Copper as an Inflation Hedge

By Leia Michele Toovey-Exclusive to Copper Investing News

Inflation is the hot topic on the market these days, as consumers are beginning to feel the effects of rising costs on their pocket books. So far this year, record high grain-prices and ensuing high food costs have led to violent riots . Another hit to consumers, we are paying just as much at the pump as we were pre-recession, despite the fact that the cost of a barrel of oil is significantly below the pre-recession peak. While the recovery is still fragile, especially in the United States, many investors are preparing for a vicious inflationary bite, and one that many experts expect will be amplified compared to previous cycles, thanks in part to the Fed's ambitious quantitative easing programs, embarked upon to stoke the ailing American economy.

As inflation strikes, investors need to position themselves to prevent against loss of wealth. Many investments have been used as inflationary hedges, including various commodities, real estate and stocks. While stocks tend to gain against rising prices, they can be volatile and need a longer-term holding in order to smooth out the spikes and dips. Real-estate can appreciate, but the current trend in the U.S. is rising living costs and stalling home prices. What remains are commodities. Commodities can be a viable source of inflation protection because generally, as the economy grows, so does the cost of inputs. Not all commodities are created equal when it comes to inflation protection. The classic choices include silver and gold , however, taking data from the recent economic cycle, some economists are beginning to say that in the coming cycle, copper may be a better hedge that the more popular gold and silver.

Copper as a hedge against inflation has the following benefits in comparison to gold and silver: it is cheaper, and according to many analysts, it will have more upside over the next few years. The bullish prediction for copper's price over the near-term is basic. Supply is predicted to lag demand. The International Copper Study Group has said that the growth in copper demand in the world is likely to exceed global output within this year. While annual deficit was previously projected around 253,000 tonnes of refined copper during 2010, it is likely to jump further by 378,000 tonnes this year. Over the near-term, demand will be supported by growth in the emerging markets, and even the rebuilding of Japan. There will be a lag in time before adequate, new copper supply comes online. It is quite obvious that miners are positioning themselves to benefit from copper's expected rally. Even the world's largest gold miner Barrick Gold Corp. (NYSE: ABX ) has joined the copper market, through its purchase of Equinox Minerals. Barrick was not shy in admitting that it was interested in the company for its copper assets, and that it had no intention in becoming a diversified miner: it was interested in copper, and copper alone.

This does not mean that classically used gold is not a good hedge. Gold has been, and will continue to be, an excellent hedge against inflation; however, its performance comes with a few caveats. Gold performs best under certain situations. Gold is a great hedge when instability such as war and political crisis rock the markets. Gold also tends to perform the best in the later stage of an expansionary cycle. Copper, in contrast, performs best in the early expansionary cycle, where we are at today. A cautionary note about gold is that it is susceptible to unpredictable bubbles. Copper's tie to economic growth is so predictable, that the metal is nicknamed "Dr. Copper."

Copper can predict the health of the economy. When copper prices rises, it is seen as a prediction that the economy is about to grow; when copper drops, often a decline in the stock market follows. An example of Dr. Copper's reliability was seen last June, during round one of the Euro Crisis. Copper prices collapsed and bottomed in June. The same dip did not hit the stock market until a month later. So while investors seek ways to protect themselves against inflation, copper is an important commodity to consider. Copper has already shown its strong correlation with inflation during this recent rally, posting impressive gains whenever market sentiment has turned its focus to inflationary pressures.

Copper as an Inflation Hedgeoriginally posted

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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