Why do investors use copper as a hedge against inflation?

SMM, March 7: every year, large amounts of copper are used to make a variety of goods to boost the global economy.

Copper is a major component of large consumer goods, such as cars (13 per cent), home appliances, electronics and new homes. At the same time, copper is widely used in many industrial areas, including telecommunications (31 per cent), utilities (16 per cent), construction (29 per cent) and industrial machinery (11 per cent).

The weathervane of the economy

The following figure shows the important role of copper in the economy and why it has become a famous economic vane.

Growing demand

When the economy is doing well and new projects continue to go into production, demand for copper will rise.

Rise in price

When demand rises, the price of copper goes up.

The market pays close attention to the price of copper

As a result of this historic relationship, analysts around the world are keeping a close eye on copper prices.

Dr. Copper.

Copper prices have long hinted at the direction of the economy, so it is known as a metal with a doctorate in economics.

In other words, while construction and manufacturing are growing, sales of copper products are also growing. But as an economic indicator, the link has other important implications, especially for investors who want to build a sound portfolio.

Rising prices; rising copper prices

When copper is interestingly linked to economic trends, its ability to protect portfolios from inflation is even more bizarre.

Rising prices come from overheating the economy and strong consumer spending-which is also one of the factors affecting copper prices. As a result of this link, research shows that for every 1 per cent increase in consumer prices since 1992, copper prices have risen by nearly 18 per cent.

In a Bloomberg analysis, copper outperformed all major asset classes and, with the exception of energy as an inflation hedge, rose more than twice as much as gold during the rise in consumer prices.

Threaten the portfolio

Inflation can kill an unprotected portfolio.

Why? If inflation is higher than the rate of return on the portfolio, the portfolio actually produces a negative real return. (example: 2% growth-3% inflation =-1% return)

In other words, inflation can be a "hidden" threat that erodes returns, especially for fixed-income portfolios. The good news: holding copper or other commodities can prevent prices from rising.

Copper: the best way to fight inflation

In general, the use of other industrial metals is limited to specific areas, and precious metals are often driven by investor sentiment.

Copper is widely used in fields such as industry and technology, which makes it a bellwether for the economy as a whole.