Infographic: Why Investors Turn to Copper as an Inflation Hedge
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Why Investors Go to Copper as an Inflation Hedge

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Why Investors Turn to Copper as an Inflation Hedge

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.

Rising Demand
When the economy is doing well and new things are being made, demand soars for the red metal.

Rising Price
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.

Dr. Copper
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

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Energy

Visualizing U.S. Consumption of Fuel and Materials per Capita

Wealthy countries consume large amounts of natural resources per capita, and the U.S. is no exception. See how much is used per person.

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Visualizing U.S. Consumption of Fuel and Materials per Capita

This was originally posted on Elements. Sign up to the free mailing list to get beautiful visualizations on natural resource megatrends in your email every week.

Wealthy countries consume massive amounts of natural resources per capita, and the United States is no exception.

According to data from the National Mining Association, each American needs more than 39,000 pounds (17,700 kg) of minerals and fossil fuels annually to maintain their standard of living.

Materials We Need to Build

Every building around us and every sidewalk we walk on is made of sand, steel, and cement.

As a result, these materials lead consumption per capita in the United States. On average, each person in America drives the demand of over 10,000 lbs of stone and around 7,000 lbs of sand and gravel per year.

Material/Fossil FuelPounds Per Person
Stone10,643
Natural Gas9,456
Sand, Gravel7,088
Petroleum Products 6,527
Coal 3,290
Cement724
Other Nonmetals569
Salt359
Iron Ore239
Phosphate Rock 166
Sulfur66
Potash49
Soda Ash36
Bauxite (Aluminum)24
Other Metals 21
Copper13
Lead11
Zinc6
Manganese4
Total 39,291

The construction industry is a major contributor to the U.S. economy.

Crushed stone, sand, gravel, and other construction aggregates represent half of the industrial minerals produced in the country, resulting in $29 billion in revenue per year.

Also on the list are crucial hard metals such as copper, aluminum, iron ore, and of course many rarer metals used in smaller quantities each year. These rarer metals can make a big economic difference even when their uses are more concentrated and isolated—for example, palladium (primarily used in catalytic converters) costs $54 million per tonne.

Fuels Powering our Lives

Despite ongoing efforts to fight climate change and reduce carbon emissions, each person in the U.S. uses over 19,000 lbs of fossil fuels per year.

U.S. primary energy consumption by energy source, 2021

Gasoline is the most consumed petroleum product in the United States.

In 2021, finished motor gasoline consumption averaged about 369 million gallons per day, equal to about 44% of total U.S. petroleum use. Distillate fuel oil (20%), hydrocarbon gas liquids (17%), and jet fuel (7%) were the next most important uses.

Reliance on Other Countries

Over the past three decades, the United States has become reliant on foreign sources to meet domestic demand for minerals and fossil fuels. Today, the country is 100% import-reliant for 17 mineral commodities and at least 50% for 30 others.

In order to reduce the dependency on other countries, namely China, the Biden administration has been working to diversify supply chains in critical minerals. This includes strengthening alliances with other countries such as Australia, India, and Japan.

However, questions still remain about how soon these policies can make an impact, and the degree to which they can ultimately help localize and diversify supply chains.

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