Wednesday, March 09, 2005


Copper was "The King of Metals" for long stretches of years. Copper was mined for about 5,000 years before Gold was discovered. It gained new luster when inventions such as the telephone, electric motor and indoor plumbing grew in popularity.

The primary use of copper is for transporting water. Everything from water pipes, sauce pans to radiators need to be made from corrosive resistant materials such as copper or aluminum. The second most often use for copper is in electronic applications. Copper conducts electricity efficiently relative to other metals. The price of copper would be outrageous today if the law of substitution had not beaten it down.

Most homes built today have a lot of plastic pipes and even communication lines are now made of glass rather than copper. These major shifts in materials are just one small part of the ingenuity of free economies to hold down prices by inventing ways to save materials. The USA has been a leader in this effort. For example, to produce $1 of GNP the USA has reduced the need to buy only 7 cents worth of energy. This is half of what it was 20 years ago!

Many investors and consumers do not realize that the price of commodities go down over-time. The cost of a gallon of gas or a bushel of corn is very low today relative to what these items cost years ago. In the mid 60's a common entry level wage was 25 cents per hour. One had to work an hour to buy one gallon of gas. The only problem with most commodities is that it takes a lot of capital to find the darn stuff. When supplies get tight, the price has to go relatively very high to spark exploration and production.

Copper is currently priced at ten year highs. The reason is that IBM, TXN and other electronic manufacturers need a lot. It really does not matter how much it costs. These companies need it and they will buy it at the going rate. When a DLP based big screen TV sells at Best Buy for $2,700, the buyer is not going to not buy because the TV would have been only $2,690 had the price of copper not gone up!

One might argue that the housing BULL BOOM BUBBLE is causing the spike in copper prices. No doubt this is having an effect but, again, the amount of copper used in the average new home is going down. IBM , TXN and others have in recent years announced changes in electronic products where the use of more copper has enhanced the speed and reliability of the products.

Regardless of the use in housing or electronics, the indication from the spike in copper prices is that we are now well into the BOOM phase of the economy. The BULL phase will continue; stocks will do well. At some point, we will move into the BUBBLE phase. On balance we are not nearly there yet. My favorite electronic stock is Texas Instruments (TXN). When semi-conductor stocks make big moves, please do not even think about shorting after a run-up. The jumps can be big.

This morning I read where , TXN's largest customer, is running a trial of "Cell Phone TV" in Finland. This product will sweep the globe in the next 5 years. Fifty percent of all cell phones will be TV cell phones within 5 years.

COPPER IS KING AGAIN! Just like oil prices lead higher airline prices, copper prices lead semi-conductor prices. Buy the Bull or the Boom but be cautious during the Bubble, you don't want to be around for the BUST!