Profit from Inverse Relationship between Gold and Copper (GLD, JJC, LIWA, AZC, TGB)

Small cap speculators, traders and investors should profit from the inverse relationship between gold (NYSE: GLD) and copper securities such as iPath Dj-UBS Copper (NYSE: JJC), Lihua International (NASDAQ: LIWA), Augusta Resource Corp (AMEX: AZC) and Taseko Mines (AMEX: TGB).  This inverse relationship is to be expected, as gold is an inert metal bought when there is doubt about economic growth and copper is purchased when there is burgeoning demand from factories and mines around the world going full force.  If it is to be expected, then it can be exploited for profits by speculators, traders and investors in financial markets.

Distorting the inverse relationship recently has been Quantitative Easing II by the Federal Reserve.  As a result of this weak dollar policy, commodities increased in value.  Quantitative Easing II was announced in August 2010, which is when both gold and copper escalated in value.  However, after Quantitative II ended earlier this year, as the chart below dictates, the inverse relationship between gold and copper was restored.







One economic growth factor that has copper rising is China increasing its buys.  According to a recent article in the Financial Times, "Confident Chinese in metals buying spree," prices for copper are up 9 percent in August, as a result.  China uses 38 percent of the world's copper supply.  The increase in the value of the Renminbi, the currency of China, has made copper imports cheaper, too. 

In the current investing environment, post Quantitative Easing II, copper and gold are now moving in a mathematically inverse relationship.  Gold increased in value due to the weak economic outlook as about 90% of the precious metal is purchased for only for speculative purposes.  Copper, on the other hand, is now rising due to demand for the base metal in industrial production for everything from electrical wiring to plumbing pipes to heating and cooling systems as economies continue to struggle from the effects of The Great Recession.  This is great strength of copper as a long term investments, along with companies in the sector such as Lihua International.  A recent article in www.smallcapnetwork.com detailed the merits of Lihua International as an investment.  James Brumely, Chief Analyst for The Rhino Report, with 70% of stocks selected rising in value, is also bullish on Lihua International.

Here is what Warren Buffett had to say about gold as an investment in March 2011, when GLD was trading around 140:


Copper, on the other hand, presents actual usage in many of the products used by the ExxonMobils, farmers and other commercial operations of the world.  According to the International Copper Study Group, a copper deficit of 435,000 metric tons in 2011 is expected.   On the demand side will be economic expansion in China, Brazil and India.  Lihua International is based in China, which just registered 9.5% growth for the second quarter of 2011.  From growth such as this will be more infrastructure developed along with increased construction and manufacturing.  This will keep the demand for copper high as it is needed for electrical wiring, plumbing and in heating and cooling systems.  It will also raise the stock price of Lihua International, as it is involved in the production of replacement copper wire and cable products.    

To put it into perspective, demand for copper in China, India, Brazil and the Middle East is expected to increase at an average annual rate of 7 percent per capita through the next four years. China's growth rate of 9.5% for the second quarter of 2011 clearly demonstrates this demand.

As an investment, gold is not.  It is a speculation.  As defined by Benjamin Graham, founder of the value school of investing and the intellectual inspiration for Warren Buffett, speculation is for those who seek to profit from the conditions of the market.  Investors, on the other had, seek to profit from the conditions of the company.  By a pure value standpoint, gold is selling for much more than it should as only 10% has an actual fundamental economic usage.  The rest is for a technical, speculative play that is benefiting from, as George Soros terms it, how "chaotic" financial markets can be.

Rex Tillerson, the CEO of ExxonMobil, recently testified before Congress that oil was worth about $60 a barrel when it was trading for around $100.  It has since fallen into the 80s, the lowest price for a barrel since February of this year.  Markets are inefficient in the short term, which is why gold is so high.  In this regard, the other time in history when gold was so high was in 1980, when the Hunt Brothers tried to corner the silver market, driving up the price for all commodities.   Eventually that speculative scheme collapsed, as all do.  Like all asset bubbles, basic economic fundamentals result in the bursting.  By its definition, value investing is buying an asset when the market price is less than its intrinsic worth.  At this point, gold is still vastly overpriced as a value investment.  That is why Warren Buffett does not like it. 

Gold is gaining from the "chaos" of the markets now as it did in 1980, but over the long term copper is the better investment.  Economic growth favors copper and frowns on gold, as the chart and history reveal.  Stocks that represent mining interests and manufacturing such as Lihua International, Taseko Mines, Augusta Resource Corp and JJC, the exchange traded fund for copper, give investors a broad exposure to the industry for the red metal.  Copper will continue to rise due to economic demand long after the gold bubble has been burst.  It should be remembered that the 1980s were a period of strong economic growth, after the gold bubble was deflated early in the decade.