Investors are ever watchful for signals that might tell them how the economy is doing. Aside from the standard pieces of data such as GDP growth, jobs numbers and earnings, the way certain assets perform can tell them just as much, if not more, about where the economy is headed.
Oil prices are an estimator of future energy demand — the lower the price, the less demand and therefore less growth and vice versa. Transportation stocks can tell investors if manufacturing demand is picking up or not before the official numbers come out. But no other asset gauges economic growth quite as well as copper.
Copper’s widespread applications in electronics, manufacturing, energy and everyday household items makes it a versatile asset that’s considered one of the best leading indicators of economic growth. As with oil, high copper prices mean greater global demand and higher expected growth, while falling copper prices mean just the opposite.
The Only Metal With a Doctorate
When investors think of metal commodities, they usually think of gold and silver for the most part. But if you ask an economist what they think of, the answer is copper. It’s one of the largest metals in commodity indexes and claims the title of highest global production and greatest liquidity. It makes up 6.5% of the Dow Jones Commodity Index — more than aluminum at 4.5% and silver at 3.65%.
Copper’s versatile nature makes it highly valued in numerous sectors. It’s a good conductor of heat and electricity, making it valuable in the electronics industry, and its high corrosion-resistance makes it useful in industrial and infrastructural settings. In short, copper is necessary in almost every sector of the economy, so copper prices reflect the underlying demand.
When copper prices go up, that means the demand for the metal is rising due to increased economic growth. More electronics are being made, manufacturing is picking up and construction is rising. If copper prices start falling, it means that there is less demand, manufacturing is slowing down and less economic activity is happening.
Copper isn’t infallible. Despite the heavy reliance on copper predictions, other activities can obscure what copper is trying to tell investors. Sometimes price fluctuations are caused by other factors such as trading patterns or regional issues.
The four major copper-producing countries are Chile, China, Peru and the U.S.; the latter is almost exclusively attributed to Freeport McMoRan. China leads the world in refined copper demand — nearly double that of Europe. The combination of China’s economic slowdown and the strength of the U.S. dollar has put tremendous pressure on copper, hurting prices separately from the issue of global demand.
Investors should also keep in mind that copper is a volatile asset — nearly twice that of equities. Macroeconomic factors such as currency strength, regional economics and other commodity weaknesses (e.g., oil) can put excess downward pressure on copper and obfuscate true global economic demand and growth.