Why invest in copper? Increasingly investors are looking outside the traditional asset classes of equities, bonds, cash, and property when looking to build a diversified portfolio. There are plenty of alternative investments that can be used, including fine wines, antiques, vintage cars, and the like. One of the most popular is an investment in metals. Most commonly such an investment is made in gold, silver, or perhaps platinum. But are investors missing a trick by only considering the metals that are most associated with money and jewellery?
Copper is one of the most widely used metals in the modern world. It’s used in electrical wiring, plumbing, car and other transportation parts, construction…in fact its uses are almost endless. It’s even used in the minting of coins, though the typical ‘copper’ in your pocket is now made almost entirely of zinc.
It was in 1982 that the US Mint changed the composition of its copper coins from over 90% copper to over 90% zinc. The reason: cost. Now, with the movement in the price of copper since 1981, copper coins that pre-date this time have twice the value of copper content than their face value.
Ways to Invest in Copper
There are many ways to invest in copper. An investor could seek out pre 1981 coins, and hope that at some time in the future the US government allows him to melt down for the copper content. Or he could invest in more traditional ways.
Investors are able to buy copper bullion bars and coins from metals dealers in exactly the same way that they would purchase gold or silver bullion. It is available in a variety of sizes, though investment grade copper is extra refined (0.999 copper). This is one reason why the premium paid over the cash price of copper on the international markets is often as high as 60% or 70%. Because of this huge premium, many investors in copper use other financial instruments to take a position in the red metal.
Owning the stock of companies that mine and refine copper will give an indirect exposure to the price of copper. There are many other factors that move a copper mining company’s share price over and above the price of copper. Costs and wages, margins, tax, law changes, and eventual earnings all impact the share price of all quoted companies. Unlike holding the copper as bullion, however, ownership of copper companies’ stock often gives the investor income by way of dividends.
There are dozens of publicly quoted copper miners though one of the problems with holding shares in a single miner is the narrowness of investment: the fortunes of one company could be vastly different to the fortunes of a basket of companies. So many investors look to other financial instruments to make their investment.
Exchange Traded Funds are bought and sold on an exchange, in just the same way as company stocks are. Different ETFs offer different investment profiles to investors. There are copper ETFs that can be used to profit from a rise or fall in the copper price, and others that give exposure to a basket of copper mining companies.
Investment in a copper ETF can therefore be used to speculate on the mining sector, or the metal, or used as a hedge against an existing position.
More complex are copper futures. A future gives the holder the obligation to buy a certain amount of copper on a date in the future. In reality, very few futures are ever exercised – that is the physical copper is never required to be delivered. This is because investors (who are most usually large institutions or copper companies) either trade out of their position, selling the future they have bought, or roll the position over to the next settlement cycle.
An investment in a future gives a direct exposure to the price of copper, and for the experienced investor can be the most powerful of investments. Copper futures are not paid for up front. This means that the exposure they offer is far in excess of the value of copper underlying the futures contract bought, which in turn means an investor has a leverage position on which his profit can be many times his initial outlay. But he also realizes that the risk on an adverse movement in the price of copper is equal and opposite of the upside potential.
Copper is drawing attention as an investment metal, and as it becomes more popular so the number of investment instruments that give exposure to the metal will grow. However, as with all investments there are costs involved. Purchase of stocks or ETFs will incur a commission and possibly trading fees, as will trading in futures.
Futures prices are determined by time value as well as the price of the underlying copper, and so the longer dated a future the higher the premium paid over the value of the copper pertaining to the future.
ETFs will also suffer management fees over a period of time, and these could impact upon the correlation of the ETF price to the underlying security.
If investing in copper bullion, an investor will have to bear in mind not only the premium over the copper cash price, but also delivery and storage costs.
Overall, an investment in copper is an investment in the modern world and in confidence of modern industry. It’s also a good way to gain diversity of asset class within an investment portfolio, and can be achieved in a number of ways to suit individual investment aims and profile.