Copper, coal: crystal balls for the global economy
Copper, coal and other industrial commodities can be great tools for predicting economic prospects and right now they’re offering a gloomy outlook, but a closer analysis shows a glimmer of hope as the world struggles to avoid recession. “People are looking at commodities and trying to figure out if a slight adjustment in the price of oil, copper, aluminum, etc. means that the world will prosper,” or the global economy will fall off a cliff, said Byron King, editor of investment newsletter Outstanding Investments. But while some commodities can be leading indicators, making their moves ahead of the broader market, others may only offer a “coincident” indicator for the economy — one that by definition shows the current state of the economy, analysts said. Copper has been widely seen as a leading economic indicator among commodities — so much so that it’s referred to as “Dr. Copper,” suggesting it holds a Ph.D. in economics due to its ability to help predict economic trends. But analysts may also look to coal, zinc, iron ore, lead, aluminum, tungsten and oil for hints on what direction the economy will take next. Read more about copper.Right now, none of those commodities appear to be offering any good news, especially after they dropped in tandem with the broad global equity market selloff on Thursday.
Year to date, futures prices for copper HG1Z -4.13% have fallen by 21% on the Comex division of the New York Mercantile Exchange.
Coal futures QL1Z 0.00% have also lost about 5.6% year to date on Nymex. On the London Metal Exchange year to date, cash prices for aluminum are down 6.6%, lead has declined by 11.6% and zinc has lost over 14.5%, according to data from FactSet Research.
“Copper is saying that the global economy is rapidly slowing and the risk of a recession has increased,” said Sam Subramanian, editor of AlphaProfit Mutual Fund and ETF Newsletters.
Digging deeper
But the sharp declines in commodities don’t set the fate of the economy — and the moves in commodities can offer a deeper, more telling story of what’s to come.
The earlier in the production cycle a commodity is needed, the more likely it is to be a leading indicator, said Philip Romero, a finance professor at the University of Oregon and former chief economist of California.
Copper, for example, is used in wire telecommunications, which must be done before a building, like a factory, can be occupied, he said. “Therefore, copper should ‘lead’ manufacturing output by six to 12 months.”
However, “most materials and energy inputs are coincident indicators,” he said. “They don’t need to be bought until the goods that use them are produced.”
Gold, on the other hand, plays another role. It’s a “mainly an inflation hedge,” said Romero. Read a blog on gold as an economic indicator.
For hints on the state of economic health, Romero said he would place his reliance on materials used in building industrial facilities, such as lumber, concrete and copper. “The lead time is quite long, and most factories aren’t built unless demand for their products is reasonably assured.”
Even analysts who aren’t completely convinced of the ability of commodities to predict an economic path believe they play an important role nonetheless.
Kevin Mahn, president and chief investment officer at Hennion & Walsh Asset Management, said that while commodities may not necessarily say a lot about the health of the economy, they can certainly “provide insights into demographic trends as well as the state of the economy in terms of areas of growth and development.”
In terms of potential areas of growth and development, industrial commodities can be used to “gauge infrastructure development projects across the globe,” he said. And when it comes to demographics, as the world population grows, particularly in emerging markets, demand for agricultural commodities increases.
Corn C1Z +0.27% and rough rice futures RR1X +0.03% traded on the Chicago Board of Trade are among the few commodities that have gained year to date. Corn has climbed 3% and rough rice has added 19%.
Not so bad
With so many different ways to decipher commodity moves, it’s no surprise that the analyses on the market differs so greatly.
When asked what commodities indicate about economic health, Chris Mayer, editor of Capital & Crisis, simply said “Dr. Copper, the old reliable bellwether for economic activity, tells you all you need to know. It just put in lows for the year.”
There is no hint among commodities to turn the tide, he said. Read Mayer’s latest commodity articles.
The “bearish Europe psychology has certainly led to bearish economic outlooks, which will naturally bleed into commodities,” Scott Wright, an analyst at financial-services company Zeal LLC. The International Monetary Fund Tuesday slashed its worldwide economic forecast. Read about the IMF outlook.
Still, Wright said he has “no doubt the Europe fears will fade, and so too will bearish economic outlooks and thus commodities weakness.”
Besides, economies overall haven’t stopped growing, they’ve just slowed their growth.
Commodity prices are telling us that “we’ve gone from a world running well above trend growth rates in [the first half of the year] to a world pulling back in line,” said Josh Crumb, director of gold miner Astur Gold Corp. CA:AST -6.54% , adding that global growth is “still fine,” running at 4%.
“We don’t need to worry about people around the world not wanting more,” he said. The world is a “place with limited supply in key commodities.”
Gold and industrial mining equities look “incredibly cheap,” said Crumb, who’s also a former senior metals strategist at Goldman Sachs Commodity Research. “The global fight is for industrial commodities, so you want to own those, and western countries are trying to stay in the game by deflating their currencies … so you want to own gold as well.”
Patient investing
So what’s an investor to do as prices for most commodities seemingly plummet to the ground?
“In this environment of slowing growth, investors can look to economically sensitive commodities as a longer-term play,” said AlphaProfit’s Subramanian. And there are ways to “reduce the risk of short-term pain while positioning for longer-term gains.”
“Look at well-maintained diversified commodity producers like Rio Tinto RIO -10.18% and BHP Billiton Ltd. BHP -6.50% , he said. Also look at “commodities that have lagged and, as such, may pose limited downside risk.”
Natural gas is among the natural resources that have “lagged” recently. Year to date, futures prices NG11V +0.97% have fallen 16%.
Natural gas looks appealing, said Subramanian. “Faced with a supply glut, producers have already cut back on production and inventories are coming more in line with demand.”
Among the equities, there are opportunities and bargains as well.
“Investors with a five-year horizon need to step up now and buy in,” said Outstanding Investments’s King. “You can get some excellent companies at low prices just now, if you have patient capital to risk in the market.” Read King’s latest articles on commodities.
And some of the companies are paying nice dividends as well, “so you’ll get paid to wait — at a dividend yield that’s higher than the zero-interest you get in the bank,” he said.
As for exchange-traded funds, they haven’t performed very well recently.
ETFs have “provided an easy way for investors to get into commodity markets, and just as easily a way to quickly head for the door,” said Mark Williams, a risk-management expert who teaches finance at Boston University.
The Market Vectors Coal ETF KOL -8.96% has fallen more than 30% year to date, the Global X Copper Miners ETF COPX -10.07% lost nearly 40% and the United States Oil Fund LP USO -5.44% fell 20%.
But Will Rhind, managing director of ETF Securities, said he has recently seen flows into some of ETF Securities’s more industrial-focused metals ETFs such as platinum PPLT -4.56% and the ETFS White Metals Basket Trust WITE -10.36% , which owns silver, platinum and palladium.
“This may indicate that certain investors do not believe that the economy will enter a full blown double-dip recession and are using this time of lower commodity prices as a buying opportunity,” he said.
Myra Saefong is a MarketWatch reporter based in San Francisco.
Year to date, futures prices for copper HG1Z -4.13% have fallen by 21% on the Comex division of the New York Mercantile Exchange.
Coal futures QL1Z 0.00% have also lost about 5.6% year to date on Nymex. On the London Metal Exchange year to date, cash prices for aluminum are down 6.6%, lead has declined by 11.6% and zinc has lost over 14.5%, according to data from FactSet Research.
“Copper is saying that the global economy is rapidly slowing and the risk of a recession has increased,” said Sam Subramanian, editor of AlphaProfit Mutual Fund and ETF Newsletters.
Digging deeper
But the sharp declines in commodities don’t set the fate of the economy — and the moves in commodities can offer a deeper, more telling story of what’s to come.
The earlier in the production cycle a commodity is needed, the more likely it is to be a leading indicator, said Philip Romero, a finance professor at the University of Oregon and former chief economist of California.
Copper, for example, is used in wire telecommunications, which must be done before a building, like a factory, can be occupied, he said. “Therefore, copper should ‘lead’ manufacturing output by six to 12 months.”
However, “most materials and energy inputs are coincident indicators,” he said. “They don’t need to be bought until the goods that use them are produced.”
Gold, on the other hand, plays another role. It’s a “mainly an inflation hedge,” said Romero. Read a blog on gold as an economic indicator.
For hints on the state of economic health, Romero said he would place his reliance on materials used in building industrial facilities, such as lumber, concrete and copper. “The lead time is quite long, and most factories aren’t built unless demand for their products is reasonably assured.”
Even analysts who aren’t completely convinced of the ability of commodities to predict an economic path believe they play an important role nonetheless.
Kevin Mahn, president and chief investment officer at Hennion & Walsh Asset Management, said that while commodities may not necessarily say a lot about the health of the economy, they can certainly “provide insights into demographic trends as well as the state of the economy in terms of areas of growth and development.”
In terms of potential areas of growth and development, industrial commodities can be used to “gauge infrastructure development projects across the globe,” he said. And when it comes to demographics, as the world population grows, particularly in emerging markets, demand for agricultural commodities increases.
Corn C1Z +0.27% and rough rice futures RR1X +0.03% traded on the Chicago Board of Trade are among the few commodities that have gained year to date. Corn has climbed 3% and rough rice has added 19%.
Not so bad
With so many different ways to decipher commodity moves, it’s no surprise that the analyses on the market differs so greatly.
When asked what commodities indicate about economic health, Chris Mayer, editor of Capital & Crisis, simply said “Dr. Copper, the old reliable bellwether for economic activity, tells you all you need to know. It just put in lows for the year.”
There is no hint among commodities to turn the tide, he said. Read Mayer’s latest commodity articles.
The “bearish Europe psychology has certainly led to bearish economic outlooks, which will naturally bleed into commodities,” Scott Wright, an analyst at financial-services company Zeal LLC. The International Monetary Fund Tuesday slashed its worldwide economic forecast. Read about the IMF outlook.
Still, Wright said he has “no doubt the Europe fears will fade, and so too will bearish economic outlooks and thus commodities weakness.”
Besides, economies overall haven’t stopped growing, they’ve just slowed their growth.
Commodity prices are telling us that “we’ve gone from a world running well above trend growth rates in [the first half of the year] to a world pulling back in line,” said Josh Crumb, director of gold miner Astur Gold Corp. CA:AST -6.54% , adding that global growth is “still fine,” running at 4%.
“We don’t need to worry about people around the world not wanting more,” he said. The world is a “place with limited supply in key commodities.”
Gold and industrial mining equities look “incredibly cheap,” said Crumb, who’s also a former senior metals strategist at Goldman Sachs Commodity Research. “The global fight is for industrial commodities, so you want to own those, and western countries are trying to stay in the game by deflating their currencies … so you want to own gold as well.”
Patient investing
So what’s an investor to do as prices for most commodities seemingly plummet to the ground?
“In this environment of slowing growth, investors can look to economically sensitive commodities as a longer-term play,” said AlphaProfit’s Subramanian. And there are ways to “reduce the risk of short-term pain while positioning for longer-term gains.”
“Look at well-maintained diversified commodity producers like Rio Tinto RIO -10.18% and BHP Billiton Ltd. BHP -6.50% , he said. Also look at “commodities that have lagged and, as such, may pose limited downside risk.”
Natural gas is among the natural resources that have “lagged” recently. Year to date, futures prices NG11V +0.97% have fallen 16%.
Natural gas looks appealing, said Subramanian. “Faced with a supply glut, producers have already cut back on production and inventories are coming more in line with demand.”
Among the equities, there are opportunities and bargains as well.
“Investors with a five-year horizon need to step up now and buy in,” said Outstanding Investments’s King. “You can get some excellent companies at low prices just now, if you have patient capital to risk in the market.” Read King’s latest articles on commodities.
And some of the companies are paying nice dividends as well, “so you’ll get paid to wait — at a dividend yield that’s higher than the zero-interest you get in the bank,” he said.
As for exchange-traded funds, they haven’t performed very well recently.
ETFs have “provided an easy way for investors to get into commodity markets, and just as easily a way to quickly head for the door,” said Mark Williams, a risk-management expert who teaches finance at Boston University.
The Market Vectors Coal ETF KOL -8.96% has fallen more than 30% year to date, the Global X Copper Miners ETF COPX -10.07% lost nearly 40% and the United States Oil Fund LP USO -5.44% fell 20%.
But Will Rhind, managing director of ETF Securities, said he has recently seen flows into some of ETF Securities’s more industrial-focused metals ETFs such as platinum PPLT -4.56% and the ETFS White Metals Basket Trust WITE -10.36% , which owns silver, platinum and palladium.
“This may indicate that certain investors do not believe that the economy will enter a full blown double-dip recession and are using this time of lower commodity prices as a buying opportunity,” he said.
Myra Saefong is a MarketWatch reporter based in San Francisco.
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