If you think the global economy is OK, then you have to ask yourself why copper — an economically sensitive metal — is down a whopping 46% since its high of $4.65 in February 2011.
The answer is obvious: The global economy is not OK. Yes, China continues to grow, as does most of Asia, but copper demand there — China accounts for as much as 40% of copper demand — is falling. Meanwhile, Europe is in a depression and the U.S. economy is lukewarm, at best.
Moreover, like other tangible assets, there is simply very little investment or speculative demand for copper. Hence the sharp collapse in its price.
Miners with heavy exposure to copper are even worse off. Freeport-McMoRan (FCX) is down 75.4% since its 2011 high. Rio Tinto (RIO) is down 72.05%. BHP Billiton (BHP) is down 61%.
So what’s the future for copper? Still lower. And then, an incredible new future and new bull market for the base metal.
Let me explain: Copper will head still lower because it’s still in the grips of deflation, like virtually all other commodities.
Per my models, long-term major support for copper doesn’t even come into play until the $1.75 level. That indicates the potential for another devastating 28% loss.
A loss that will put copper prices below the cost of production, shakeout and close lots of mines, but also pave the way for a recovery and new bull market.
That eventual bull market, in my opinion, will not be driven by housing demand for copper, its traditional big driver, but instead, a new role for copper in the 21st century: Electric and hybrid vehicles.
Especially copper induction motors, Tesla’s smart choice for its vehicles.
Copper induction motors have more than adequate torque and efficiency, but with a very rugged, durable design. Copper rotors don’t have a drag loss when the motor turns on and they don’t lose their efficiency during high speed or low torque conditions.
Copper rotors are also 25% smaller than an equivalent motor with an aluminum rotor. The superior heat conduction of copper also contributes to cost savings.
Tesla’s high-performance copper rotor motor, for instance, delivers 300 horsepower and weighs only 100 pounds.
So how much copper goes into an electronic or hybrid vehicle? The average car produced in North America has 50-55 pounds of copper in it. In a hybrid vehicle, the amount will double. In a pure electric car, the amount of copper will triple.
Moreover as hybrid and all electric technology advances and the costs come down, you’ll see more and more hybrid and electric vehicles on the roads. And one day in the not-too-distant future, we may all own electrics or hybrids.
So once a final low is in place, copper’s future will look very bright indeed.
Thanks again for all of your comments. Here again I’m highlighting and responding to some of the top ones.
Reader William writes:
“Larry, we’ve been told in the past that the dollar has to be devalued in order for American products to compete worldwide or else American companies and our economy will suffer and decline. Now with the dollar climbing, American companies and our economy are booming and no one even mentions devaluing the dollar. This seems contradictory. What gives?”
My response: You are correct, a weaker dollar boosts exports, while a stronger dollar tends to make our products less competitive and import deflation. What is driving the dollar higher is capital flight from Europe and other troubled areas of the world. That will continue for some time, ultimately dooming our economy as the dollar gets way too strong.
You will hear more and more from the Federal Reserve and the Treasury about the stronger dollar. But they will not be able to stop it from rising.
Ultimately, the dollar will have to be replaced as the world’s reserve currency, by something far more neutral — economically and political — not because the dollar crashes, but because it becomes too strong.
Why? Because most global debt is dollar-denominated. So as the dollar gets stronger, the burden of those debts becomes far heavier. — Larry
Reader Mike asks:
“Larry, the convergence of your cycles is certainly interesting.
But how can you make a huge leap and conclude, so very specifically, from that convergence, that Europe will be the first to go, followed by Japan, and then America will be the last to fall?”
My response: It has to do with cycles, but also the fundamentals. Who has the largest, deepest most liquid markets on the planet? The U.S. does. That’s an advantage neither Europe nor Japan have.
Who has the deepest most liquid currency market? We do, the dollar. Neither the euro nor the yen comes close.
So you can see the order yourself: First Europe, due to its massive debts and ill-designed currency. Then, Japan. Then the U.S. — Larry
From Reader Balu:
“I hear that interest rates could be raised by the Fed either this year or maybe next year. Is it possible to give some ‘possible scenario’ as examples as to how catastrophic the effect will be if the Fed raises the interest rate by say 0.25%?”
My response: It will not be catastrophic. You will see knee-jerk reactions to the downside in most markets. But shortly thereafter, markets that are in bull mode will continue higher. Moreover, a rate hike will be long-term bullish for most commodities and stocks. Keep in mind the biggest bull markets in commodities actually occur with rising rates, not declining rates.
That said, it’s all about timing. As we head into 2017, the relationships between interest rates and markets and between different asset classes will change dramatically. — Larry
Sales of new U.S. homes tumbled in June, indicating less robust strength in the industry than had been expected. Sales fell to 482,000, a 6.8% drop and the weakest pace since November. Previous reports had shown steady growth amid better jobs figures and low interest rates. “There’s no question the housing sector kicked into a higher gear in the second quarter, but this might be a dose of reality that the acceleration is not as sharp as it had looked,” Ward McCarthy, chief financial economist at Jefferies LLC, was quoted by Bloomberg as saying. He added, however, that the outlook remains positive.
Publishing company Pearson said it will sell its Financial Times unit to Nikkei, Japan’s biggest private media company, for $1.3 billion in cash. Nikkei has promised to uphold the FT’s editorial independence. The price tag made for one of the biggest deals ever for a newspaper.
There’s been another shooting, this time at a movie theater in Lafayette, Louisiana. Police say 59-year-old John R. Houser fired 13 times, injuring 9 and killing two. The shooting occurred only a few hours after President Obama filmed an interview with the BBC lamenting that it was “distressing” how the U.S. lacked “common-sense” laws to tackle gun violence.
In a move that will impact anyone (read: everyone) with health insurance for years to come, Anthem (ANTM) has agreed to buy Cigna (CI) for $48 billion in a move that will create the largest U.S. health insurer by membership. It still faces scrutiny by antitrust authorities.
Cheers to Jeff Bezos, whose fortune just ballooned by $8.05 billion (not a typo), after Amazon blew away second-quarter estimates and shares of the company surged 20 percent. The rise in the share price gave Amazon a larger market capitalization than Wal-Mart (WMT).
What are your thoughts on the news? Are the gigantic health-industry mergers good or bad for consumers? Will premiums continue to rise because of the reduction in competition? Should antitrust authorities step in to prevent such mergers, or let the free market handle the situation itself? Use this link to share your thoughts over at the website.
The Money and Markets team