Industrial commodities -are they cheap?
Updated: Aug 19, 2020
Dear reader, hope the summer break has not only been different, but very refreshing.
Outside the roaring equity bull market, there is a forgotten asset class worth paying attention to. It was not oil which was I had in mind, on the contrary, I was thinking of commodities in general, but for this occasion; industrial metals.
Some key bullet points:
Supply disruptions due to the current lock down.
Copper is cheap relative to gold
Declining US Dollar
Latest LME records for copper warehouse data state equally low inventories as those seen in 2008. This seems at first very interesting indeed, is the market near sold out?
For our benefit, I've inverted the Nymex copper prices in green overlaid the LME warehouse records as displayed below. Low inventory numbers do not necessarily equal higher prices short term.
Below is a barchart of copper relative to gold while in orange, Nymex copper prices.
Below is NYMEX copper relative to the S&P 500
I've done the same below for Zinc LME warehouse records and inverted the price of the metal itself. Inverting the warehouse records would have been more ideal, but the software would not let me.
If one does have a specific US Dollar view, either bullish or bearish, this could to some extent be expressed through copper. Below is a display of copper prices overlaid an inverted US Dollar index. In my view, the EURUSD is trending up based on monthly charts, thus I believe the dollar is continuing a multi decade decline. This could give copper prices some tailwind.
Aluminium prices do not seem so sensitive to warehouse data, ie there are other drivers which I will leave out.
Aluminium has some correlation with the Dollar index, below in green inverted. Correlation does seem somewhat less than compared to USD and copper.
Having quickly gone through three industrial metals, it is copper prices which stands out as the most appealing based on:
Low inventory numbers
The current supply side disruptions
Relative cheapness vs gold and US equities.
A higher correlation to the US Dollar compared to other industrial metals.
Furthermore, going back to the Spanish Flu, copper was increasingly popular as the exposure to dry copper alloy surfaces, such as brass, kills a wide spectrum of bacteria and fungi and permanently inactivates several viruses. Could history repeat itself?
Gaining exposure to the metal; copper futures or through the numerous miners listed in Sweden (BOL and LUMI), the LSE (ANTO, RIO, BHP, KAZ ++), NYSE and of course in Sydney. Only to start "digging"!
If metal prices actually do continue their rise, could this spur some producer price inflation?
Hope that was helpful.
And as always, manage your risk accordingly and be prudent. This article was not meant to be a recommendation, merely to expand our views.