Seeking Alpha article, 6 May 2011

By Kerri Shannon

With metals and commodities on a long-term bull-market run, investors have recently turned their attention to copper. The red metal's price recently has fallen due to mixed economic data. Copper's use as an industrial metal -- it's widely used in buildings, electronics, appliances and automobiles -- makes it sensitive to economic growth prospects.

But despite the recent dip, many analysts and industry experts have a bullish copper price forecast. Barrick Gold Corp. (ABX), the world's biggest gold company, announced a big bet on copper last week with a $7.68 billion offer for copper producer Equinox Minerals Ltd. (EQMIF.PK). Barrick relies on gold for 80% of its revenue, but will double its copper position with the Equinox purchase. Barrick Chief Executive Officer Aaron Regent said Equinox's copper reserves are a hard-to-come-by asset.

"Directionally, I would say that most of the long-term copper price assumptions that are being used right now are understating what's going to happen," Regent said.

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Our contributing editor and natural resource expert Peter Krauth explains:

As I consider all commodities to be in a long-term secular bull market, copper should be a great place to invest for the medium and long term.

There's little doubt that copper is an important, perhaps even strategic, metal. It's widely used in industry, including electrical, engineering, building, and transport applications. And with the rise of Chindia (China and India), home to one third of the world's population, demand for copper is likely to remain strong for many years still.

Despite the credit crisis, which saw the price of copper plummet to $1.25 per pound from $4.00 per pound, the all-important metal has come roaring back with a vengeance. Since its early 2009 lows, copper has easily surpassed its 2008 highs, reaching $4.60 in mid-February this year.

Copper's price has been gradually trending downwards over the last couple of months. At this point, we've seen copper's price back off to the $4.00 level. I suspect this is for two reasons: The price got ahead of itself despite strong demand fundamentals, and there's continued uncertainty whether the U.S. Federal Reserve will follow up its second round of quantitative easing with "QE3."

Also, copper's recent highs were reached with copper stocks at historically high levels -near 450,000 tons. That also could weigh on the price for a while.

A potential floor for copper could well be around the $3.50 to $3.75 per pound area. But I'd expect to see copper resume its rise after bottoming near those levels.

As far as copper being the next gold, there's a key difference between these two metals. Though it's used in coinage, copper is essentially an industrial metal. Gold is essentially used for investment and jewelry. So clearly these two metals have different fundamental drivers.

I doubt that China will use copper to back its currency, at least not copper by itself. Remember that China is the largest holder of U.S. debt, and that debt is losing value daily as the U.S. dollar declines. It would make sense for China to shift significant portions of its $3 trillion in foreign exchange reserves into hard assets, like base metals, which it will need anyway to continue to build out its infrastructure.

In my view, it's not outside the realm of possibility that China would want to increase its influence on the world stage by allowing its currency, the yuan, to float freely and be supported with hard assets. I can envision a time when China would use a basket of base and precious metals to back its yuan, thereby making it a highly desirable currency.

As for Japan, the country's devastating earthquake, tsunami, and nuclear disasters will certainly add to the demand for copper. So I think these unfortunate events will help to keep a floor under the copper price going forward.