Thoughts on gold and copper miners as an inflation hedge?

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millennialinvestor
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Thoughts on gold and copper miners as an inflation hedge?

Post by millennialinvestor »

Given that gold and copper prices have a history of rising when inflation takes hold, do you think mining firms are wise investments going forward?

The price of gold and copper has gone up considerably in the last year.
Actin
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Re: Thoughts on gold and copper miners as an inflation hedge?

Post by Actin »

Mining stocks are garbage. The mining companies are not the metals. Even Buffet learned this the hard way. Many of these companies are intentionally unprofitable
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Re: Thoughts on gold and copper miners as an inflation hedge?

Post by Thesaints »

...and price of gold has not always gone up with inflation. In fact, it has been kind of a coin toss.
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Re: Thoughts on gold and copper miners as an inflation hedge?

Post by nisiprius »

a) What would be your reason for thinking that gold would track inflation, and copper would track inflation, but silver would not track inflation? Are you really basing this on some kind of economic fundamentals?

b) You say "Given that gold and copper prices have a history of rising when inflation takes hold" but I don't think that is a given at all. Have you researched this yourself? Who gave you that "given?" What's your source?

I don't know how reliable this source is, but it says that from 1900 to 2009, the real price of copper has halved. That doesn't sound like inflation protection to me.

I edited the image to remove some data, irrelevant to this topic, on estimated production price, and superimposed an inflation chart on their image.

Image

As for shorter-term effects, all I can say is that when I roughly superimposed an inflation chart (light blue) on the price of copper, I don't see it at all. If the copper price chart is correct, the real price of copper kept falling--like a rock--during 1915-1920, worst period of inflation in the history of the CPI. And it also fell during the period of high inflation I lived through, the period around 1980.

It didn't happen around 1920, and it didn't happen around 1980, and there hasn't been any inflation to speak of since then. So why this "given?"

c) So in the case of copper, I think you have a chain of three predictions, not one of which is a strong link.

1) Inflation will spike.
2) If inflation spikes, then copper prices will spike.
3) If copper prices spike, then the stocks of copper-related businesses will boom.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: Thoughts on gold and copper miners as an inflation hedge?

Post by nisiprius »

millennialinvestor wrote: Thu Jun 10, 2021 1:47 pm...The price of gold and copper has gone up considerably in the last year...
They may have been lucrative investments for people whose timing was favorable, but if the price of gold and copper has gone up in the absence of inflation, that contradicts the idea that they are an inflation hedge.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: Thoughts on gold and copper miners as an inflation hedge?

Post by millennialinvestor »

I don't know how to upload an image. Here are two links:

https://www.macrotrends.net/1333/histor ... year-chart

https://www.macrotrends.net/1476/copper ... chart-data

Inflation seems to be correlated with the prices in the 70s. I think the 70s are the best decade to compare the current economic climate.
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Re: Thoughts on gold and copper miners as an inflation hedge?

Post by nisiprius »

For copper prices you show: https://www.macrotrends.net/1476/copper ... chart-data

Image

It's hard to select endpoints objectively, but I'll take "the decade of the 1970s" literally. I'm seeing
$0.68 on 1/19/1970 and
$1.29 on 1/14/1980.

$1.29 in 1/1980 = $0.63 in 1/1970
Image

I don't see the correlation with inflation that you see. It still looks to me as if copper's price, even in nominal dollars, was going down just as inflation was peaking. So I don't see a spike when inflation spiked. And I see multiple spikes when inflation wasn't spiking. So I think this is just "high volatility," not any clear relationship with inflation.
Last edited by nisiprius on Thu Jun 10, 2021 6:13 pm, edited 2 times in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
ckangas
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Re: Thoughts on gold and copper miners as an inflation hedge?

Post by ckangas »

Just food for thought...

You can use broader precious metal indexes or broader commodity indexes as well.
Financial sector stocks have historically done well in periods of high inflation.
Companies with high existing debt benefit from high inflation; so those stocks will on average benefit.
Assets such as housing, real estate, and social security, will (on average) keep up with inflation.
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Re: Thoughts on gold and copper miners as an inflation hedge?

Post by PVW »

millennialinvestor wrote: Thu Jun 10, 2021 1:47 pm Given that gold and copper prices have a history of rising when inflation takes hold, do you think mining firms are wise investments going forward?

The price of gold and copper has gone up considerably in the last year.
Inflation is a slow moving storm. Unless you're looking for a gamble, there's no need to make guesses and time the market on inflation hedges. You can deal with it when it comes.
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Re: Thoughts on gold and copper miners as an inflation hedge?

Post by millennialinvestor »

ckangas wrote: Thu Jun 10, 2021 3:15 pm Just food for thought...

You can use broader precious metal indexes or broader commodity indexes as well.
Financial sector stocks have historically done well in periods of high inflation.
Companies with high existing debt benefit from high inflation; so those stocks will on average benefit.
Assets such as housing, real estate, and social security, will (on average) keep up with inflation.
I thought financial sector stocks, such as banks performed poorly in the 70s
learntoinvest123
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Re: Thoughts on gold and copper miners as an inflation hedge?

Post by learntoinvest123 »

millennialinvestor wrote: Thu Jun 10, 2021 1:47 pm Given that gold and copper prices have a history of rising when inflation takes hold, do you think mining firms are wise investments going forward?

The price of gold and copper has gone up considerably in the last year.
You are too late to the party. The party can still go on for a long time or you could be left picking up the trash.
Mining stocks are cyclical. If there is a commodity super cycle they can double. If that does not pan out, they can drop in half.

Miners are heavily leveraged to the price of the metal, since their fixed costs don't increase proportionally. Any increase or decrease goes directly to their bottom line.

Don't buy miners for Gold. Plenty of physical Gold holding ETFs that you can buy instead.
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millennialinvestor
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Re: Thoughts on gold and copper miners as an inflation hedge?

Post by millennialinvestor »

learntoinvest123 wrote: Thu Jun 10, 2021 7:14 pm
millennialinvestor wrote: Thu Jun 10, 2021 1:47 pm Given that gold and copper prices have a history of rising when inflation takes hold, do you think mining firms are wise investments going forward?

The price of gold and copper has gone up considerably in the last year.
You are too late to the party. The party can still go on for a long time or you could be left picking up the trash.
Mining stocks are cyclical. If there is a commodity super cycle they can double. If that does not pan out, they can drop in half.

Miners are heavily leveraged to the price of the metal, since their fixed costs don't increase proportionally. Any increase or decrease goes directly to their bottom line.

Don't buy miners for Gold. Plenty of physical Gold holding ETFs that you can buy instead.
Miners are the ones that actually produce the gold though. Should things turn sour they will be very valuable.
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Re: Thoughts on gold and copper miners as an inflation hedge?

Post by Forester »

millennialinvestor wrote: Thu Jun 10, 2021 1:47 pm Given that gold and copper prices have a history of rising when inflation takes hold, do you think mining firms are wise investments going forward?

The price of gold and copper has gone up considerably in the last year.
Regardless of inflation you should own gold miners due to positive returns + low correlation to TSM.
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Re: Thoughts on gold and copper miners as an inflation hedge?

Post by Ocean77 »

nisiprius wrote: Thu Jun 10, 2021 2:34 pm a) What would be your reason for thinking that gold would track inflation, and copper would track inflation, but silver would not track inflation? Are you really basing this on some kind of economic fundamentals?

b) You say "Given that gold and copper prices have a history of rising when inflation takes hold" but I don't think that is a given at all. Have you researched this yourself? Who gave you that "given?" What's your source?

I don't know how reliable this source is, but it says that from 1900 to 2009, the real price of copper has halved. That doesn't sound like inflation protection to me.

I edited the image to remove some data, irrelevant to this topic, on estimated production price, and superimposed an inflation chart on their image.

Image

As for shorter-term effects, all I can say is that when I roughly superimposed an inflation chart (light blue) on the price of copper, I don't see it at all. If the copper price chart is correct, the real price of copper kept falling--like a rock--during 1915-1920, worst period of inflation in the history of the CPI. And it also fell during the period of high inflation I lived through, the period around 1980.

It didn't happen around 1920, and it didn't happen around 1980, and there hasn't been any inflation to speak of since then. So why this "given?"

c) So in the case of copper, I think you have a chain of three predictions, not one of which is a strong link.

1) Inflation will spike.
2) If inflation spikes, then copper prices will spike.
3) If copper prices spike, then the stocks of copper-related businesses will boom.
Thanks for the chart. That looks like a good inflation hedge to me. The copper price held roughly steady over the last 100 years, in real terms. By comparison, the value of $1 went down to something like 3 cents I think, in this period.
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Re: Thoughts on gold and copper miners as an inflation hedge?

Post by Ocean77 »

nisiprius wrote: Thu Jun 10, 2021 2:40 pm
millennialinvestor wrote: Thu Jun 10, 2021 1:47 pm...The price of gold and copper has gone up considerably in the last year...
They may have been lucrative investments for people whose timing was favorable, but if the price of gold and copper has gone up in the absence of inflation, that contradicts the idea that they are an inflation hedge.
If we would apply the same logic to the stock market, we might conclude that if stock prices go up in the absence of economic growth (as they did in Spring of last year), that there is no link between stocks and the economy. The reality is of course that the stock market is forward looking. Perhaps commodity prices are as well.
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Re: Thoughts on gold and copper miners as an inflation hedge?

Post by 000 »

I prefer a broader natural resources play like GUNR but I am also bullish on precious metal miners.

All this talk about the past is just that: the past. The situation today is quite different from the last few decades. Trying to look for precise correlations between a commodity and a random price index during a "good times" bull run is not relevant to the future performance of the commodity under other circumstances.
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Re: Thoughts on gold and copper miners as an inflation hedge?

Post by phantom0308 »

Inflation and gold have a long term correlation of 0.16, so it’s not as good of an inflation hedge as you think. It dropped during the early 80s when inflation was still high for example

https://www.cnbc.com/2021/06/08/gold-as ... rwise.html
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Re: Thoughts on gold and copper miners as an inflation hedge?

Post by Forester »

phantom0308 wrote: Thu Jun 10, 2021 11:18 pm Inflation and gold have a long term correlation of 0.16, so it’s not as good of an inflation hedge as you think. It dropped during the early 80s when inflation was still high for example

https://www.cnbc.com/2021/06/08/gold-as ... rwise.html
Why would gold be preferred when real interest rates are strongly positive?
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Re: Thoughts on gold and copper miners as an inflation hedge?

Post by nisiprius »

I've been focussing on copper because I've never looked at it before. I'm only looking at copper itself, not stocks in copper-related businesses.

I obtained the price of copper from the USGS website, 1900-2017, and the CPI from the Bureau of Labor Statistics website, 1913-present.

Here is the relative value of a dollar, versus the real price of copper adjusted to year-2017 dollars. I only have data for Treasury bills back to 1926; I plotted that, going forward, starting with equal amounts in copper and Treasury bills in 1926, and adjusting for inflation. In all cases the chart is showing the cumulative results of a buy-and-hold investment, not percentage returns for individual years. Spikes in year-by-year returns show up as sharp rises on this chart.

Image

Observations:
  • Over the entire 103-year period, copper held real value.
  • But at times it was worth six times as much as at others.
  • Copper failed to provide much protection during the high-inflation period of 1970-1985.
  • Copper also failed to provide protection during the highest inflation in the history of the CPI, 1915-1920
  • Copper spiked around 2005 despite the absence of inflation.
  • The return from copper, 1926-2017, was no higher than Treasury bills.
  • The annual volatility of copper, 1926-2017, was six times that of Treasury bills (standard deviation 19.0% for copper, 3.1% for bills.
  • Copper did better than Treasury bills during one specific period of inflation, post-World-War-II. However,
  • Copper did worse during another: the 70's, 80's, and kept on doing worse in the 1990s.
  • I don't see any consistency here. Copper has just been a highly volatile asset. Sometimes it has spiked when inflation has spiked. Sometimes it has spiked when there was no inflation. Sometimes (1920) it has failed to spike when inflation spiked. Sometimes (1930) it has fallen when the dollar was increasing in value.
  • Like any other highly volatile asset, it can be a lucrative short-term investment/speculation/gamble if well-timed.
  • Like most assets except currency and bonds, it has tended to keep up with inflation over sufficiently long periods of time. It doesn't seem to be particularly good in this regard.
The next chart shows the correlation of annual changes in CPI versus annual changes in the price of copper; i.e. inflation versus copper annual percentage return. I would summarize it simply: there was no correlation.

Image

I don't agree that copper prices have "a history of rising when inflation takes hold."
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: Thoughts on gold and copper miners as an inflation hedge?

Post by seajay »

Thesaints wrote: Thu Jun 10, 2021 1:56 pm ...and price of gold has not always gone up with inflation. In fact, it has been kind of a coin toss.
Long dated TIPS don't always go up with inflation either. They're more real yield products and as such can move (significantly) counter direction to inflation, a kind of coin toss. Gold might be considered as a form of long dated TIP, undated zero coupon. Best to barbell gold with stocks to combine to a more central bullet overall holding (click the Inflation Adjusted tickbox in the chart for visibility of how the barbell served as a (volatile) inflation bond).

Given the longer dating/duration is variable however its awkward to figure the duration

Unlike copper, gold is a tier 1 asset, considered risk-free and equal to cash dollar at full market value (previously when considered as tier 3 only part of the market value was counted). In effect another currency, that can do well if a currency declines, lose out if the currency does well.
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