51.2, the price of Copper also jumped, rising to 2.70. The December 2016 and January 2017 PMI further strengthened to 51.7 and 51.4, which carried the price of Copper into the 2.75 level. Recently, the price of Copper has reached the 2.85-2.90 level as the China PMI Index has been reported as a strong 51.7 and 51.4. As the last week’s 51.4 was a tad shy of 51.6 consensus forecast, the price of Copper held back from touching a milestone 3.00.

In early May this year, the 2.47 support level for Copper held, leading me to start writing about the leading Copperminers, like BHP, Southern Copper, Freeport McMoRan, HudBay and First Quantum. I had been already seen the renewed interest in the Oilers on account of strengthening in the world economy as well as the efforts of the majority of Oil producing countries to lift the price of Oil to levels that would attract capex needed to sustain that industry, and I felt the same would be happening in Copper.

As noted in this blog, I recommended the Oil Fund USO at 8.95, which is now well above 10 and I added to positions in my highly leveraged (but very well managed) Canadian Oilers Baytex, MEG and Cardinal. I might have gone for the Big Oil stocks, which I believe have the capacity to double in price in this Bull market cycle, but I believe that $WTIC prices of 55, 65, 75 and higher will boom the junior Canadian Oiler stocks by 5x to maybe 10x. One day soon, I will publish a template on my expectations, which I think 98% of readers will find incredulous. However, I have done my homework, so I am confident.

Also, as noted in this blog, on July 27 I purchased HudBay (HBM) at 7.50 and under, which within hours lifted to 8.05 before falling back after the mildly disappointing China PMI manufacturing data to close yesterday at 7.70. I believe before the current Bull market exhausts itself that HBM will be a 3x winner. For now, HBM requires a break-out above 2.95-3.00 in the price of Copper, which will happen should the China manufacturing data continue to post +51 levels, as expected.

Somebody yesterday said to me that everybody seems to have opinions based on squiggly lines of a price chart; however, the issue is that almost none of them will post their trades. As a true investor, I will do that along with the caveat that the reader appreciates that investing takes patience. Those who treat the market like a computer game are going to be eaten up by price direction controlling computer algorithms and high frequency traders.

Enjoy your day. The message I have tried to give here is that prices in the long run are caused by drivers such as economic supply-demand, currency rates, central bank policies, and so forth. It is important to let the drivers work in your favor over months and years and to ignore the daily sound-bite media.

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