Wednesday, November 30, 2005

The Serendipity of the Net

Not too long ago, I read this interesting piece on Slate about the price of copper (this blog makes me write sentences I never thought of):
Copper is a cheap, plentiful metal with lots of useful properties: It resists corrosion and is an excellent conductor of heat. As a result, it can be found in the intestines of a good chunk of the world's industrial economy. Plumbing, radiators, electrical wiring, and air conditioners all require copper....

The rising demand has also been good news for copper traders. This monthly chart plots copper's rise over the last several years, and this vertigo-inspiring chart illustrates how the price of copper has doubled in the last year....

The price of copper generally represents a pretty accurate barometer of the demand for it in the real world, rather than an irrational bet on its future value. Why? As Howard Simons, a strategist for Chicago-based Bianco Research, notes, copper is cheap, heavy, and plentiful. "So you don't stockpile it, you use it as needed." Nobody bothers to hoard it. (You'd need a massive warehouse to store any meaningful amount of copper.) And while some hedge funds are doubtlessly speculating on copper, "nobody goes out and takes a flyer on it, the way you would with more expensive metals like gold and silver,"
Nobody, says you? Really?
HO CHI MINH CITY, Vietnam, Nov. 24 -- China on Thursday acknowledged that a since-detained government trader placed a series of disastrous bets on the price of copper in London this summer, leaving the state to cover hundreds of millions of dollars in losses, according to a report in official Chinese media....

China has in recent years developed a voracious appetite for raw materials, becoming the world's largest buyer of copper, iron ore and steel, as well as the second-largest purchaser of oil. This month copper prices soared to record levels on the assumption that China will eventually have to buy large quantities to square its accounts after the trading debacle.
It's so funny when highly-paid financial advisors get proven wrong. (In fairness, it's obvious that the Chinese trader was doing something very very stupid, so Mr. Simons can't be blamed for not anticipating that.)

The Slate article poses an interesting paradox for us. According to the article, Copper is a positive indicator of a good economy (high copper prices = goodness) and Gold is a negative indicator (high gold prices = badness.) So what does it mean when both copper and gold are reaching record high prices?

I honestly don't know. Any economists out there?


Battlepanda said...

I'm no economist, but here's some speculation anyhow.

We are in a weird economy consumer spending by the United States is driving a lot of the growth. To put it in crass, reductionist terms, we import a bunch of junk from China, and in return we export a bunch of bonds. Everybody is happy with this arrangement for the time being, we get lots of goods, china gets lots of jobs. Growth for everyone. The demand for copper is high as long as this consumption boom continues. But everybody knows that the party can't go on forever. At some point in the future, the imbalance has got to be corrected.

That's why a lot of investors are running scared and buying gold -- the traditional safe harbor. The inverting yield curve is a further vote of no confidence from investors -- if they think there is going to be lots of growth (and thus demand for credit) in the future, they would be driving up long-term interest rates.

Westacular said...

To put it in even more crass terms:

Copper is up because we -- particularly China -- are on a runaway train.

Gold is up because the bridge is out.