Dr. Copper Signals Rising Inflation Ahead
Friday February 10, 2017 12:00
(Kitco News) - Feb 10 – Performance numbers don't lie. Through the first five weeks of 2017, returns in the metals arena are running laps around those in the stock and bond markets.
Metals prices are soundly trouncing broader market equity gains. Take a look:
Quick Snapshot:
S&P 500 + 3.33%
U.S. 10-year note yield +2.42%
Palladium futures +14.31%
Silver futures +11.17%
Platinum futures +10.58%
Gold futures +6.51%
Year-to-date Data through Feb. 10
Copper Is Breaking Out
Copper prices surged dramatically higher this week. Three main factors are bolstering copper prices.
A strike at the world's largest copper mine in Chile.
Better-than-expected economic data out of China, the world's largest copper consumer, is supporting the price of the red metal. January data for Chinese import and export levels were higher than expected, with exports climbing 7.9% and imports up 16.7%.
Pro-growth policy expectations in the U.S. Copper prices received a boost this week from news that President Trump said his tax cut plans are moving ahead of schedule and that an outline will be delivered to Congress by month's end.
Why Should You Care About Copper?
Nicknamed "Dr. Copper" for its ability to presage economic turning points in the global economy, the widely used industrial metal has surged since the November 8 U.S. presidential election. Rising demand for copper, which is generally seen with a rising price trend for the metal signals improving global growth trends. Many analysts use demand for copper as a proxy for rising and declining economic activity.
How it's used: Copper is a key component in manufacturing
and building applications across industries. It is highly malleable,
can conduct heat and electricity and is resistant to corrosion. It
is used in wiring and plumbing, heating and cooling systems and
in automobiles.
Copper Stocks Are On Fire
Through Feb. 3 (before the Chile strike news hit), copper stocks, which are a subsector of Materials posted a whopping 20% gain.
Gold stocks, also a subsector in Materials, gained 7.9% through Feb. 3.
Materials – A Late Cycle Performer Shows Inflation Is Coming
The Materials sector includes commodity oriented (non-energy) companies including the metals and mining sector plus some chemical producers and forestry and paper product companies. This sector is a known outperformer during the late stages of an economic cycle – which the U.S. is in now.
Notably, price performance in the Materials sector is highly correlated to rising inflation.
The Materials sector overall posted the second best overall returns in the first five weeks of the year with a 4.8% gain, second only to Information Technology, which is up 5.9%.
Putting It All Together: Gold and Silver
Gold already has a jump on the S&P 500 in the first five weeks of the year. Often times, gold and stocks do not rise in tandem.
Despite the rising equity environment, gold and silver are both climbing now – boosted by uncertainty over potential repercussions from some of President Trump's proposals including trade wars and tariffs. Political concerns about the strengthening populist movement in Europe -- notably with Marine Le Pen's visions for France, which include an exit from the European Union. Rising inflation worries are also driving fresh demand into gold and silver.
Bottom line: It looks like the 2017 rally in the metals arena is only getting started now. What's in your portfolio now?
By Kira Brecht, Kitco.com
