Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
US Coronavirus Pandemic Final Catastrophe 2021 - 15th Jan 21
The World’s Next Great Onshore Oil Discovery Could Be Here - 15th Jan 21
UK Coronavirus Final Pandemic Catastrophe 2021 - 14th Jan 21
Here's Why Blind Contrarianism Investing Failed in 2020 - 14th Jan 21
US Yield Curve Relentlessly Steepens, Whilst Gold Price Builds a Handle - 14th Jan 21
NEW UK MOT Extensions or has my Car Plate Been Cloned? - 14th Jan 21
How to Save Money While Decorating Your First House - 14th Jan 21
Car Number Plate Cloned Detective Work - PY16 JXV - 14th Jan 21
Big Oil Missed This, Now It Could Be Worth Billions - 14th Jan 21
Are you a Forex trader who needs a bank account? We have the solution! - 14th Jan 21
Finetero Review – Accurate and Efficient Stock Trading Services? - 14th Jan 21
Gold Price Big Picture Trend Forecast 2021 - 13th Jan 21
Are Covid Lockdowns Bullish or Bearish for Stocks? FTSE 100 in Focus - 13th Jan 21
CONgress "Insurrection" Is Just the Latest False Flag Event from the Globalists - 13th Jan 21
Reflation Trade Heating Up - 13th Jan 21
The Most Important Oil Find Of The Next Decade Could Be Here - 13th Jan 21
Work From Home £10,000 Office Tour – Workspace + Desk Setup 2021 Top Tips - 12th Jan 21
Collect a Bitcoin Dividend Without Owning the King of Cryptos - 12th Jan 21
The BAN Hotlist trade setups show incredible success at the start of 2021, learn how you can too! - 12th Jan 21
Stocks, Bitcoin, Gold – How Much Are They Worth? - 12th Jan 21
SPX Short-term Top Imminent - 12th Jan 21
Is This The Most Exciting Oil Play Of 2021? - 12th Jan 21
Why 2021 Will Be the Year Self-Driving Cars Go Mainstream - 11th Jan 21
Gold Began 2021 With a Bang, Only to Plunge - 11th Jan 21
How to Test Your GPU Temperatures - Running Too Hot - GTX 1650 - Overclockers UK - 11th Jan 21
Life Lesson - The Early Bird Catches the Worm - 11th Jan 21
Precious Metals rally early in 2021 - 11th Jan 21
The Most Exciting Oil Stock For 2021 - 11th Jan 21
Financial Market Forecasts 2021: Navigation in Uncharted Waters - 10th Jan 21
An Urgent Message to All Conservatives, Right-Wingers and Patriots - 10th Jan 21
Despite Signs to the Contrary, Gold Price at or Near Top - 10th Jan 21 -
Ultimate Guide On The 6 Basic Types Of Index Funds - 10th Jan 21
Getting Vaccinated at TESCO - Covid-19 Vaccinations at UK Supermarket Pharmacies and Chemists - 10th Jan 21
Cheers for the 2021 Stock Market and These "Great Expectations" - 9th Jan 21
How to Plan Your Child With Better Education - 9th Jan 21
How To Find The Best Casino - 9th Jan 21
Gold Is Still a Bargain Buy - 8th Jan 20
Gold Price Set to Soar as Hyperinflation Looms - 8th Jan 21
Have Big Dreams? Here's How to Pay for Them - 8th Jan 21
Will the Fed Support Gold Prices in 2021? - 8th Jan 21
Stocks trading strategies for beginners - 8th Jan 21
Who is Buying and Selling Stocks in 2021 - 8th Jan 21
Clap for NHS Heroes 2021 as Incompetent Government Loses Control of Virus Again! - 8th Jan 21
Ultimate Gaming and Home Working PC System Build 2021 - 5950X, RTX 3080, Asus MB - Scan Computers UK - 7th Jan 21
Inflation the bug-bear looking forward through 2021 - 7th Jan 21
ESG ETF Investing Flows Drive Clean Energy to Fresh Highs - 7th Jan 21
5 Financial Market Surprises in 2021 - 7th Jan 21
Time to ‘Reset’ Your Investment Portfolio in 2021? - 7th Jan 21
Bitcoin Price Collapses almost 20% at the start 2021 - 7th Jan 21
Fed Taper Nervous Breakdown - 6th Jan 21
What Will the U.S. Dollar Ring in for 2021? - 6th Jan 21
Stock market frenzy- Ride the bandwagon but be sure to take along some gold coins - 6th Jan 21
Overclockers UK Custom Build Gaming System Review Heat Test and Final Conclusion - 6th Jan 21
Precious Metals Resuming Bull Market, Gold, Silver, GDX Trend Forecasts 2021 - 5th Jan 21
Trump’s Iran-COVID-Gate Anniversary  - 5th Jan 21
2021 May Be A Good Year For The Cannabis / Marijuana Sector - 5th Jan 21
Stock Market Approaching an Important Target - 5th Jan 21
Consumer Prices Are Not Reflecting Higher Inflation; Neither Is The CRB - 5th Jan 21
NEW UK Coronavirus PANIC FULL Lockdown Imminent, All Schools to Close! GCSE Exams Cancelled! - 4th Jan 21
The Year the World Fell Down the Rabbit Hole - 4th Jan 21
A Year Like No Other for Precious Metals… and Everything Else - 4th Jan 21
The Stocks Bull Market is Only Half Completed - 4th Jan 21
An In- Depth Look At Gold Price Trend - 4th Jan 21
Building America Back After a Dark Covid Winter - 4th Jan 21
America's Dark Covid Winter Ahead - 4th Jan 21
Buy a Landrover Discovery Sport in 2021? 3 Year Driving Review - 3rd Jan 21
Stock Market Major Peak in Early April 2021 - 3rd Jan 21
Travel and Holidays 2021 - Flight Knight Cabin Bag Review - 3rd Jan 21
�� Happy New Year 2021 Fireworks and Drone Light Show from London and Sheffied - BBC�� - 2nd Jan 2
The Next IMMINENT Global Catastrophe After Coronavirus - 1st Jan 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Crude Oil and Copper Better Value Than Gold

Commodities / Commodities Trading Jun 07, 2010 - 02:54 AM GMT

By: Dian_L_Chu

Commodities

Best Financial Markets Analysis ArticleThere have been some nice pullbacks in commodities like copper and crude (Chart 1), which should trend significantly higher by year-end. Both crude oil and copper tumbled after the Labor Department May jobs report and the fear about Europe heightened by the total clueless-about-financial-markets comment from Hungary’s Prime Minister.


Crude oil declined the most in four month with July delivery dropping 4.3%, to $71.40 a barrel, while Copper for July delivery also lost 4.3%, to settle at $2.81 a pound. Meanwhile, gold for August delivery, bucking the trend, added $7.70, or 0.6%, to $1,217.70. (Chart 1)

Copper, Crude vs. Gold

Copper and crude oil are both base essentials heavily reliant upon by economies globally for everyday usage, with no meaningful substitution options. Gold, on the other hand, is not as essential to keep the everyday world running seamlessly, and could conceivably be substituted by other commodities with a change in global monetary standard or people’s perception.

From that perspective, I think there are a few recent trends pertaining to crude and copper that are being misinterpreted or overlooked by the market, and I will discuss some of them here.

China Destocking = Future Strategic Buying

One recent trend that worries the market is that China appears to be eating into some of its commodities reserves. Imports from China in markets such as refined copper, iron ore and lead have declined in the last few months, which could also be a factor behind the recent drop in prices for those commodities.

This has prompted several investment banks sending teams of analysts to China to gauge actual demand. Through field visits and data mining, the analysts have concluded that Chinese domestic demand still is strong. They surmise commodity imports are declining at least partly because the country and its industrial companies are tapping reserves, possibly because they expect prices to fall further, reports the Wall Street Journal.

It is conceivable that China could be taking advantage of its market position putting downward pressure on current commodity price levels through destocking. This tactic could set the stage for a fairly strong strategic buying from China in order to rebuild the stocks depleted over the last several years. Metals such as copper will be needed for China's aggressive infrastructure program and to hedge its foreign reserves against possible currency devaluation in the future.

Higher Cost Base by Tax & Restrictions

In addition, there are two recent events—the Aussie mining tax, and the expected future restrictions regarding deep-water drilling in the U.S. —that are currently being overlooked by the market.

These two new developments mean that costs for getting both commodities out of the ground/sea and to consumers are going up, miners now have higher profitability thresholds to meet in evaluating future projects, and the current drilling moratorium and future legislation is sure to increase the per barrel extraction costs, and decrease future supply, thereby causing the price of oil and copper to rise considerably in the future.

BDI Suggests Contango Trade

With this recent pullback in both of these commodities, coupled with low storage costs right now due to many available cargo ships and unoccupied warehouse space available, smart investors are going to buy these commodities and store them just like central banks store Gold causing the available spot market supply to go down, thereby raising future prices.

So, with such relatively low available storage costs, and new regulatory restrictions guaranteeing higher prices in the future, market players are putting crude oil and copper into storage, similar to storing gold in a vault, as an inflation and currency devaluation hedge.

This probably partly explains the recent run-up of the Baltic Dry Bulk Index (BDI), and the decoupling of BDI with the prices of crude oil and copper, as the BDI typically should have a positive correlation with the price of commodities. (Chart 2)

Red, Black and Gold – The Same Glitter

It seems highly probable that Crude Oil and Copper, although not as glamorous as Gold, are actually the better commodity plays going forward. Expect Oil to be well over $100 a barrel in 2011, and Copper to break the $5 a pound barrier as well.

Jobs Picture To Improve

This all assumes that we don’t have the end of the world depression scenario. But despite all the negativity and over-reactionary tendencies of modern culture, it seems that human civilization continues to improve processes, invent new technologies, and overall improve the quality of life of each successive generation.

As such, and to reiterate my previous article regarding the May jobs report, there will be plenty of future jobs required along the way as civilization advances towards greater achievements, so rather than the latest jobs report being viewed as a dismal failure on a short-term analysis, the overall jobs trend is quite bullish and the economic recovery is still intact (as confirmed by the majority of economic data for the week.)

Out of Treasuries, Into Oil & Copper

Once investors recover from their initial reaction to hide out in treasuries, the fed rate of zero percent for the rest of the year makes this an unattractive place to be unless the world is coming to an end, which I think is an unlikely scenario.  

Since the Fed is incentivizing investors to take risks, to spur economic growth and move the ongoing recovery forward, it makes rationale sense to move out of treasuries into growth assets like Oil and Copper which remain critical components in any economic recovery, and are cheaper than ever on an inflation adjusted basis within this paradigm of unprecedented loose monetary policy.

(Note: Some of the commodity related investment options were discussed in my earlier article - Commodities: Time to Go Long nd Physical.)

Dian L. Chu, M.B.A., C.P.M. and Chartered Economist, is a market analyst and financial writer regularly contributing to Seeking Alpha, Zero Hedge, and other major investment websites. Ms. Chu has been syndicated to Reuters, USA Today, NPR, and BusinessWeek. She blogs at Economic Forecasts & Opinions.

© 2010 Copyright Dian L. Chu - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules