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3 Reasons to Trade Copper
Commodity traders often refer to copper as Dr. Copper. They say the metal has a PhD in economics because its price is a reliable barometer of the overall health of the global economy.
In fact, investing in copper is a way to express a bullish view on world GDP.
Here are some specific reasons you might consider trading copper:
Speculating on Industrial Growth
Copper has so many industrial uses that it would be virtually impossible to build the infrastructure of a country without it. As developing regions such as the African continent, Eastern Europe and Asia modernize their economies and expand their infrastructure, copper demand will grow.
Any trader optimistic about international growth should consider copper investing.
Betting on the Housing Market
The global housing market overheated and took a tumble during the Great Recession of 2008. Investors who believe the worst is behind us may want to have copper in their portfolios. Furthermore, as emerging markets grow, demand for housing should follow in those regions as well. Copper benefits from strong housing markets.
Speculating on Supply/Demand Imbalance
Copper mining and recycling routinely fall short of copper demand. Mine expansions and new mines may help soak up some of this excess demand, but many fear that that environmental concerns and limitations on land usage will keep the imbalance in place for many years. Investing in copper is a way to bet on a long-term supply/demand imbalance.
Should I Trade Copper?
All investments carry the potential for risks and rewards, and traders should weigh these carefully before making a decision. In the case of copper, traders might consider purchasing the metal as a way to lower the overall risks of their portfolios. Most traders have the overwhelming majority of their assets allocated to stocks and bonds. Trading copper provides asset class diversification, which can be an effective way to lower the overall volatility of a portfolio.
Copper also provides another way to invest in the global economy, particularly in the emerging and developing sectors where infrastructure needs are greatest. Investing in copper also provides a way to bet on a rebounding housing sector in more mature economies.
In fact, copper provides one of the purest and more direct ways to bet on global growth.
Copper trading, however, also carries risks. If the global economy were to experience a severe economic slowdown or, worse yet, a global recession or depression, copper prices would almost certainly suffer. Also, lower prices for other industrial metals compared to copper could lead buyers to substitute their purchases of copper for similar metals. However, traders can mitigate this risk by buying a basket of industrial metals.
What Do The Experts Say About Copper?
Most experts agree that the big unknown for copper prices is how strong the Chinese economy will be over the next decade.
As the biggest growth engine in emerging markets, China plays the most critical role in determining copper prices. Goldman Sachs believes that strong Chinese demand will produce higher prices for the metal over the long term.
Similarly, BMI Research commodities analyst, Molly Shutt, sees the combination of strong demand growth in China and decelerating production supplies, particularly in Chile and China, as a catalyst for bullishness.
Some analysts, however, are less optimistic about the Chinese demand story.
Julius Baer analyst, Carsten Menke, thinks that Chinese demand and a US infrastructure rebound have been overstated, and that copper prices should suffer as a result.
How to Trade Copper
There are a number of ways to trade the commodity
|Method of Investing||Complexity Rating (1 = easy, 5 = hard)||Storage Costs||Security Costs||Expiration Date||Management Cost||Leverage||Regulated|
*Storage costs are passed on to traders in the form of management fees.
Investors can purchase copper bullion bars and coins from metals dealers in the same manner in which they can purchase gold or silver bullion. Dealers offer a variety of sizes. Typically investment-grade copper is refined to a purity level of .999 copper. As a result of this purity, prices for bullion trade at a significant premium to other copper markets such as futures. This premium, along with the cost of storing the metal, may make bullion an impractical way to invest in copper.
Fewer dealers offer copper bullion than gold bullion but you can still buy online. Here are some online copper bullion dealers you might consider:
One way to invest in copper is through the use of a derivative instrument known as a contract for difference (CFD). CFDs allow traders to speculate on the price of a commodity such as copper without actually owning copper bullion, ETFs, futures, options or mining shares.
The value of a CFD is the difference between the price of copper at the time of purchase and the current price. As copper prices increase, the value of the CFD goes up, and as copper prices decline, the value of the CFD declines.
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Important: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail trader accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
These are derivative instruments that allow traders to speculate on the future price of the metal.
Investors in futures use leverage to purchase contracts on an exchange. If prices decline, the trader must put up additional margin to maintain the position. In addition, when the futures contract is about to expire, the trader must either accept physical delivery of the commodity or roll the position forward to the next month.
These are another derivative instrument for trading copper. Like futures, options have a limited shelf life and an expiration date.
However, unlike futures, option bets are successful only if the price reaches a certain level by the expiration date. In exchange for a potential payout, option buyers pay a premium to own the option.
To be successful, the price must make a big enough move to compensate the option buyer for the premium paid for the option. In other words, options traders must be correct on both the size and timing of the move.
These financial instruments trade as shares on exchanges in the same way that stocks do. There are several ways to invest in copper using exchange-traded funds (ETFs). Investors can purchase ETFs that invest in bullion, futures, options or some combination of the above. There are also ETFs that invest in baskets of copper mining stocks. ETFs have management fees that get passed on to shareholders.
Here are some leading copper ETFs (based on assets under management):
|iPath Dow Jones-UBS Copper ETN||United States Copper Index Fund||iPath Pure Beta Copper ETN|
Copper traders can also invest in companies that mine copper. However, such investments are not pure plays on copper. Investment returns will depend on other factors such as how well management performs and the quality of the mines the company owns. Furthermore, increases in mining input costs such as the price of oil and equipment can adversely impact share prices.
Here are some leading copper mining company shares you might consider (inclusion here is NOT a recommendation for investment):
|Current Price||Overview||Listings||Founded||Number of Employees||Interesting Fact|
|Freeport McMoran||The second largest copper producer in the World. (Codelco the Chilean state owned company is #1)||New York (NYSE)||1912||30,000||Originally a sulphur mining company based in Freeport, TX.|
|BHP Billiton||Anglo-Australian multinational mining, metals and natural gas company.||London (LSE)|
New York (NYSE)
|1885||60,000||The World's third largest copper producer.|
|Southern Copper||Headquartered in Phoenix, AZ. It's a major producer of copper, molybdenum, zinc, silver, lead, and gold.||Lima (BVL)|
New York (NYSE)
|1952||12,000||Owned by Mexican mining conglomerate Grupo México|
|Rio Tinto||Australian-British multinational with operations in mining and metals.||London (LSE)|
New York (NYSE)
|1873||50,000||The company has operations on six continents.|
|Anglo-American||Major producer of copper based in Johannesburg.||London (LSE)|
|1917||135,000||Produces around 40% of the World's platinum.|