zaterdag 28 november 2015

What Happened to Dr. Copper?

Resource investors are much aware of the recent carnage in commodities like copper, zinc, aluminum, oil, gold, silver. In fact, the global natural resource index has hit a multi year low together with an all time low for the Baltic Dry Index, which measures freight and transportation costs.

What's even more stunning is that we see this weakness two months before the seasonally weak first quarter of 2016. So more weakness is about to come. The economies that are the most hit are the resource based economies like Canada, Australia, China, Brazil, Russia, Mexico and other emerging markets. These countries are hit so hard, people are giving them a new nickname: "submerging markets".

To give an idea of the severity of the state of the resource sector, we can take a look at what percentage of the total market cap is still invested in resources (see chart below from Deutsche Bank). We can see that resources have almost become irrelevant in our society (15% of total market cap), going back to the low of the Nasdaq bubble in 2000.

With all of this in mind, we wonder why there is this glaringly obvious discrepancy between copper and the stock market (see chart below from StockCharts). It seems that this correlation has been broken. Many investors view the price of copper as one of the best indicators of global economic activity.

Go here to read the analysis.

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