Did Doctor Copper Just Put On His Dancing Shoes?
Excelsior Prosperity w/ Shad Marquitz 03-25-2024
This article will be another one of our periodic updates on specific commodities and the related resource stocks, with a particular focus on copper in this update. The “red metal” has been generating more headlines the last 2-3 weeks after the recent price break above the $4 per pound threshold, and after a number of larger financial firms have weighed in on their outlook for this sector. We’ll get into all of that further into this piece, but first let’s take a step back and get a broader view of copper’s place in the commodity sector, and why it’s such a fascinating metal to speculate on.
As an active investor in the commodities and resource stocks space over the last 14 years, I’ve noticed that copper is one of those metals that gets a lot of attention and lip service from investors and economists (but bizarrely, not nearly enough from policy makers whose stated goals are going to require so much more of it). It’s a sector that has undeniable positive longer-term value drivers (but don’t worry this is not going to be another one of those copper-to-the-moon any minute or dire warnings that copper supply is running out next month marketing pitches).
There are PLENTY of articles and reports out there from the last decade that are uber-bullish on this industrial metal; and rightly so considering the larger supply and demand trajectories over time. The reality is though, that many investors just got far too bullish on copper and copper junior resource stocks far too early in this commodities cycle (with a few notable company exceptions that had unique micro drivers). The good news is that now the fundamentals, technicals, momentum, and sentiment are finally starting to stack up towards a better opportunity window for copper and the broader range of copper stocks. We’ll get into that later in this piece. First though, let’s pan back to get our bearings for investing in the copper sector.
Copper is really the kingpin of the base metals, often referred to as “Dr. Copper” because of it’s ability to diagnose the health of economic growth, or the lack thereof. This is largely because the human world has only become more and more electrified, ever since the 1880’s, when electricity utilization first really captured the imagination of big industry. Conducting an electrical current into lightbulbs and countless devices and appliances over time, has now spread out into every aspect of daily life and business life. The reach of electricity in our lives has gone from merely being outlets embedded in the walls and floors of homes or businesses, to branching out into a myriad of mobile devices and external machines all over the planet, via the electrical charging of batteries. Copper is that critical metal conductor of electricity in wiring and devices, not to mention several types of batteries, and thus the key “Energy Metal” for this progress, expansion, and wiring up and connecting of the planet.
Many believe that we are entering back into a critical phase of expansion and industrial growth again in many global emerging nations, and even in the more developed nations. In tandem with the projected economic growth, policy makers in many countries have continued advancing “green” initiatives, very focused around energy generation for the power grid, electricity utilization in electric vehicles, and the larger advances around batteries and energy storage.
Duracell have long marketed their “Copper Top” batteries.
This is precisely why so many economists and pundits use the daily copper price (as the merger of all supply and demand factors culminating in a single numeric metric) as the tell or diagnosis for the health of the global economic landscape. During recessions and economic contractions, in major global economies like the USA, China, Japan, Germany & the greater Eurozone, India, South Korea, etc… the base metals like copper, nickel, zinc, lead, iron, aluminum, etc… fall out of favor as there is less commercial and residential building, slower manufacturing, slower vehicle demand, and sluggish industrial output. This slower demand in economic contractions leads to rising supplies and inventories, forcing prices in the industrial metals lower. Conversely, during times of economic expansion or booms in many key economies, we witness these base metals prices take off to the upside with demand over time swamping supply.
So essentially, most economists myopically boil their whole outlook on copper down to whether we will see economic expansion or contraction, and don’t spend much time on the unique market dynamics. Resource sector enthusiasts, that understand the unique commodity market nuances, and shrinking reserves and reduced longevity around the globe of the aging copper mines, and the lack of enough new major discoveries, have highlighted the supply/demand imbalances for many years now. There are more charts with arrows of demand going up and arrows of supply going down that you can shake a copper pipe at, but those forecasts have been out there for many years now.
I’m not going to rehash those points again, as that massive quantity of info is all out there for anyone to digest on their own, just a key word search away. Many copper sector investors and enthusiasts, for many years, have raged on about why the market price today is just not correct, and that it should be much, much, much higher. I don’t disagree with their premise, but still remember articles and calls from pundits or company executives 5-7 years ago that thought $10 copper was right around the corner.
OK… but the reality and cold hard truth is that that the copper price has simply not been in that big uptrend to double digit prices, that so many have been clamoring for all this time. We have here another prime example of the old adage that, “The market can stay irrational for longer than you can stay solvent.”
Don’t get me wrong here… That doesn’t mean that eventually those fundamental factors won’t play out, simply that the market price action was not in agreement all this time. The forward-looking discounting market price, (whether people like it or not) does wholistically take into account all supply/demand factors and all buying/selling. What else can be said except that over the years the pricing has just not confirmed the longer-term thesis and narrative that many have prognosticated about in copper for a long time. The truth is that many investors and sector talking heads were just far too bullish on the copper sector, far too early; even if they will eventually be correct that copper does move to much higher price levels.
As important as copper is, there is a big problem for some people with the metal because open pit copper mines are seen as a scar on the landscape, and very energy intensive and bad for the environment. However, paradoxically, those people complain about mining on mobile devices charged by electricity that travels over copper wires, and ironically all of the green policies they say they want to save the planet, will require huge new supplies of copper. As the saying goes, to create almost any products in our lives, “If it’s not grown then it’s mined.”
The mining sector gets a bad rap, but quite often it is from the very people oblivious to the reality that their houses, appliances, cars, computers, smartphones, and the services they utilize everyday, would simply not be possible or exist if most of the raw materials were not mined in the first place. Once that primary and most basic lightbulb about how the world works goes off in the heads of investors, (that the commodities are the very “stuff” of life), then projecting price trends for many market watchers simply comes down to the basic economic principles of supply & demand.
The problem though, and continually vexing reality in the resource sector, is that we actually witness very regularly that the markets don’t always mirror or match the economic backdrop. Quite often, there are really confusing disconnects between how the stock markets move, in contrast to the economic health messaging being continually pumped out by the macroeconomic data and the mainstream financial media.
Diving down into the commodities is no different in this regard. We have witnessed plenty of historical disconnects where the pricing reality in a given commodity remained in stark contrast to the supply/demand narratives running in the background and in the forefront of investors’ minds. This has very much been the case in copper for many years now, but it is a phenomenon that is seen across the commodity complex, and not limited to just the “good doctor.”
One only has to look back a decade to see all the discussions and prognostication around the eventual higher prices that would be needed for rare earths, lithium, or uranium. People forget those sectors had prior bubbles in 2009-2011 that also dropped for many years afterwards, because it was still too early for these moves to be self-evident to the masses. It is important to remember how many years those narratives were in place and circulating before the eventual metal price rises finally caught up with the supply/demand mismatches, and those metals had their inevitable big price runs over the last few years. There were people that went from constructive to flat out table-pounding bullish on those sectors for at least 5-7 years prior to those sectors finally taking off. It has very much been the same way with copper for many years now.
This is a very important point, because there is a real and legitimate opportunity cost to being “too early” when we are talking about years, and not months. Yes, it is better to be early than late, as the trite mantra is often parroted, and yes, often it is even worth the wait if the sector pays off in a big way. People will run calculations annualized over that whole time period of holding, or HODL’ing, showing it was worth the candle. Agreed 100%. However, let’s keep it real here… there is little point or rationale to being way too early and stuck in dead money for many years, and missing all the opportunities to have deployed that capital into the sectors that actually were working during that time period.
So many will utter the phrase when investing in almost every commodity or sector:
It is not really a question of “If?” but rather a question of “When?”…
Absolutely – true enough. However, the part most people leave out when uttering this convenient trope, is that the “When?” can still take years to materialize, wearing everyone out in the process. So yes, it is very possible to be right on a call eventually, but actually be making a very wrong call to start positioning in that speculation far too early. Even if the fundamentals for the specific metal or its related companies are obvious, if there is not yet the right kind of momentum setup then it is a moot point, and only sowing the seeds of investor disappointment. Overall, with the exception of the brief commodity explosion in 2022, tied in with concerns on the Ukraine war conflict, most copper bulls have been 5-7 years too early here once again… at least as it relates to most juniors and the price of copper really breaking out.
It absolutely does not serve investors, or the related companies in the sector, to be permanently bullish, year after year, and to be crying wolf way too early in a given commodity. This only creates heartbreak, and an eventual loss of confidence in the thesis from investors. Inevitably what happens is that people will get positioned during huge lulls in the commodity sector on the back of a sizzling longer-term macro story, but that is not nearly ready to eat yet and needs a lot more time to cook in the oven before being ready for consumption.
When the bullish narrative mismatch to the actual underlying sluggish commodity pricing underperforms for a long period of time, those biggest fans lose interest and become impatient long before that commodity has its eventual moment in the sun. Ironically, those same superfans then pivot to becoming sector detractors, as the bitterness from a love lost sets in.
We saw that same investor phenomenon play out in the years leading up to the big rallies in lithium, uranium, and oil stocks, where so many prior fans turned to sector haters, and claimed those sectors and stocks would never run. They had given up and repeatedly trash-talked those sectors because they got too excited and too exposed to those sectors far too early. Then when the rallies did come, they were jaded and out of position and missed the multi-bagger returns.
Not to poke the hornet’s nest here… but for another example just think about how long so many investors have been waiting for their big payday in silver and the silver stocks… (Look, I’m a huge silver bug and absolutely love the sector, and am fully cognizant of the supply/demand mismatches and games that are played in the paper pricing schemes, etc…) The point being, is that resource investors often are so bullish on a longer-term narrative being “inevitable,” that they fail to see that it isn’t a “now” story.
That has been the issue with both silver and copper for many years up until the present day, where finally now the time is more ripe for a rip higher. Yes, the fundamentals have been in place for much higher prices for many years, but pricing was channeling sideways to down and not confirming the fundamental backdrop. It actually hasn’t been until just more recently that the overall pricing conditions have been setting up for big runs in both metals in the next 1-2 years. The good news is that both silver and copper are finally “now” stories.
The technical pricing picture in copper has a much more compelling setup now, and the recent break above $4 again is a signal that many have been watching for. In the 3-year daily copper chart below, it does look like the red metal bottomed (in the intermediate-term) back in July of 2022 at $3.13, and has started to steadily climb out of that area making a series of higher lows, but it’s been real choppy.
More recently, I think that $3.65 level tagged in mid-February, was close enough to consider it having bounced off trend line support there (downward sloping blue straight line). Now that copper has vaulted up to $4.16 recently, it cleared and closed on the daily and weekly charts above a number of lessor prior peaks in the high-$3’s definitively, which is bullish. It closed today Monday 03/25/2024 at $4.02, so it still has the risk of dipping briefly below the psychological $4 level, but I believe that other trendline (upwards sloping blue straight line) will provide support around $3.96, and coincides with 3 other peaks right around that area ($3.96, $3.967, $3.947 – shown by blue ellipses on the chart below).
Now, there is still a lot of work to do for copper to bust out above the recent peak at $4.355, or the overhead congestion zones in the $4.40s-$4.60s, much less make a new all-time high above the $5.04 level; hit during the peak concerns of the Ukraine war conflict taking hold. So unless something drastic happens in the near-term, like a black swan, then it appears that copper has a lot of work to do to chew threw all that prior pricing memory in the mid to high $4’s, before it can make another run at a breakout to $5.05 or higher. Still, despite the overall multi-year sideways pricing channel, I’d suggest that copper has been in a bullish posture since mid-2022, but just not making much pricing progress. Now, it technically looks set up to be able to run to the upside in price and that will bring more excitement back to the copper juniors as well.
From a fundamental standpoint, the overall US economic outlook for this year and next year, from many analysts and economists, is actually much better than many had feared things would be 2 years ago, (leading into the period where central banks switched to the most aggressive monetary tightening cycle in multiple decades). Sure, China has been a mess, but may be starting to gradually climb out of the hole it dug for itself the last few years, and the sentiment has shifted to far too negative on China, and it likely will start to surprise to the upside. Many are pointing to the new global engine of growth to be found in India, so that is a part of the copper story few are considering, but it should be increasing its demand for commodities over the next decade.
On the supply side, we’ve seen the shuttering of a number of copper mines over the last few years, and there simply aren’t enough new mines coming online to make up for the lost production.
So thankfully, from a medium-term perspective, we are finally at a better junction for copper prices starting to accelerate and gain some momentum, both technically and fundamentally. This uplift in copper should also start to translate down into some of the sector equities finally getting moving again, in the months and years ahead.
Additionally, for all the longer-term investors out there... Yes, coming out of the pandemic crash market lows, a global environment has unfolded where commodities did finally start a much larger “Supercycle,” which will playing out over a longer period of time. The early part of the post-pandemic cycle popped a number of commodities earlier on. As the reverberations of that period continue to be felt, this should strengthen many core metals and energy commodities for many years to come. Post 2020-2021 lockdowns, the flaws with the “just in time” manufacturing model, and the convoluted supply chains and trade agreements were properly exposed.
As a result there has been a transition from a focus strictly on globalism to more of one focused around nationalism, and each country securing it’s own supply chain and source of raw materials. As a result, we finally are seeing a change and awakening as to the importance of raw materials and commodities, where now the language is considering them “strategic” or “critical.”
Over the last few years since 2020-2021, the fundamental supply/demand mismatches have become much more pronounced and obvious to governments and the manufacturers. This growing awareness has seen funds be set aside for developing critical and strategic metals resources by governments (notably in both the US and Canada, but also in Europe). This desire to know the source of the raw materials, and to some extent a focus on ESG policies, has had OEMs coming upstream in the supply chain to start partnering and investing directly in the mining companies themselves as it relates to lithium, nickel, silver, and copper. Doctor Copper, as one of the key “critical minerals” and “energy metals” to take us into the future, has finally put his dancing shoes on, and we should anticipate some nice moves from Dr. C on the marketplace dancefloor over the next 2 years.
This recent article summarizes some recent institutional takes on the red metal move just now getting underway.
Copper drops from 11-month peak; UBS says copper rally 'just the beginning'
Mar. 20, 2024
https://seekingalpha.com/news/4081522-copper-drops-from-11-month-peak-ubs-says-copper-rally-just-the-beginning
Now let’s look at the copper equities, to get a sense on how they are trending, noting a big difference in how the copper producers have been performing in contrast to the copper junior developers and explorers.
In much the same way that the ETF (GDX) is the best proxy for larger gold producers, the ETF (COPX) is a great proxy for the larger copper producers. Here’s a look at the COPX daily chart:
One can see on this chart that more or less, the copper producers have tracked the overall price moves in copper itself, peaking in early 2022, then bottoming in the summer of 2022, and then gradually starting an upwards climb, but still, essentially channeling sideways for the last few years. It is encouraging that lately the COPX price rocketed higher during the month of March, blasting well above the 50-day, 144-day, and 200-day Exponential Moving Averages (EMA). It is also significant that the pricing recently popped up to $42.13, eclipsing all the prior peaks from 2023 at $41.11, $41.45, and $41.63. So that is also a bullish development, and a big enough move to note a trend change here in the copper producers. The next key level of resistance moving forward is really that all-time high from 2022 at $44.61. After that, we’ll likely see the generalist momentum traders get serious about copper stocks, and then the real fireworks will begin.
The reality with most resource investors though, is that if they’ve been bullish on copper, they are more likely in a large group of 150-200 copper junior drill plays and development companies peppered all over the globe, and those stocks (with a few notable exceptions like Filo or Solaris that made big discoveries) have mostly struggled the last 2 years. While many copper juniors are still down plumbing levels near their lows, I have noticed that this month, a lot of the beat up stocks did finally spring back to life, and again the sentiment, and pricing momentum has had a change of tone.
First I’ll highlight another ETF, the Sprott Junior Copper Miners ETF (COPJ), which again claims to be copper juniors, (but still has a lot of the larger market cap producers and the larger developers that are most heavily weighted). However, COPJ does actually have more copper juniors included as one goes down the batting order of their roughly 40 stock holdings, and it’s worth following.
https://sprott.com/copj-sprott-junior-copper-miners-etf/
· In full disclosure, I’ve been building a position in COPJ over the last few months, and am biased in that sense
From a technical perspective, it is nice to see (COPJ) recently blast higher in tandem with the copper price, and along with the (COPX) major producers. Granted there is some overlap in the holdings of the two ETFs, and again there are a lot of producers and larger developers included in COPJ that are not representative of most of the true copper juniors many investors are positioned. Regardless, the pricing went up recently to make a short-term peak that was at the exact same level (to the copper penny) as the peak from last summer at $20.94. The next peak to take out is the all-time high at $21.35, as this ETF has only existed for a little over 1-year. (prior peaks noted within the blue ellipses on the chart above).
Bulls will want to see a close above $20.94 and then $21.35 to really get some upside momentum traders following along. The price is getting pretty extended here above the 50-day, 144-day, and 200-day EMAs, so it is possible that the copper stocks may need that “pause that refreshes” and a consolidation first before blasting up to new highs. Really, that would be a better scenario, because if we see that big break to new highs now, then it will still be bullish and encouraging, but may flame out in a parabolic move up and crash right back down. It would be technically more constructive to see it backfill some of the recent gains, let the moving averages start sloping up to meet pricing, and then see COPJ climb the next step higher, and then base, and then climb the next step higher, etc…
Now, one stock doesn’t make a market, and I don’t want to make too much of the move in this next stock, but the blast up recently in Regulus Resources (REG.V) (RGLSF) caught my attention as a potential early mover developer that just got rerated recently. This stock was down at $0.60 the end of last year, but just shot up to $1.38 last week, surpassing all it’s 2023 peaks and just slightly under the early 2022 peak at $1.50 (when copper had run to just over $5). That’s a pretty exciting move in Regulus, and it may have just made the kind of move we are going to see in more copper stocks that have proven pounds in the ground as this sector really gets moving over the next 18 months.
So, for those still confounded by the nice moves up recently in copper and the larger copper stocks, but then not seeing that translate over yet into most of the true copper juniors…. Patience. Moving forward my strategy personally will be that dips should be accumulated and held in copper juniors, and I’m giving my speculations roughly a 2 year window of time to go up 3x or more. I’ll provide more details of the junior copper stocks that I’m starting to accumulate in future updates on the red metal.
The overall takeaway from this first article on copper is that all indications are that we are finally at the point where the opportunity cost in being too early is actually worth the candle for accumulating many of the beat-up copper juniors. As the metal price and larger stocks continue to pop and show relative strength, more interest will filter down the risk profile into the junior copper stocks. Having said that, it may still be a few more months before the juniors wake up, but there are so many good risk/reward scenarios out there to be capitalized on, and many copper juniors that have not even gotten off the mat yet.
Happy hunting, and wishing you all prosperity in trading and in life!
- Shad