Not gold or silver, but copper
Over the past three years, the silver price in dollars has risen by 45 percent, the gold price by 37 percent, and copper only by 14 percent. Today, gold is mainly extracted from the ground to be stored deep underground in a vault, a rather senseless activity from a rational point of view. It is that gold has been seen as a safe haven for 5,000 years, although these days gold has to compete fiercely with bitcoin. Silver, on the other hand, is widely used in the industry. Formerly mainly in the photographic industry, but nowadays also for switches, superconductors, and printed circuit boards. In addition, silver ions kill bacteria, algae, and fungi, which is why silver is widely used to purify and disinfect water. Copper is a metal of a completely different order. Copper wire, water pipes, roofing materials, electrical circuits, and semiconductor components – it seems that copper is used in everything. All these uses make copper susceptible to development. It is also called Dr. Copper because of the strong correlation between copper prices and future economic developments. The demand for copper is a reliable economic indicator. In recent months, therefore, the copper price has risen more strongly than the price of gold or silver.
This year, the world economy is expected to grow by around six percent. Of course, this depends on the development of the Corona crisis, but it is clear that there will be some catching up to do once the virus is contained. In addition to this cyclical development, a structural increase in demand for copper can also be expected. According to the International Copper Association, an electric vehicle consumes four times more copper than a fossil-fuelled vehicle. Even the hybrid variant still consumes twice as much copper as a traditional car. Strong growth in demand for electric vehicles is therefore accompanied by rising demand for copper. And that doesn’t include all the copper needed for the additional charging stations. In addition, four to five times more copper is needed to produce alternative energy than is needed to produce fossil electricity. Moreover, if we all switch to alternative energy electricity, the capacity of the electricity grid will have to be expanded considerably.
Today, more than half of all the copper in the world is used in China. In particular, the growing middle class consumes many times more copper than Chinese farmers in the countryside. In the coming years, several hundred million more Chinese will move from the countryside to the city. We see the same movement in the rest of Asia. Rising incomes mean that people want access to the Internet, will buy numerous appliances, will buy a house, and, with a bit of luck, a car as well. It is estimated that, as a result of this development, total world consumption will double in the next ten years, with Asia accounting for almost 90% of this growth. The demand for copper will more than double as a result. On top of this will be demand arising from the energy transition outlined above.
Commodities, including copper, are not a structural asset class. There is no structural risk premium. The oil price today can be the same as the oil price ten years ago and the oil price in the future. In addition, advancing technology allows commodities to be produced at ever-lower prices. Nevertheless, there have been several super-cycles in the past, often associated with periods of war, in which commodities can rise sharply in price. The start of such a supercycle seems to have begun. Firstly, because in recent years many commodity prices have been at such low levels that producers have started to invest much less. Because of a long time between the investment decision and the first production, there is an extremely long pig cycle in raw materials. This will lead to shortages in a few years’ time and also push up the price further. Moreover, the production of raw materials is often very polluting and, in parallel to addressing the climate crisis, governments are nowadays paying much more attention to the effects on the environment. Measures taken to prevent environmental pollution will also have a price-increasing effect. Together with further urbanization, the emerging middle class in Asia, the energy transition, and the rapid switch to electric cars, copper is, therefore, a much better alternative than gold or silver, let alone bitcoin.