Dr. Copper: Using ETFs to Diagnose the Global Economy's Health | ETF Trends

Copper has been alluded to as an indicator for the overall economic health of the global economy. Copper demand has been indicative of economic activity because of the base metal’s wide industrial applications. But is this conclusion accurate?

The performance of copper shares and exchange traded funds can be used as an indicator of the activity in the global economy because when copper prices drop, it is due to lowered demand. Low demand is indicative of slow economic activity, or a recession, reports James Brumley for Investopedia.

However, the so-called “Dr. Copper” theory is not a hard and fast rule. While there are historical correlations between higher copper prices and economic health, there have also been opposite situations. [Copper ETFs Test 200-Day Average as Speculators Turn Bullish]

  • Since 2002, the correlation between copper prices and the stock market is evident. High-grade copper bottomed in late 2001 and the market began a rebound the next year. Copper peaked in May 2008, right before the market meltdown that fall. [Copper ETFs Recover on Dollar, Economy]
  • Brumley says that the 1990s are full of contradictory events that negate the Dr. Copper theory. On three separate occasions between 1990 and 1999 the price of copper slumped more than 30%, but there was never a bear market during that decade.
  • There are times that a bear market occurred when copper prices were robust. Between 1972-1974 copper prices were high, however, the market was down.

Over the past 40 years, the copper correlation, or “Dr. Copper” theory can not be proven through historical performance. However, copper will continue to be a gauge of economic health because of its uses for building pipes to electronics and wiring. In 2012, copper prices have been up 10% on signs the U.S. economy is regaining strength. [ETF Chart of the Day: Base Metals]

Copper exchange traded products include:

  • First Trust ISE Global Copper Index Fund (NYSEArca: CU)
  • Global X Copper Miners (NYSEArca: COPX)
  • iPath Dow Jones UBS Copper Sub-Index Total Return ETN (NYSEArca: JJC)

iPath Dow Jones UBS Copper Sub-Index Total Return ETN

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.