Submitted by William Briat as part of our contributors program.
Depressed Copper Prices Presenting Perfect Buy-Low, Sell-High Opportunity?
By now, you have probably noticed one phenomenon: the speculations regarding China’s growth are increasing each day. Turning on the TV or flipping through the pages of the newspaper, you’ll likely hear and read all about how the second-biggest economic hub in the global economy will tumble.
No doubt, the arguments backing this argument are very credible. The Chinese economy is seeing an economic slowdown and troubles in that country continue to gain strength. For example, the Chinese manufacturing sector is stalling. In March, the HSBC Flash China Manufacturing Purchasing Mangers’ Index (PMI) declined to its lowest level in eight months. The output index declined to an 18-month low. (Source: “HSBC Purchasing Managers’ Index Press Release; Output contract at quickest pace in 18 months during March,” Markit, March 24, 2014.)
We have seen a few companies in the Chinese economy default on their bonds, and there are fears that more will soon fall. The widespread speculation is that the government might not come to the aid of those companies that are in trouble.
With this, investors are panicking. One of the hardest-hit asset classes due to this panic is copper. Please take a look at the chart of copper prices below.
Chart courtesy of www.StockCharts.com
Since the beginning of the year, copper prices are down more than 13% and investors believe demand for the red metal will continue to decrease due to the decline in manufacturing. During the past decade, China was building massive infrastructure and a significant amount of copper was needed as a result. This is not the case anymore.
Copper prices have broken below a key level—$3.00—and it seems they are having a very hard time getting back to that level.
In spite of all of this, I believe copper is presenting a great buying opportunity to long-term investors.
Investors too often hear that they should buy low and sell high, but when the prices are low, few really take any action. Instead, investors turn too pessimistic and start to believe that prices will go lower. One of the greatest examples of this was in March of 2009, when key stock indices made their lows. Some of the well-known companies were selling for massive discounts. Those who bought, profited heavily and those who didn’t, missed out. Copper is presenting a very similar opportunity.
When I look at copper, I think there’s a global need for the metal in the long run. Investors are reacting on a short-term problem. If they believe China has stopped growing, they need to realize that there are many other countries that need more infrastructure. Mind you, copper is needed in many other industries, as well.
You see, due to declining copper prices, investors have sold companies that produce the red metal—companies that may turn out to be a good play in the long run. One of the copper companies I see facing significant bearish pressure is Freeport-McMoRan Copper & Gold Inc. (NYSE/FCX). This company has massive resources and is diversified in other metals, too. On top of all this, Freeport-McMoRan pays a hefty dividend.
Having said that, please note that this is not a buy recommendation, but just an example of what kind of company to seek as copper prices are declining and investors show bearish sentiment towards the metal.
This article Depressed Copper Prices Presenting Perfect Buy-Low, Sell-High Opportunity? was originally published at Daily Gains Letter