Rick Rule: We’re in the ‘first inning’ of a new commodity bull market

From Ben Morris, Editor, DailyWealth Trader:

Last year, gold and silver were on the tips of everyone’s tongues…

But this year, many of the experts are equally – if not more – excited about the prospects for another metal.

Supplies are declining while demand is increasing. And prices are far too low for new production to be economic. This situation means it could be one of the leading performers in the emerging bull market in commodities.

The metal I’m referring to is copper.

Let me back up, though…

I’m writing to you from the Sprott Natural Resource Symposium in Vancouver, Canada. If you haven’t heard about it, it’s a meeting of many of the world’s top natural resource specialists.

Entrepreneurs, investors, geologists, explorers, financiers, executives, and other newsletter writers… They’re all here talking about what they know best to a group of about 700 investors.

Rick Rule, who hosts this conference each year, has an encyclopedic knowledge of the natural resource industry. He knows the management teams personally and intimately… He has visited their projects around the world… And he has made billions of dollars for himself and his clients in his career, which has spanned nearly four decades.

Two of the ways he’s achieved such a high level of success are by identifying top talent in the industry and by investing at the right times in natural resource cycles…

I suggest you read the full interview with Rick on natural resource cycles in our Training Center. The concept is so important to today’s idea, I want to share his explanation here…

Resource markets are cyclical for two primary reasons… They are extremely capital intensive, and they are extremely time intensive. In other words, resources tend to take a great deal of time and money to produce, mine, or extract.

So when supply and demand imbalances occur, the resource sector isn’t able to react as quickly as other markets. This long lag time creates huge price swings… extreme highs and extreme lows you don’t see in most other markets.

When demand exceeds supply in most markets, you see a relatively quick reaction from producers to meet the new demand. Compare this to resources like copper or gold… Before you can produce it, you have to go find it and build a mine. The exploration cycle – the pre-development cycle – can take up to 10 years. In the meantime, prices can soar, while the market waits for that increased supply.

On the other side, after supplies come onto the market, prices peak and start to fall. What happens is that the industry comes to regard their sunk costs as just that… sunk costs. So they’re hesitant to slow production, in spite of high supplies and falling prices. They’ll continue to produce even when prices fall below the level at which they would be profitable. In fact, they’ll often produce even below the marginal cost of production for a while in a contest known in the resource industry as “the last man standing.” 

The reasoning here is that it might cost them more to shut down a project and restart it than it would to continue operating at a loss. And each producer wants to be the first in the game when the cycle turns back around. This drives prices even lower than they otherwise would go.

For these reasons, Rick likes to say that “bull markets are the authors of bear markets, and bear markets are the authors of bull markets.”

Yesterday afternoon, Rick opened a discussion by saying, “The bear market we just went through was a Lollapalooza. My suggestion is that we’re in the first inning of a nine-inning game for most commodities, and maybe the third inning of a nine-inning game with regards to gold.”

Why are so many natural resource insiders bullish on copper?

Like many other commodities, copper dropped hard starting in 2011. It fell from more than $4.50 per pound down to less than $2 in early 2016… a 58% decline. (For comparison, gold fell 45% from its 2011 peak to its 2015 low.)

As Wojtek Wodzicki of NGEx Resources (NGQ on the Toronto Stock Exchange) explained…

Low prices over the last five or six years have met very little exploration and limited investment. Very few large deposits have been found over the past 10 years.

In other words, many of the world’s copper mines are old. And not surprisingly, producers mined the highest-grade rock (the rock with the highest percentages of copper) first.

As Robert Friedland of Ivanhoe Mines (IVN on the Toronto Stock Exchange) pointed out, Escondida in Chile is the world’s biggest and best copper mine. It was discovered 40 years ago. As recently as 20 years ago, the average grade of the mine was 1.7% copper. Now, the average grade of its reserves is 0.52% copper.

This means folks have to mine larger and larger volumes of rock – at higher costs – to produce the same amount of copper.

Friedland agreed with Bernstein Research’s estimate that in order to stimulate a new generation of mines, copper needs to double in price from today’s levels.

But new mines are a long way off. And in the meantime, copper demand will likely continue to increase. Wodzicki continued…

On the demand side, there’s also a bullish picture. Just average growth is going to result in a supply shortage. But copper also stands to be the main beneficiary of the growth in green energy in transportation. For example, a Tesla uses about five times as much copper as a conventional car.

China’s got a serious problem with air pollution. And it’s investing very heavily in green energy. Green energy is copper intensive.

Friedland pointed out that wind and solar power uses about eight times more copper per unit of electricity, on average, than coal-powered electricity.

Yes… Both mining executives were talking up their books. But price action doesn’t lie…
As you can see in the chart below, copper just broke out to a new two-year high…

080217-crux-copper-002

After years of falling and unsustainably low copper prices, it looks like the bear market in copper is over.

Copper trades at about $2.87 per pound today. On the upside, if copper rises back up to $3.50 per pound – where it bounced around for most of 2012 – 22% gains are possible from here. If the bull market gets going and copper hits $4.50 per pound – just below its old peak – prices could rise by 57%.

If Friedland and some of the other natural resource experts here are right, though, copper will likely break out to new all-time highs. Gains of 80% or more are possible.

We may be in the early stages of a big bull market in commodities. Copper was crushed in the recent bear market… Production is slowing… And demand is increasing. Now, it’s time for the price of copper to climb. Invest accordingly.

Good trading,

Ben Morris

Crux note: Ben told his DailyWealth Trader readers his favorite way to profit on the rally in copper prices. But he’s also recommending another commodity trade with 200%-plus upside right now. You can access these ideas and more with a risk-free trial subscription to his DailyWealth Trader letter. Get all the details right here.

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