June 25, 2012

Watching ‘Dr. Copper’

Part V in our series. Thanks to Troy Warwick for analyst coverage.

Industrial materials have always been useful tools in the prediction of economic prospects to come. Of these materials, copper is most notably reliable in indicating future market moves—in fact, some investors call the metal "Dr. Copper" because of its trend-predicting ability. Most of copper’s usage is put in place before industries are created, like in telephone wires and electrical equipment, which explains it use as a leading economic indicator.

The three main funds that track copper futures (CPER, CUPM and JJC) have dropped 15% in the last three months. Most investors see this drop in price as a result of lowered expectations of global economic growth. Worries over Greece’s New Democracy government and the continually shaky Spanish economy have been contributors as well. If the summit this week between European nations do not yield any real solutions in the euro debt crisis, copper will likely continue to drop.

China also has the ability to drastically affect the copper market. Focusing on massive industrial growth in recent years, that country has become the world’s largest consumer of copper, with about 40% of the global market. A large attributing factor in the drop of copper value is due to the slowdown of Chinese growth.

So what can Dr. Copper tell us? Investors may want to monitor the three funds listed above for evidence of bottoming in the red metal. Observing how the funds react to inputs of new information may also be useful—for example, if the funds rally on bad news that may portend a change in trend. At any rate, as we’ve said numerous times, the crisis in Europe will eventually be resolved, so market participants should be looking for opportunities to redeploy risk capital sometime in the next three or so months.

Reprints Discuss this story
This is where the comments go.