This year has been a mixed bag for commodity and metal stocks. Mostly, the year has been a disappointment. Once the European financial crisis took center stage in the second half of 2011, commodities broadly sold off, taking the businesses that produce and sell them along for the ride.
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A Precious Metal
Insulated from the sell-off, however, were precious metals, notably gold. As measured by the SPDR Gold Shares (NYSE:GLD), an ETF that tracks the price of gold, gold is up a little over 20% so far in 2011. Yet even gold is not bulletproof. In the past month, the shiny metal is off nearly 20%, with shares of GLD dropping from a high of $185 hit in August to $155 today. Silver has managed to stay positive in 2011 with the iShares Silver Trust (NYSE:SLV) up over 5% in 2011. Another commodity that investors had high hopes for in 2011 was copper, a commodity that is arguably just as valuable as gold due to its necessity in every manner of urban development. As nations such as China, India and Africa continue to advance, the demand for copper grows exponentially. Yet, even as China and India grew respectably in 2011, copper was a laggard in 2011. (For related reading on ETFs, see Using ETFs To Build A Cost-Effective Portfolio.)
Better Than Gold
Based on the First Trust ISE Global Copper Index (NYSE:CU) - an ETF that measures the performance of the price of copper - the price of copper is down nearly 30% in 2011. To be sure, copper is still trading well above the price it sank to during the recession in 2008. Going forward, however, copper demand will likely remain strong, although one can expect volatile price swings as the economy continues to find solid ground. Yet copper will never be treated as gold and vice versa. In fact, from an investment perspective, copper may actually be better than gold. (For related reading, see Commodities: Copper.)
Without copper, societies could not exist as they do today. Microwave ovens, computers, air conditions and electricity generation all require copper. Gold, on the other hand, is primarily used for jewelry and ornate structures. Gold is not consumed, but rather melted and reused. But more importantly, gold derives its value solely from the degree of monetary disorder, whereas copper has an economic utility. As economies grow and progress, copper use intensifies; the demand for gold rests primarily on how the next person feels about it.
So while gold looks very attractive today, over a period of years, copper could be a more attractive result for investors. One of the more attractive plays in the industry may be Freeport-McMoRan Copper and Gold (NYSE:FCX), which, incidentally, also mines gold. Shares in FCX are currently valued at six times earnings and yield 2.7%. Production issues aggravated by a strike have temporarily hurt the stock, but as those problems get resolved, the market should realize the shares are undervalued.
The Bottom Line
With monetary concern still at the forefront of the economy, gold will likely attract investors. But it's interesting that the price of gold has dropped about 16% amidst an ever growing EU crisis, as this is an indication to investors that the price of gold is based on emotion and not fundamental outlook. Copper, on the other hand, appears to have a very attractive long-term fundamental outlook.
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At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.