Gold is Shining–Does this Spell Trouble for Copper?

Global economic conditions play a large role in the price of precious metals and other metals used by the process industries. Emerson’s Juan Carlos Bravo, a member of the metals & mining industry team, shares his perspectives on these economic conditions and their impact on gold and copper prices:

Gold has always been synonymous with wealth and if you were a prescient investor, your investment increased 194% over the past five years. Investors continue to pile their money into gold as it is still deemed one of the safest places for cash in uncertain times.

With the demand for gold, it’s no surprise that we continue to hear about a renewed worldwide “gold rush”. Projects are seemingly being announced everywhere and new prospecting “49ers” are opening abandoned gold mines, even some that are thousands of years old. This may not be a bad approach as ever increasing gold prices and technology advances mitigate risk and can make it profitable to take another look at these old mines. Some experts are predicting that its price may be headed towards $2,400 an ounce.

Unfortunately, this enthusiasm is a microcosm of a poor global economy. The low confidence in the U.S. economy, coupled with concerns over the debt burden in Europe, has weighed on world financial markets in recent weeks. Unlike gold, one casualty from the waning economy is weaker demand for copper. So far in September, copper prices have fallen 1.6% on the New York Mercantile Exchange. The outlook is not sunny as Citigroup recently cut its copper pricing forecast for 2012.

If we’re going to talk about copper, we need to discuss China who buys about 40% of the world’s supply. But it’s not just demand from an expanding construction sector that is driving China. A recent article in the Wall Street Journal details how commodities traders skirt the credit curbs put in place by China’s central bank. You see, these traders were using letters of credit to buy copper which they sell to raise funds to use for real estate and other transactions. In reality, it’s the demand for credit and not copper that was helping to fuel commodity prices. Now that the central bank is cracking down on this practice, the future market for copper will likely better reflect true demand.

So what does the crystal ball say about future prices? If the global economy continues to struggle, I’m of the opinion that gold will likely continue to be a safe haven for investors. Conversely, copper demand is fueled by a strong economy and the demand by the construction industry for infrastructure. Only time will tell, but right now the demand signals for copper are mixed.

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