QE3 Is Strong Medicine for Dr. Copper


"The biggest winners from the Fed's move are likely to be emerging stock markets. And in those markets, the biggest winners may just be commodity stocks."

With QE3, Ben Bernanke just gave Dr. Copper a shot in the arm that should carry prices to new highs.

In fact, shortly after the U.S. Federal Reserve announced its decision to launch a third round of bond buying, copper rallied to $3.84 a pound on the Comex division of the New York Mercantile Exchange, up from around $3.35 in mid-August.

But that is only part of the story. . .

As "the only metal with a Ph.D. in economics' because of its widespread use in industrial applications copper is an excellent bellwether for the state of global economic activity.

And right now copper is predicting a major global rebound.

"Investors' expectations for global economic growth in the fourth quarter are rising and Dr. Copper is rallying," Andrew Rosenberger, senior portfolio manager at Brinker Capital told MarketWatch.

"Copper and other assets which are linked to global growth are taking the approach of rally now, ask questions later," he said.

For investors, there are lots of reasons to like copper right now.

Let's take a look. . .

How QE3 Lifts Markets

The biggest winners from the Fed's move are likely to be emerging stock markets. And in those markets, the biggest winners may just be commodity stocks.

That's mainly because the global economy now might grow faster than thought and a weaker U.S. dollar should push up commodity prices.

But the Fed isn't the only global powerhouse opening the stimulus spigot.

The European Central Bank (ECB) announced Sept. 6 that it intends to purchase "unlimited" amounts of bonds from beleaguered Eurozone countries to lower borrowing costs and put a lid on the debt crisis.

The program could print hundreds of billions in euros, the most ambitious move yet in the central bank's fight to control rates and save the euro.

But that's not all.

China chimed in recently by announcing a new infrastructure spending plan to the tune of 1 trillion yuan ($157 billion) focused on power grid expansion. Beijing also revealed plans to build 36 million new housing units.

Building new power grids is especially bullish for copper because grids are the single most important end-use for copper, accounting for 45-50% of Chinese demand.

The addition of 36 million new homes will also suck up tons of copper due the extensive use of copper in electrical wiring and plumbing.

"China spending $157 billion means that demand for copper will far outstrip supply going forward. . .the price will likely stay robust and likely rise in the future," Resource analyst David Lennox told Commodity Online.

But that could be just the tip of the iceberg.

Chinese Premier Wen Jiabao has said China has ample monetary strength and would "appropriately use that for preemptive policy and fine-tuning to propel stable economic growth."

In other words, China will use its huge capital reserves to keep its economy humming. . .no matter what.

It all adds up to the world's three largest economies throwing the equivalent of gasoline on the economic fires in the form of trillions of euros, dollars and yuan.

And that means copper and other commodities will catch a wave from the ECB, ride another from QE3, and then shoot higher on a final tidal surge of Chinese spending.

"Three major pieces of the puzzle are coming together. . .namely monetary stimulus here in the U.S., a reduction in tail-risk in Europe and new fiscal-stimulus measures in China," said Rosenberger.

Another factor that should give copper prices a boost is a continuing shortage of the red metal.

Even though copper supplies are expected to increase by 3.4% in 2012, the markets will still be about 240,000 metric tons short of demand.

"Global copper inventories stand at their lowest level in several years," Evariste Lefeuvre, chief economist of Natixis North America's economic research department wrote in Seeking Alpha."Given the levels of stock to consumption, there is potential for a 20% increase in copper prices."

Cashing in on Higher Copper Prices

Fact is, copper stocks are holding up better than other resource commodities because of the supply/demand squeeze. Copper shares have been on a tear since the June 1 low on the S&P 500 Index.

Investors should take a close look at shares of Freeport McMoRan Copper & Gold Inc. The world's largest publicly traded copper company is gaining momentum after supply disruptions from a strike at its Grasberg Indonesia mine. The giant miner has recoverable reserves of 119.7 billion pounds of copper and 33.9 million ounces of gold. The shares are up 29.1% from the June lows and yield a juicy 3.01%.

Another play worth a look is Southern Copper Corp., with mining, smelting operations and mineral rights on over 700,000 acres in Peru, Mexico, and Chile. The shares just popped a new 52-week high, are up 25.8% from the June low and throw off a yield of 2.7%.

Don Miller
Money Morning

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