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Visual Capitalist: Why investors turn to copper as an inflation hedge

by Jeff Desjardins | posted with permission of Visual Capitalist | March 6, 2018

Why investors turn to copper as an inflation hedge

 

Every year, a vast amount of copper is used by the global economy to manufacture a wide variety of goods.

It’s a major ingredient in big-ticket consumer goods like autos, appliances, electronics and new homes. Simultaneously, copper is also gobbled up for many industrial uses including telecommunications, utilities, construction and industrial machinery.

An economic bellwether

This infographic comes to us from Kutcho Copper TSXV:KC and it shows the red metal’s important role in the economy, as well as why it has become a famous economic bellwether.

Rising demand
When the economy is doing well and new things are being made, demand soars for the red metal.

Rising price
When demand goes up, it drives the price of copper higher.

All eyes on copper
Because of this historic relationship, analysts around the world watch the price of copper closely.

Dr. Copper
Copper’s long history of predicting economic movements has famously earned it a nickname as the metal “with a PhD in economics.”

In other words: when construction and manufacturing are growing, so do sales of copper products. But this link as an economic gauge has other important implications, especially to investors looking to build a robust portfolio.

Rising prices, rising copper

While copper’s link to economic trends is interesting, its power to shield a portfolio from inflation is even more compelling.

Rising prices come from an overheating economy with strong consumer spending—the same factor that is an influence on copper prices. As a result of this connection, for every 1% annual increase in consumer prices since 1992, copper’s price jumped almost 18%.

In an analysis by Bloomberg Intelligence, copper outperformed every major asset class aside from energy as an inflation hedge—and during periods of rising consumer prices, copper had triple the 5.2% gain logged by gold.

A threat to portfolios

Inflation can absolutely kill an unprotected portfolio.

Why? If inflation is higher than the portfolio’s rate of return, then that portfolio is actually producing a negative real return. (Example: 2% growth – 3% inflation = -1% return.)

In other words, inflation can be a “stealth” threat that chips away at returns, especially for fixed income portfolios. The good news: holding copper or other commodities can protect against rising prices.

Copper is more sensitive to inflation and the dollar because of its uses and its growth with the economy.—Jodie Gunzberg,
S&P Dow Jones Indices

Copper: The inflation hedge

At the end of the day, other industrial metals are very specialized in their use, and precious metals tend to be driven by investor sentiment.

Copper, on the other hand, is used in a vast array of industrial and technological uses, which makes it a proxy for the economy as a whole.

Posted with permission of Visual Capitalist.

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