Gavekal Capital: Doctor Copper Is Dancing To His Own Beat

Tuesday, March 11, 2014

Doctor Copper Is Dancing To His Own Beat

Copper is mankind's most useful metal and is used in everything from consumer products to industrial products.  The average home contains 500 pounds of copper and the average car contains 50 pounds. Copper's electric conductivity is second only to silver, explaining why its largest use, accounting for half of total production, is in electrical equipment.  For all the these reasons, copper is the most important industrial metal, and economists focus on its movement as a barometer of global economic health.  Economists often refer to copper as the metal with a Ph.D in economics because it has served as a very reliable economic indicator, especially at turning points.

Since hitting almost $3.50/pound in December, copper has plunged under $3/pound.  The doctor appears to be dancing to his own beat, as copper prices are diverging from some traditionally well-correlated indicators.  For example, copper tracks reasonably well with inflation expectations embedded in the 30 year US Treasury bond.


It also tracks well with the relative performance of counter-cyclical stocks vs. cyclical stocks.  Notice the price of copper is inverted here to represent how a falling copper price is generally associated with the outperformance of counter-cyclical stocks.


Over the last two decades copper has had a remarkable correlation withe Chinese fixed investment. Here we show capital formation as a percent of GDP and copper prices.  Perhaps copper is signaling a change in the economic complexion of China's economy.