Why Investors Turn to Copper as an Inflation Hedge
Every year, a vast amount of copper is used by the global economy to manufacture a wide variety of goods.
It’s a major ingredient in big-ticket consumer goods like autos, appliances, electronics, and new homes. Simultaneously, copper is also gobbled up for many industrial uses including telecommunications, utilities, construction, and industrial machinery.
An Economic Bellwether
Today’s infographic comes to us from Kutcho Copper, and it shows the red metal’s important role in the economy, as well as why it has become a famous economic bellwether.
When the economy is doing well and new things are being made, demand soars for the red metal.
When demand goes up, it drives the price of copper higher.
All Eyes on Copper
Because of this historic relationship, analysts around the world watch the price of copper closely.
Copper’s long history of predicting economic movements has famously earned it a nickname as the metal “with a Ph.D. in economics”
In other words: when construction and manufacturing are growing, so do sales of copper products. But this link as an economic gauge has other important implications, especially to investors looking to build a robust portfolio.
Rising Prices, Rising Copper
While copper’s link to economic trends is interesting, it’s power to shield a portfolio from inflation is even more compelling.
Rising prices come from an overheating economy with strong consumer spending – the same factor that is an influence on copper prices. As a result of this connection, tor every 1% annual increase in consumer prices since 1992, copper’s price jumped almost 18%.
In an analysis by Bloomberg Intelligence, copper outperformed every major asset class aside from energy as an inflation hedge – and during periods of rising consumer prices, copper had triple the 5.2% gain logged by gold.
A Threat to Portfolios
Inflation can absolutely kill an unprotected portfolio.
Why? If inflation is higher than the portfolio’s rate of return, then that portfolio is actually producing a negative real return. (Example: 2% growth – 3% inflation = -1% return)
In other words, inflation can be a “stealth” threat that chips away at returns, especially for fixed income portfolios. The good news: holding copper or other commodities can protect against rising prices.
Copper: The Inflation Hedge
At the end of the day, other industrial metals are very specialized in their use, and precious metals tend to be driven by investor sentiment.
Copper, on the other hand, is used in a vast array of industrial and technological uses, which makes it a proxy for the economy as a whole.
Copper is more sensitive to inflation and the dollar because of its uses and its growth with the economy.
– Jodie Gunzberg, S&P Dow Jones Indices
The Periodic Table of Commodity Returns (2012-2021)
Energy fuels led the way as commodity prices surged in 2021, with only precious metals providing negative returns.
The Periodic Table of Commodity Returns (2022 Edition)
For investors, 2021 was a year in which nearly every asset class finished in the green, with commodities providing some of the best returns.
The S&P Goldman Sachs Commodity Index (GSCI) was the third best-performing asset class in 2021, returning 37.1% and beating out real estate and all major equity indices.
This graphic from U.S. Global Investors tracks individual commodity returns over the past decade, ranking them based on their individual performance each year.
Commodity Prices Surge in 2021
After a strong performance from commodities (metals especially) in the year prior, 2021 was all about energy commodities.
The top three performers for 2021 were energy fuels, with coal providing the single best annual return of any commodity over the past 10 years at 160.6%. According to U.S. Global Investors, coal was also the least volatile commodity of 2021, meaning investors had a smooth ride as the fossil fuel surged in price.
Source: U.S. Global Investors
The only commodities in the red this year were precious metals, which failed to stay positive despite rising inflation across goods and asset prices. Gold and silver had returns of -3.6% and -11.7% respectively, with platinum returning -9.6% and palladium, the worst performing commodity of 2021, at -22.2%.
Aside from the precious metals, every other commodity managed double-digit positive returns, with four commodities (crude oil, coal, aluminum, and wheat) having their best single-year performances of the past decade.
Energy Commodities Outperform as the World Reopens
The partial resumption of travel and the reopening of businesses in 2021 were both powerful catalysts that fueled the price rise of energy commodities.
After crude oil’s dip into negative prices in April 2020, black gold had a strong comeback in 2021 as it returned 55.01% while being the most volatile commodity of the year.
Natural gas prices also rose significantly (46.91%), with the UK and Europe’s natural gas prices rising even more as supply constraints came up against the winter demand surge.
Despite being the second worst performer of 2020 with the clean energy transition on the horizon, coal was 2021’s best commodity.
High electricity demand saw coal return in style, especially in China which accounts for one-third of global coal consumption.
Base Metals Beat out Precious Metals
2021 was a tale of two metals, as precious metals and base metals had opposing returns.
Copper, nickel, zinc, aluminum, and lead, all essential for the clean energy transition, kept up last year’s positive returns as the EV batteries and renewable energy technologies caught investors’ attention.
Demand for these energy metals looks set to continue in 2022, with Tesla having already signed a $1.5 billion deal for 75,000 tonnes of nickel with Talon Metals.
On the other end of the spectrum, precious metals simply sunk like a rock last year.
Investors turned to equities, real estate, and even cryptocurrencies to preserve and grow their investments, rather than the traditionally favorable gold (-3.64%) and silver (-11.72%). Platinum and palladium also lagged behind other commodities, only returning -9.64% and -22.21% respectively.
Grains Bring Steady Gains
In a year of over and underperformers, grains kept up their steady track record and notched their fifth year in a row of positive returns.
Both corn and wheat provided double-digit returns, with corn reaching eight-year highs and wheat reaching prices not seen in over nine years. Overall, these two grains followed 2021’s trend of increasing food prices, as the UN Food and Agriculture Organization’s food price index reached a 10-year high, rising by 17.8% over the course of the year.
As inflation across commodities, assets, and consumer goods surged in 2021, investors will now be keeping a sharp eye for a pullback in 2022. We’ll have to wait and see whether or not the Fed’s plans to increase rates and taper asset purchases will manage to provide price stability in commodities.
Visualizing the Scale and Composition of the Earth’s Crust
This animation shows the handful of minerals and elements that constitute the Earth’s crust.
Visualizing the Scale and Composition of the Earth’s Crust
For as long as humans have been wandering the top of Earth’s crust, we’ve been fascinated with what’s inside.
And Earth’s composition has been vital for our advancement. From finding the right kinds of rocks to make tools, all the way to making efficient batteries and circuit boards, we rely on minerals in Earth’s crust to fuel innovation and technology.
This animation by Dr. James O’Donoghue, a planetary researcher at the Japan Aerospace Exploration Agency (JAXA) and NASA, is a visual comparison of Earth’s outer layers and their major constituents by mass.
What is the Composition of Earth’s Crust?
The combined mass of Earth’s surface water and crust, the stiff outermost layer of our planet, is less than half a percent of the total mass of the Earth.
There are over 90 elements found in Earth’s crust. But only a small handful make up the majority of rocks, minerals, soil, and water we interact with daily.
Most abundant in the crust is silicon dioxide (SiO2), found in pure form as the mineral quartz. We use quartz in the manufacturing of glass, electronics, and abrasives.
Why is silicon dioxide so abundant? It can easily combine with other elements to form “silicates,” a group of minerals that make up over 90% of Earth’s crust.
Clay is one of the better-known silicates and micas are silicate minerals used in paints and cosmetics to make them sparkle and shimmer.
|Mineral||Major Elements||Percentage of Crust|
|Plagioclase Feldspar||O, Si, Al, Ca, Na||39%|
|Alkali Feldspar||O, Si, Al, Na, K||12%|
|Pyroxene||O, Si, Mg, Fe||11%|
|Amphibole||O, Si, Mg, Fe||5%|
|Micas||O, Si, Al, Mg, Fe, Ca, Na, K||5%|
|Clay Minerals||O, Si, Al, Mg, Fe, Ca, Na, K||5%|
|Other Silicates||O, Si||3%|
2. Aluminum and Calcium
SiO2 bonds very easily with aluminum and calcium, our next most abundant constituents. Together with some sodium and potassium, they form feldspar, a mineral that makes up 41% of rocks on Earth’s surface.
While you may not have heard of feldspar, you use it every day; it’s an important ingredient in ceramics and it lowers the melting point of glass, making it cheaper and easier to produce screens, windows, and drinking glasses.
3. Iron and Magnesium
Iron and magnesium each make up just under 5% of the crust’s mass, but they combine with SiO2 and other elements to form pyroxenes and amphiboles. These two important mineral groups constitute around 16% of crustal rocks.
Maybe the best known of these minerals are the two varieties of jade, jadeite (pyroxene) and nephrite (amphibole). Jade minerals have been prized for their beauty for centuries, and are commonly used in counter-tops, construction, and landscaping.
Some asbestos minerals, now largely banned for their cancer-causing properties, belong to the amphibole mineral group. They were once in high demand for their insulating and fire-retardant properties and were even used in brake pads, cigarette filters, and as artificial snow.
Surprisingly, even though it covers almost three quarters of Earth’s surface, water (H2O) makes up less than 5% of the crust’s mass. This is partly because water is significantly less dense than other crustal constituents, meaning it has less mass per volume.
Breaking Earth’s Crust Down by Element
Though there are many different components that form the Earth’s crust, all of the above notably include oxygen.
When breaking down the crust by element, oxygen is indeed the most abundant element at just under half the mass of Earth’s crust. It is followed by silicon, aluminum, iron, calcium, and sodium.
All other remaining elements make up just over 5% of the crust’s mass. But that small section includes all the metals and rare earth elements that we use in construction and technology, which is why discovering and economically extracting them is so crucial.
What Lies Below?
As the crust is only the outermost layer of Earth, there are other layers left to contemplate and discover. While we have never directly interacted with the Earth’s mantle or core, we do know quite a bit about their structure and composition thanks to seismic tomography.
The Upper Mantle
At a few specific spots on Earth, volcanic eruptions and earthquakes have been strong enough to expose pieces of the upper mantle, which are also made of mostly silicates.
The mineral olivine makes up about 55% of the upper mantle composition and causes its greenish color. Pyroxene comes in second at 35%, and calcium-rich feldspar and other calcium and aluminum silicates make up between 5–10%.
Going Even Deeper
Beyond the upper mantle, Earth’s composition is not as well known.
Deep-mantle minerals have only been found on Earth’s surface as components of extra-terrestrial meteorites and as part of diamonds brought up from the deep mantle.
One thing the lower mantle is thought to contain is the silicate mineral bridgmanite, at an abundance of up to 75%. Earth’s core, meanwhile, is believed to be made up of iron and nickel with small amounts of oxygen, silicon, and sulphur.
As technology improves, we will be able to discover more about the mineral and elemental makeup of the Earth and have an even better understanding of the place we all call home.
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