Author: Mr. X
Predictions of inflation and the collapse of the dollar have been made for decades. Prophecies of doom can be attractive. If you think the economy is working against you or that it is “rigged,” then some future financial reckoning is a sign that there is justice in the end. Reality rarely works that way. Though inflation fears are up, it doesn’t mean fiat currency in general or the dollar specifically is going to collapse.
That said, there is likely to be some mild inflation. The Democrats appear willing to use budget reconciliation to force through a $1.9 trillion stimulus bill, which will include direct payments for most Americans. The bond market points to inflation. Rising prices in oil and food show the process in real time.
It’s important to view this not as a sign of impending collapse, but renewed global economic growth. The United States government is pushing hard to restart demand by printing money and keeping interest rates low. However, there’s little sign that the deficit is going to overwhelm the country or that the dollar will lose its status as the world’s reserve currency in the short-term. Don’t panic and drop everything into gold thinking that the age of fiat currency is coming to an end. It’s not.
Instead, looking at commodities from this more optimistic perspective, raw materials are a strong candidate for investment. The “real” economy is poised to make a global comeback and that means certain key resources will be in short supply.
The Bloomberg Commodity Spot Index just hit its highest level since March 2013. Rare earth metals have been a good investment choice over the last year – the VanEck Vectors Rare Earth/Strategic Metals ETF [REMX] is up over 73 percent over just the last three months, and double that over the last year. (REMX is part of RID’s Model Portfolio). Lithium has also gained in recent months, and even silver has increasing importance as an industrial metal. However, don’t overlook one of the most common industrial metals – copper.
Last year, China imported record amounts of refined copper and unwrought aluminum. China already consumes about half of the world’s copper supply, and China will probably need even more of it next year as its economy recovers.
Here in the States, the $1.9 trillion stimulus is expected to boost manufacturing. The Democrats are also likely to focus on delivering infrastructure, one of the key initiatives that President Donald Trump failed to get through Congress during his term. If successful, these American efforts will put additional strain on the already pressed global copper supply. Chinese inventories of copper are reportedly at the lowest levels in a decade.
Copper is not a “backward looking” industrial material. In fact, battery/electric vehicles generally use more than three times as much copper as standard internal combustion engines. Copper won’t just be needed for standard industrial projects, but for the clean energy and electric vehicle programs poised to receive massive subsidies from the American government.
Commodities are generally thought of as a hedge against inflation. However, in copper’s case, this could also be a growth investment. If copper isn’t quite a “precious metal,” it’s certainly a necessary one both for traditional industries and the companies of the future. Therefore, investors should consider taking stakes in mining companies focusing on copper as well as larger ETF funds that allow you to invest in the sector.
The United States Copper Index Fund [CPER] is up about 25 percent over the last three months. The more daring Global X Copper Miners ETF [COPX] is up more than 57 percent over that same time period. Industry stalwarts Southern Copper [SCCO] and Freeport-McMoRan [FCX] are up about 43 and 77 percent respectively over the last three months.
A hedge against inflation doesn’t have to be a static investment. It can be something that accompanies economic growth and outpaces the decline in the dollar. Investing in the “real” economy of raw materials may be the best strategy in uncertain times – and copper is well-positioned. It’s still essential to many of the corporate titans that have survived from the 19th century and it will be just as important to the companies that are shaping the 21st century.