by Ben Baden

May 23, 2011

Often called "Dr. Copper," this metal is a telling indicator of global economic growth

In recent weeks, metals of all sorts -- precious and industrial -- have taken a beating in a major selloff in the commodities market. Experts cite a number of reasons, including speculation, increased margin requirements (how much collateral investors have to put down), and concerns that the economic recovery may not be as strong as previously thought. But experts say the losses in copper are the most troubling.

While scarce precious metals like gold and silver are often perceived as safe havens or inflation hedges because of their inherent value, copper is an industrial metal that's seen as a leading indicator for the future of global economic growth. It's often called "Dr. Copper" because of its past success in forecasting the direction of the economy.

"Oftentimes, the price action in copper indicates what's going on in the global economy because it's used so much for so many industrial purposes," including electrical wiring, says Sean Brodrick, small-cap and natural resource analyst for the blog Uncommon Wisdom Daily. "The breakdown we're seeing in copper right now looks quite ominous."

The price of copper fell about 5 percent last week, to below $4 per pound for the first time this year, and Brodrick believes it could continue to decline. His target price for the metal is $3.50 per pound.

As the price of copper falls, the assumption is that economic activity, manufacturing, and construction are slowing down, says Christian Magoon, CEO of asset management consultant firm Magoon Capital. "You would expect [the price of] copper to be hurt by poor economic conditions," he adds.

Experts say a growing number of concerns about the stability of the global recovery are weighing on the industrial metal. A number of mixed economic reports have come out recently in the United States. The jobs report in April showed improvements, but the unemployment rate still remains stubbornly high. And last month's first-quarter GDP report revealed an economy growing at a sluggish pace of 1.8 percent because of a number of factors, including higher oil prices.

Economic growth also looks threatened overseas.

Copper's course is greatly influenced by economic activity in China. "China's at the center of [the demand for copper] because they're by far the biggest consumer in the emerging markets story," says Ted Wright, director of portfolio management for Genworth Financial Asset Management. Brodrick says the Chinese government occasionally tries to interfere in the copper market to push the price of the metal down. In recent months, the Chinese government has been forced to raise interest rates a number of times because of inflation concerns. Higher interest rates generally cause a slowdown in economic growth.

Investors in copper-related funds have benefited from copper's rise in recent months.

Two exchange-traded funds, Global X Copper Miners (symbol COPX) and First Trust ISE Global Copper Index (CU), track copper mining companies or other copper-related stocks. Over the past 12 months, both funds have gained about 50 percent. But over the past month, the funds are each down about 10 percent.


Why Copper Is the Metal to Watch