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Dr. Copper's Last Hurrah

Stocks in this article: BHP NEM GOLD ABX FQVLF

NEW YORK (TheStreet) -- Copper has got market watchers all excited at the moment thanks to getting back to the $3 per pound level.  There are various reasons for this recent price move, with demand and inventory shifts in China inevitably cited as particularly influential.

But let's nail one myth right here: "Dr. Copper" is not back in town.

For those who are unaware, "Dr Copper" is the name given to the so-called predictive ability of the industrial metal to call market and economic turning points. The logic for this is pretty clear: Copper is used in many industrial and household applications and use therefore rises (or falls) as an economy expands/gets richer (or does not).

BHP Billiton (BHP), in a recent presentation, showed copper use peaks at a far higher GDP per capita level than steel. The company also suggested that Chinese copper consumption per capita was just a fifth of the level in the U.S. back in 2010. This ratio would not have closed up that much since.

However, as a predictor Dr. Copper has failed in recent years. The copper price peaked three years ago, a period when most global stock market indices have risen -- in the case of the S&P 500 by over 40%. So much for the Dr. Copper signal.

The distortions of the last few years on the equity markets via the use of quantitative easing and other extraordinary measures have been well-documented and could certainly account for some of the differential. The use of copper in China as a financing instrument within its shadow banking operations has also had an impact. So will tapering and the attempt by the Chinese authorities to reduce the size of the shadow banking system re-establish the relationship?

Here's one last aspect to think about: the diversified London- and Hong Kong-listed miner Glencore included in its investor day last September a chart on copper grades showing that not only have they fallen sharply over the last decade but further declines were coming.  

Falling grades represent bad news for copper consumers because unless the mining companies turn into charities, prices are going up. Weak Chinese growth and related this year may delay the day of reckoning but we may be witnessing the last hurrah of "Dr Copper."

His more problematic cousin "Lower Grade" -- last heard of in the gold sector differentiating in performance terms between the high-grade Randgold Resources (GOLD) and the lower-grade Newmont (NEM) and Barrick Gold (ABX) -- is likely to take his place.  All copper stocks may be slaves to the perception of the level of Chinese demand at the moment, but it is going to all be about grade in the medium term.  First Quantum (FQVLF) looks amongst the better placed to me.  

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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