It’s a sea of red out there.
Overnight, the S&P 500 fell more than 4.3%, the Dow dropped 4%, and the Nasdaq plunged by 5.16%.
Amazon…oil…Bitcoin [BTC]…you name it…everything is down after higher-than-expected inflation took markets by surprise.
In August, US annual inflation increased by 8.3%. While this was down from July’s 8.5%, it was higher than the expected 8.1%.
Petrol prices may be down, but people are paying more for rent, food, healthcare, electricity, and gas.
What’s spooking markets is that inflation hasn’t peaked, and most certainly, the Fed will keep hiking rates this year.
Markets now expect that rates in the US will be as high as 4–4.25% by the beginning of next year.
This has brought in more concerns about a recession…but also a stronger US dollar.
The US dollar has been doing pretty well lately. The US Dollar Index [DXY] — a basket that measures the US dollar against six major currencies, including the euro, British pound, and Japanese yen — jumped 1.49% overnight and has increased 15% since the beginning of the year.
But a stronger US dollar has also been driving down the prices of commodities.
Oil…gold…copper…to name a few. But copper is the one I wanted to talk about today.
Dr Copper is alive and well
Copper is widely used in many sectors of our economy. It’s why it’s usually used as a barometer for the economy’s health. It even has a nickname — Dr Copper.
Let’s take a look at the price of copper over the last couple of years:
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| Source: Business Insider |
As you can see, prices collapsed at the beginning of the pandemic.
But what’s interesting is that even as most of the world was in lockdown, copper started to climb, mainly driven by pledges for the energy transition.
It dropped earlier this year on recession fears and a stronger US dollar.
But prices have started to recover recently regarding concerns over physical supply and a weakening dollar, along with the fact that workers at Escondida, the largest copper mine in the world, were threatening a strike.
The strike’s been called off, and prices have once again fallen over concerns of a stronger US dollar.
Still, copper prices are considerably higher than before the pandemic.
And while it may sound strange, considering that there’s lots of talk of recession and copper is a proxy for the economy’s health, copper is looking very interesting indeed.
We are going to need higher copper prices
Europe is speeding up its energy transition to move away from Russian fossil fuels. China is also investing big in EVs and renewable energy, and the US has taken a giant leap into this space with the Inflation Reduction Act.
Copper is a crucial material for EVs, solar panels, and batteries, and we are going to need a lot of copper if we want to electrify everything.
In fact, it may not be reflected in the copper price, but things have been heating up recently in the copper space.
Miners like Rio Tinto have been looking at securing supply. Rio is looking to buy Canadian Turquoise Hill Mining, which owns 66% of the Oyu Tolgoi copper-gold mine in Mongolia, one of the largest copper and gold deposits worldwide. It’s also penned a farm-in deal with TechGen Metals.
But copper will need higher prices if it is going to get more miners into the game.
S&P Global expects that copper demand could double from 25 million metric tonnes today to 50 million metric tonnes by 2035. And that the gap between supply and demand could be as high as 9.9 million tonnes by 2035 in their Rocky Road Scenario.
Goldman, who, by the way, has been quite bullish on copper and last year went as far as calling it ‘the new oil’, has recently said that we may need prices above US$13,000 a tonne to get more copper miners on the market.
So we could see higher copper prices in the near future.
And don’t forget commodities like copper are real tangible things, something to consider if we are heading towards a recession.
Until next week,
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Selva Freigedo,
For Money Morning
PS: Inflation and recession aren’t the only risks to your wealth. ‘Programmable money’ could be just around the corner.
It’s why my colleague Jim Rickards has put together a plan to help you preserve your wealth, privacy, and freedom from this threat. You can learn more about it here.
