If you are still bearish on copper prices, it may be time to pause and reflect. If you look closely, copper is setting up to skyrocket in the long-term and for patient investors, gains could be exponential.
We are already seeing investors rushing to buy the red metal. Please look at the chart below that shows daily copper prices and pay close attention to the blue line.
The blue line on the copper prices chart represents the 50-day moving average. The price has remained above this moving average the longest in the last year. What does it mean? At the very core, it suggests that the short-term trend is turning in favor of those who are bullish. With this, understand that as the short-term trend remains in favor of the bulls, we could see more buyers come in.
Also, notice something interesting on the chart above? As the copper prices have increased, volume has relatively increased as well. This means there’s excited buying, and this move to the upside isn’t based on just shorts covering.
Chart courtesy of www.StockCharts.com
Dear reader, the copper price chart isn’t the only thing that should keep you bullish. There are fundamental reasons as well, and one of the biggest I see is the uncertainty over the future supply. Mind you, this isn’t talked about much in the mainstream just yet.
You see, it’s very evident that in 2016, we will most likely end up with a surplus in the copper market. But you have to look beyond that. Going forward, in 2017 and beyond, this may not be true. The reason behind this is very simple: lower prices mean next to no incentive for producers, and many projects have become non-feasible to produce.
To add more to the misery, we are seeing a significant amount of copper producers cutting back on exploration spending. This move is rational on their part. Why would they burn cash on looking for more when their existing production is hurt severely? Exploration is essentially investing in future production. When exploration is affected, future production should be questioned.
Furthermore, copper producers are going to face external pressures as well. As copper producers’ profit is hit by low copper prices, balance sheets will not be pleasant to see. This phenomenon could really impact producers’ ability to access the capital or the debt market (if it hasn’t already.) Remember, liquidity is critical to running the business. This only adds more uncertainty.
Copper Prices Outlook
When I look at investments, I try to go to the very basic economics and look at the data. That way, you are able to ignore a lot of noise that impacts decision-making.
Right now, copper looks to be a trade in the making. This statement is going to be bold: copper is too low to ignore.
For investors, take a look at copper mining companies. They are going to pay big-time when copper prices move to the upside. Earlier, I mentioned how copper companies could be running into trouble, but this won’t be the case for all companies. Investors have to be selective and look for companies with cash on hand, exceptional properties in safer geopolitical areas, and solid reserves and resources.