This article is a guest contribution by Mark Noble of Horizons ETFs.
Copper: A diversifying metal
Copper can, and often does perform very differently from precious metals – gold in particular. According to data from Bloomberg, since December of 1988, the median ratio between gold bullion contracts and copper contracts has been about 3.35, meaning gold has tended to trade at 3.35 times the value of copper.
When prices move outside of this band, it may be an indicator that one of the metals is mis-priced relative to their historical relationship.
Gold's use as an investment hedge and store of value means it's trajectory of returns can be quite different from copper, which has a higher correlation to economic factors, most notably industrialization in emerging market economies, which require copper for basic manufacturing and development.
For this reason, copper has historically had a tendency to be correlated to other base metals. Its volatility can be quite high, especially compared to other metals, offering investment opportunities for adept investors over very short periods of time. The use of leverage in the Copper ETFs can magnify these potential returns.
The chart below from Bloomberg shows the nearly one year performance of the copper futures contract ending June 16, 2010 versus the S&P/TSX Global Base Metals Index. Notice the strong periods of deviation in the price of copper versus the index.
It's important to remember that copper is a core product for many large cap metal companies, such as Xstrata and BHP Billiton. The leveraged inverse Copper ETF may be used as a hedge to protect copper producer positions.
A strong correlation to emerging markets
Copper has a unique relationship with emerging market economies, in particular China which, according to the 2009 World Copper Factbook, imports more than one quarter of the world's copper (28%). Electronics manufacturing powerhouse Japan accounts for another 23% of copper importation. Other important emerging market economies, such as India and Brazil are also major importers of copper.
From a supply and demand perspective, the price of copper can be closely tied to the development activities of emerging market economies. Manufacturing increases or slowdowns in these economic regions can be leading indicators of the direction of copper prices or vice versa.
Based on historical data, over the past year ending June 16, 2010, the performance of the near-term copper futures index has had a beta correlation of 0.672 to the performance of the MSCI Emerging Markets Index Fund (EEM), the world's largest emerging market ETF. The performance of copper over this period generally moved in the same direction as EEM performance, as indicated on the Bloomberg chart below.
Significant portions of the world's copper supplies come from the South American markets of Peru and Chile. Political disruptions or natural disasters in these locations can have an impact on the short term supply of copper.
Regardless of your view on the direction of copper, two new copper futures-based ETFs from Horizons BetaPro Funds, HKU and HKD are different investment opportunities that offer exposure to the daily performance of copper futures.
You can get more information on these new ETFs at www.HorizonsETFs.com/Copper.
