Differing drivers moving copper and gold prices

Published: Tuesday, July 2 2013 6:14 a.m. MDT

For those looking to better understand industrial expansion and contraction trends, copper prices are significantly more instructive than gold prices.

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Prices of both gold and copper have plummeted in the last several weeks. The price of gold has fallen to roughly a three-year low of about $1,200 per ounce. For many retail investors, gold exposure in an investment portfolio comes through some sort of a gold-based Electronically Traded Fund. Substantial liquidations of gold-based ETF holdings have been reported in the recent past.

Price movement of gold can be traced to a wide range of motivations. From a very macro perspective, some of the recent liquidations of gold exposure appear to have been motivated by Federal Reserve Chairman Ben Bernanke’s recent comments concerning his outlook for continued quantitative easing activities by the Fed. Behavior of some retail investors in gold can appear almost quixotic in nature.

With a material portion of overall demand for raw gold coming from the global jewelry industry, demand by retail consumers in China and India for gold-based jewelry is reported to remain relatively consistent.

Copper, on the other hand, is predominantly a metal used in industrial applications. Uses for copper include electrical equipment, cables, various refrigeration applications, a range of automotive products and assorted ammunitions. Relative to gold, copper has somewhat limited apparel and adornment applications.

Although copper has been mined and used in various forms for many thousands of years, the vast majority of copper extracted from the earth has been mined since 1900. Importantly, copper is easy to recycle. Reportedly, more than 80 percent of the copper ore ever mined is still in use.

Thus far in 2013, prices for raw copper have fallen approximately 16 percent. Over the past several years, the run-up in copper prices has been materially attributed to the increasing demand for copper coming from China. As the Chinese industrial base has expanded and as the demand for new housing in and around the larger Chinese cities has ballooned, copper prices have increased, reflecting the incremental marginal demand.

Although both gold and copper prices have recently fallen, the underlying reasons for the coincident pricing behavior are somewhat different. Gold price volatility tends to garner the headlines. Copper price fluctuations are much more informative of global economic activity. For those looking to better understand industrial expansion and contraction trends, copper prices are significantly more instructive.

Kirby Brown is the CEO of Beneficial Financial Group in Salt Lake City.

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