The Red Metal
Copper prices rise to highest levels since June 2018
As we've recently written, goodstead believes investors do well to hold portfolios of uncorrelated return streams, as this increases return and reduces risk.
One such uncorrelated return is that which derives from commodities, the raw materials we consume or turn into other products for consumption. This category includes everything from coffee to gold, live cattle to heating oil. The prices of these assets go up and down at different times as do stocks and bonds, and so contribute risk mitigation as well as return opportunity to a well-balanced portfolio. Although their prices exhibit greater volatility than bonds and even stocks, because they don't move in unison with financial assets, they are typically an effective portfolio diversifier.
We'll write in another place later this month as to the inflation hedging properties of certain assets--commodities among them--later this month. In the meantime, we'll focus on the price of one commodity: the so-called red metal, copper. This metal is primarily used for industrial purposes, namely in the production of wires for the conduct of electricity. Its price, like other commodities, is impacted by the cost of extraction--how much it costs to dig it out of the ground and refine it--but also by demand. It tends to go up during periods of economic expansion, and go down when economies contract.
Copper is trading at prices that it hasn't seen in over two years, and in the midst of a pandemic that has hit global demand hard. Why is this happening? First, there are supply shocks due to interrupted supply chains. Copper is dug out of the ground in remote places, and remote places tend to be experiencing duress now on account of their poorer public health systems. But more interesting are the demand-related factors, and it seems to be these that are really driving price.
You know what uses a lot of copper? Copper wires. You know what has a lot of copper wires? Wind turbines, solar panel arrays, battery assemblies and electric cars. The green technologies that are expected to grow due to increased secular demand over the next several years also should see additional demand due to the green-complexioned infrastructure investments developed governments will be making over the next several quarters as a result of expansionary fiscal policies. Investing in red metal--which goodstead does through its commodities exposures--could be one way to capture return from the rise of green energy.