Will copper outshine gold and silver?
All the talk of metal investing in recent months has focused on the safe-haven and inflation hedge of gold. Yet other metals, notably
copper and silver, have been starting to attract investor attention too.
By Paul Farrow
Last Updated: 7:55AM BST 18 Apr 2009
The copper price has risen by more than 50pc this year Photo: GETTY
All the talk of metal investing in recent months has focused on the safe-haven and inflation hedge of gold. Yet other metals, notably copper and silver, have been starting to attract investor attention too.
It is only a year ago that the commodity bull run was still in full swing. The wheels fell off in August, since when the price of metals has nose-dived. Orders for metals dried up overnight and the subsequent price falls have been deeper than during the worst years of the Great Depression.
But could there be glimmer of hope for a metals revival?
John Meyer, a mining analyst at Fairfax, the investment bank, thinks so.
He is revising many of his metal forecasts upwards because of several factors, including a weaker US dollar, inflation fears and the renewed demand from China.
"The ratio of the copper price versus gold is at its lowest level since 1990 – people forget that
many metals, not just gold, are a hedge against inflation. China is buying up copper and, while some see it as strategic buying,
it also has to buy metals simply to maintain its economic growth," said Meyer. "Copper is our principal focus, although lead, zinc and tin may fare well too."
The revelation that China's State Reserves Bureau (SRB) has been buying copper on a scale that appears to go beyond the usual rebuilding of stocks for commercial reasons has caught many investors' imagination.
There's even talk of China creating a 'copper standard' for the world's currency system.
Nobu Su, the head of Taiwan's TMT group, which ships commodities to China, said the next industrial revolution was going to be led by hybrid cars - and that needs copper. "You can see the subtle way that China is moving into 30 or 40 countries with resources," he said.
The SRB has also been accumulating aluminium, zinc, nickel and rarer metals such as titanium, indium (used in thin-film technology), rhodium (catalytic converters) and praseodymium (glass). Evy Hambro, who runs the BlackRock World Mining investment trust, said
the key question for metal commodities was whether the renewed demand for metals was due to companies restocking inventory levels which had been run down, or whether they were turning the capacity tap back on. If it is the former, the commodity revival could be short-lived.
He remained unconvinced that it was the latter. "We are not seeing a pick-up in demand in Europe or the US – and demand for commodities tends to slow in the summer in the northern hemisphere anyway. But we remain overweight copper, which has some of the best fundamentals."
Investors looking at copper ought to be aware that its price has risen by more than 50pc this year, so late joiners have missed some of the recovery already.
Hambro is still positive on gold, but is less convinced that aluminium will shine. Aluminium's price has fallen by more than half since last summer, but there is still a huge oversupply, which is unsupportive of a sharp price rise if demand turns.
The central banks' stimulus to kick-start the flagging car industry could also provide a fillip to metals. For example, more than 80pc of lead is used for car batteries, while 53pc of a car is made from steel.
Fairfax pointed out that sales of cars rose sharply in Germany in February after its government introduced a stimulus plan which allows consumers to trade an old car for a new one with state aid of €2,500. "That's a pretty huge increase – sales had fallen 14pc year-on-year in January," said Meyer.
Hambro agreed that fiscal stimulus would boost many metals involved in car production, but that it was difficult to judge when it would be seen to filter through. "If a car plan is announced in next week's Budget, will orders for aluminium rise sharply? Unlikely."
But early signs that the economic downturn may be reaching a floor have led many analysts to believe that silver could outperform gold. The debate about the relative merits of gold and silver was triggered because the world's largest consumer, India, did not import any gold in March for the second month running.
"In India you have people who can only afford silver and people who will only buy gold, but there are a large number of people in the middle who will rotate from gold to silver," said Ashok Shah, the chief investment officer at London & Capital.
That phenomenon is likely to be repeated in other countries as unemployment, salary cuts and potential tax rises take their toll on consumer spending. Eugen Weinberg, an analyst at Commerzbank, said:
"Silver over the past 30 years has been the poor cousin. In the first half of the last century gold and silver were on a similar footing in terms of monetary value and their roles as safe havens."Just as with copper, a measure of value is the ratio of gold to silver prices, which in the last century fell as low as 14 and compares with levels of around 70 now – suggesting gold is overvalued. Since the early 1980s the ratio has averaged about 65 and mostly ranged between 30 and 100.Weinberg added: "The ratio could drop to between 40 and 50 in the medium term. People who cannot afford to buy gold for jewellery will buy silver."
Industrial demand for silver, including from the photography industry, is reckoned to be about 65pc of total global supplies, estimated at 895 tonnes. For gold, industrial and dental demand is about 11pc of supplies estimated at around 3,880 tonnes, according to consultants GFMS.
Part of the boost for silver will come from investment demand. With gold prices still near $900 an ounce, holdings of exchange- traded silver funds are expected to rise.
The iShares Silver Trust, the largest silver-backed exchange-traded fund listed in New York, holds a record 8,413 tonnes, a gain of more than 20pc since early January. That compares with a rise of more than 40pc in the SPDR Gold Trust, the world's largest gold-backed exchange-traded fund.
Metal commodities have become a staple part of many portfolios, as investors look for diversification and assets that are not correlated to the performance of shares. There are several ways you can get exposure to individual metals – one of the most popular is exchange-traded commodities (ETCs), which you can buy through most stockbrokers or online share dealers.
London-listed ETCs last week experienced net inflows for the fifth consecutive week, with precious metals ETCs seeing the largest inflows. They included ETFS Physical Gold ($38m), ETFS Physical Platinum ($14m) and ETFS Nickel ($2m).
The other option is to buy a unit or investment trust that invests in a spread of equity-related commodities. Popular funds include BlackRock World Mining, Investec Resource Enhanced or JPM Natural Resources.
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