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Gold and the Big Copper Rally (PD, PCU, FCX)

by: Eddy Elfenbein posted on: November 17, 2005 | about stocks: FCX / PCU / PD

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Eddy Elfenbein submits: The government reported that consumer inflation was pretty tame last month. The core and non-core rates both rose just 0.2%. Despite the good inflation news, the gold bugs are very happy today. The yellow metal is up about $8 an ounce and it’s close to an 18-year high. South Africa said that its gold production this year will likely hit an 80-year low. Platinum is doing even better—it’s at a 26-year high and closing in on $1,000 an ounce.

But that’s nothing compared to what’s happening in the copper pits. Copper is at its highest price ever. Don’t worry, gold is still about 4,000 times more expensive than copper. Recently, a Chinese trader shorted $800 million worth of copper. Since he got slammed in this trade, he may have to soon deliver 200,000 tons of copper. The problem is that the trader has now...disappeared. Now we’re seeing a classic short squeeze. The rumor is that the Chinese government will step in and cover the short, which has pushed prices even higher. These are truly the golden days for copper.

And to show you that we live in a global economy, the Chilean peso has rallied to a five-year high because Chile is the world’s largest producer of copper. The Chilean peso is one of the few currencies in the world that’s actually gaining against the dollar.

The big American copper play is Phelps Dodge (PD), which is up 60% since mid-May. There’s also Southern Peru Copper (PCU) and Freeport-McMoRan Copper & Gold (FCX) which have done even better. Phelps Dodge owns about 11% of Southern Peru. Freeport McMoRan is doing so well that it just announced a special dividend and raised its regular dividend.

During the heyday of inflation in the 1970s, the price of copper rose so much that a penny was nearly worth more than a penny. That can’t happen. Printing money is a big money-maker for the government. By the way, seigniorage is a major no-no for individuals. I don’t mean counterfeiting. I mean seigniorage—printing money for a profit. Not only is it a government-enforced monopoly, it's actually illegal for you to play the game yourself. I believe it’s a felony. So if you already have two strikes on your record, do not act like your government. They really don’t like that.

About 20 years ago, the mint worked to correct the problem of having our money actually worth something. (You see, the U.S. dollar is the original faith-based initiative.) The mint changed the penny’s formula from 95% copper/5% zinc, to 97.5% zinc and 2.5% copper.

Here’s an odd tidbit for you. In 1943, pennies were made from steel due to the war. But a very small number of pennies were accidentally made from copper. Today, these pennies are the Superman Volume #1 of coin collectors (Best. Penny. Ever.) So go quickly and look at all your pennies and see if you have any 1943s. If a magnet sticks to it, then it’s steel. If not, that penny is probably worth a couple million zinc pennies.

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