Check Your Gold Miners for Copper Exposure
Investors tend to invest in gold at least in part to protect themselves against economic weakness. Should we see economic weakness the price of gold should perform very well, as investors will shift their capital out of economically sensitive assets such as stocks and in to safe havens. One asset class that will likely perform poorly should we see economic weakness is the base metals market, and copper in particular. This is the case because if the economy is weak, then there will be less demand for consumer and industrial goods, and therefore there will be less demand for the copper that goes into these goods.
Over the past several days we have seen a rapid decline in the price of copper, which now trades comfortably below $3 per pound. Gold, on the other hand, has breached its $1,350 resistance level and appears to be moving higher. This is precisely what we would expect in a weak economic environment.
With gold rising we should expect gold mining companies to see an increase in their profits and in their share prices, and many investors choose to buy mining companies as a way to bet on higher gold prices. While I think this is a great idea investors need to be very careful in choosing their gold miner holdings. There are many criteria that investors should use to screen for what will be the top performers, but one screen I think investors need to focus on in this particular market environment is copper exposure.
There is no such thing as a pure gold mine. Mines contain all sorts of metals, and those that occur the most are extracted from the ore that is produced and then sold into the market. Many gold mines contain copper, and so the company that operates the mine will naturally want to sell both the copper and the gold despite the fact that it may be a self-defined “gold miner.”