Analysts credit copper as the metal with a Ph.D. in economics for its ability to help forecast economic conditions. “Dr. Copper,” as it is lovingly called, is a vital input to many industries, from plumbing to wiring to manufacturing.
When copper is strong, we can surmise that economic conditions are better.
While copper is the most discussed commodity, there are others that can give us clues to how industry is ramping up. After all, if demand by industry for inputs such as iron ore or energy goes up, they must, in turn, believe that demand for their products is stronger.
And it is a story that stock investors should heed, as a stronger economy keeps the wind at the stock market’s back.
Let’s start with lumber. It’s a key component in the housing industry and, of course, used in packaging and paper goods.
A long-term chart of lumber futures shows a major bottom in 2015 and rising prices since that time. (Please see chart 1.)
I don’t mean this to be a forecast for the homebuilding industry itself but rather one bit of evidence that a vital input to a major industry is under accumulation. Buyers of lumber must see a growing need for it in their businesses and that contributes to a strengthening economy.
The next commodity is cotton, which started to rally early last year after several years of declines. (Please see chart 2.)
Of course, a major use for cotton is in the manufacturing of clothing, household linens and even carpeting. Cotton seed is fed to cattle and crushed to make oil. And cottonseed oil is used for cooking and in products such as soap, margarine, cosmetics and pharmaceuticals.
Again, this is not a forecast for any of the makers of these products but, again, a sign of demand from them.
Palladium the next commodity sporting a long rising trend. (Please see chart 3.)
This metal is most often associated with catalytic converters in automobiles, a system meant to clean emissions. Another common use for palladium is in ceramic capacitors, which are an important part of common electronic equipment such as cell phones.
Lumber, cotton and palladium are all traded on U.S. futures markets, although individual investors can access the latter two via various exchange traded products. For cotton, the iPath Bloomberg Cotton Subindex Total Return exchange traded note
And for palladium, the ETFS Physical Palladium Shares exchange traded fund
The caveat is that neither is particularly active and that presents an added element of risk.
There are other strong industrial commodities that are harder, if not impossible, for investors to access directly. Spot-price charts for iron ore and cobalt have broken out to the upside. Iron ore is used to make steel. Cobalt is used in aircraft-engine parts, batteries and electroplating.
And what about copper? The iPath Bloomberg Copper Subindex Total return ETN
has been stuck in a trading range over the past three months, but shortly before the election, it broke out to the upside through a multi-year declining trend. (Please see chart 4.)
While copper seems to be floundering now, its long-term condition is markedly more bullish.
To be sure, not all commodities are rising. Grains, soft commodities and meats are mostly weak. Precious metals other than palladium are improving but not really bullish at this time. And energy is still subject to oversupply issues that keep a lid on prices.
However, if we take the bullish performances of many industrial commodities, even without copper, the hidden story is quite good for continued economic growth.
Michael Kahn, a chartered market technician (CMT), is a columnist for MarketWatch as well as Barrons.com, where he writes the “Getting Technical” column. He is the author of three books on charting and comments on technical analysis on his Twitter feed.