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Nexvu on Economics, Politics and the Markets

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Copper versus Gold

Posted by nexvucapital on April 16, 2013

Those who accidentally read our posts will know we are not the biggest fans of precious metals. Mostly because the logic behind the “all-in” gold trade is counter-intuitive when one understands the level of societal breakdown required to make gold a currency of last resort. Logic dictates (as well as human history) that in a complete break-down of the current fiat currency system a bar of gold would be surpassed in intrinsic value by food, shelter, clothing and a good weapon. We are however big fans of the cyclical commodities and copper in general. The recent melt-down in commodities lead by the capitulation in precious metals has pulled down the cyclical commodities with it. The important question is – which represents the better value at this point in time?

To quote Jeffrey Currie of the Goldman Sachs Commodity Team:

“The shift in gold represents a more confident economic environment where there is a flicker of light at the end of the tunnel to this period of easy money…despite renewed European and [emerging market] macroeconomic concerns and a spillover from gold creating sharp sell-offs in crude oil and base metal prices, the longer-dated commodity prices have been remarkably stable.”

“On face value such a dull and uninspiring description does not fit with the speed and velocity of the recent sell-off across the complex. However, the point is that the sell-off was at least partly driven by the non-cyclical commodities – precious metals – with the cyclical weakness concentrated in time-spreads as long-term prices remained remarkably stable.”

We like numbers – so lets look at the new numbers:

Copper versus Gold
Price Production Cost Margin Percent
Gold  $  1,400.00  $         1,200.00  $     200.00 14%
Copper  $        3.25  $               2.00  $        1.25 38%

 

Its all about Margins and please consider that much of the world’s gold is produced as a credit from the production of copper.

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