The housing market’s impact on the entire economy can not be understated. As nearly two dozen sub-prime mortgage companies have gone under in the past few months, economists are beginning to worry that the real estate collapse may soon spill over in to other areas. Even Alan Greenspan, the perennial optimist, admitted today that the country is on the brink of a recession. To many, the timing of these bankruptcies were unpredictable. But for those who watch the copper market closely, much of this could have been predicted.
Dr. Copper, as it is often called, has a history of predicting turning points in economic cycles. Back in May of last year, prices shot through the $4.00/lb mark and topped out shortly afterwards. In retrospect, this appears to be around the time the housing market was peaking. Since that point, copper has dropped like a rock, and the real estate crunch began to rear its ugly head.
This is hardly surprising, as the average single family home in the United States now uses over 440 lbs of copper mainly for its electrical wiring and plumbing applications. The massive amounts of copper used for this purpose gives the housing market a very high correlation to the price of copper. Last month’s report that new home starts dropped by 14% don’t bode well for the near term future of copper either.
Between the years of 2000-2006, the global real estate market experienced its largest boom in recorded history. During this same time period, copper went from $.75/lb and quintupled in the following six years. With construction occupying nearly 50% of world copper demand, most of copper’s gains be attributed to the worldwide housing boom. The story doesn’t end here, however. If the recent 30% decline in copper is any indication of the housing market, the real estate market will come crashing down over the next 12 months.
While there are few analysts who factor in the price of copper when predicting the future health of the economy, The Commodity Investor believes it is one of the most important indicators. It has consistently shown itself to foretell many economic cycles, and should be considered along with the reports of durable good sales, the ratio of concurrent to lagging indicators, and hourly income reports. All of these statistics give some insight of the future health of the economy. It is very probably that in the future, more analysts will use the copper price as a predictive tool. Perhaps even Alan Greenspan has been attending Dr. Copper’s recent lectures.
by The Commodity Investor