Copper's Comeback

04/01/2009 1:00 pm EST

Focus: MARKETS

Nicholas Vardy

Editor, Bull Market Alert, The Alpha Investor Letter, and The Global Guru

Nicholas Vardy, editor of Vardy’s Global Bull Market Alert, says the red metal has moved up nicely, and it may be the start of a sustainable advance.

Over the past 18 months, commodities have gone through a bigger and badder boom and bust cycle than even US stocks. The commodities supercycle became so much a part of the conventional wisdom that investors were caught off guard when the price of everything from oil to copper collapsed in July.

Much to the consternation of perennial commodity bulls like Jim Rogers, one of the biggest money makers of 2008 turned out to be a bet against commodities. But commodities will turn one day—and may have already done so. And if you believe that inflation is coming, investing in "real assets" is a good way to protect yourself.

This week's pick is a bet on “Dr. Copper”—“the commodity with the Ph.D. in Economics”—through the iPath DJ AIG Copper Total Return Sub-Index ETN (NYSEArca: JJC). Here's why I think “Dr. Copper” is set to soar over the coming months.

Copper is used in everything from electronics, piping, roofing, and cookware to musical instruments, fire extinguishers, and biotech compounds. As a result, its price movements have been a reliable leading indicator of the health of the global economy. And look behind doom-and-gloom headlines, and you find that demand for copper has been rising steadily. Since bottoming in December, the price of copper has risen 28% in 2009, after plunging 54% last year.

In particular, China’s imports of unwrought copper, refined metal, and copper alloy for the first two months of the year surged 53.5% from a year earlier. China’s State Reserve Bureau (SRB) has been purchasing copper at much higher than expected levels. Now, rumor has it that the SRB may raise purchases to a million tons from 600,000 tons, easily turning the projected global surplus of 350,000-400,000 tons this year into a deficit.

Copper also is positioned to benefit the most from China’s $585-billion stimulus package. And with building work in China accelerating from March thanks to warmer weather, the effects of Chinese demand are being felt as far away as London. Since late February, London copper stockpiles have fallen over 50,000 tons. And last Thursday, copper topped $4,000 per ton for the first time since November.

With JJC now trading above its 50-day moving average, copper is at the beginning stages of a full-fledged up trend. There also have been numerous bullish spikes in JJC's trading volume. JJC normally trades about 30,000 shares a day, but recently there have been several days where a quarter of a million shares traded hands. Some major players are hopping on the copper bandwagon.

So, buy copper through JJC. This ETN follows the price of copper on a one to one basis. Place your stop at $21.90. (It closed under $26 Tuesday—Editor.) There are no options on this one.

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