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What is a Better Investment: Silver or Copper?

Tuesday, June 12th, 2012 at 11:40 pm

There’s a school of thought in certain investment circles that base metals such as copper are a better investment tool than silver or gold. Countries like India have been trying to build up their gold reserves while China has been keen on increasing its copper inventory. Copper is one of the base metals alongside others such as aluminum, steel, nickel, lead and zinc. It’s considered to be the hottest base metal. So is this new thinking correct and is it based on hard facts?

To begin to answer that question, we would have to start by looking at the factors that are driving high copper prices and whether these are supported by market fundamentals. It’s a fact that world copper prices are hugely dependent on China’s dominant buying position. China has been building its copper inventories over a period of time. In 2009, China’s copper imports amounted to 2.3 million tons, representing a 166% jump as compared to 2008 imports. China also imported a staggering 2.89 million tons of refined copper between September of 2008 and August 2009, representing more than 16% of global consumption. China therefore single-handedly drove copper prices from their previous $4000 per ton levels. An interesting fact to note is that despite the global economic meltdown that ended around 2009, all the copper mines and producers maintained full production during this period and non closed down.

China also stepped up its domestic copper production and recorded a 2.46 million tons output of refined copper for the period January- August 2008. This figure rose even further in 2009 to 2.63 million tons for a similar period. Its imports of copper concentrates as well as domestic production of the same have also risen significantly.

All this needs to be put into the context of real demand as well as scrap copper scarcity. China imported 2.58 million tons of scrap copper in the period January -August 2009, down 1.3 million tones from its 2008 levels. Scrap copper is very price-sensitive and low prices usually lead to lower supplies. The low prices of scrap copper were primarily to blame for China’s sudden refined copper feeding frenzy.

Other factors were to blame too. One of these is the higher Shanghai price as compared to LME price which helped boost imports. China’s $585 billion stimulus package is infrastructure-focused and is also partly the reason demand for copper in China has shot up. Many analysts also point out that China is also keen on restocking, although it not very clear at this point why it’s doing this. The size of China’s restocking is still a matter of conjecture but figures of about 1.2 million tons are being thrown around. The general consensus amongst many observers is the high copper prices being driven by China’s high demand and consumption is a temporary trend and prices are bound to revert to normal sooner than later.

Western Economic Recovery

The rising copper prices had undershot market fundamentals and a market correction is in the offing once China’s ardor cools off. Western economic recovery has largely been anemic but is expected to pick up in coming years. Meanwhile, lower Chinese demand and sluggish demand in Western countries is bound to push down prices to lower levels. The signals are currently quite mixed so it would be difficult to accurately predict just how low they’ll go. To sum it all, the high copper prices are not supported by market fundamentals and prices are unlikely to continue rising in the future. It would therefore be ill-advised for an investor to rush and buy copper based on the speculation that prices will continue rising.

 The Case for Silver

Silver is one of our most revered precious metals and has been held in high regard in past civilizations too. Silver is actually usable as a substitute for money, especially if an economic meltdown happened. The current market fundamentals for silver all point to one thing: we’re already experiencing shortages of silver with no remedy in sight. Silver, unlike gold, is a commodity that is consumed in hundreds of industrial applications. It’s estimated that 95% of the gold has ever been mined by man is still around in a usable state. Silver, on the other hand, is used in such small amounts, mostly in electronics, it’s hardly ever recovered once these components complete their useful life span. As such, most of it ends up being buried in landfills.

The demand for silver is ever increasing but the supply remains somewhat fixed. It’s estimated if the current consumption rates continue, we shall actually run out of silver in the next 15 years or so. Silver is also considered to be extremely undervalued. Silver historically trades at a ratio of 16:1 to gold. This is actually supported by estimated reserves of the two metals on the planet which stands at about the same ratio with silver being the more abundant of the two. Currently, the ratio stands at around 72:1.This means silver prices still have a lot of catching up to do before the ratio is anywhere near normal levels. So you can expect to see rising silver prices for some time. It’s a very wise move for an investor to buy silver now. Despite minor fluctuations, which can be expected, silver prices will definitely be on an upward trend in coming years.