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Copper vs. Gold: Is Copper a Better Investment Than Gold? 30 Years of Data Analyzed for Strategizing


 

Summary: 1. Gold and Copper, historically, have delivered statistically similar monthly returns. However, Gold has a superior long-term growth rate (geometric mean).

2. Copper has a higher long-term variance compared to Gold, and thus is a riskier commodity.

3. Due to increased economic electrification, Coppers' demand is likely to rise in the short-term. However, this is not likely to last long-term.

4. Copper and Gold don't have correlated returns, thus, its beta or covariance in relation to Gold cannot be established.

5. Copper investing strategy for the coming 3 horizons is discussed.

 

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Can you earn a higher yield by investing or adding Copper to your portfolio compared to Gold? What about the investment Strategy, what investment strategy should be adopted in copper? This report analyses 30 years of data for definitive answers. The returns, risks, and prospects of the two in question are analyzed in this report for efficient strategizing.


"Gold, of course, is the most widely recognized and accepted unit of account, medium of exchange, and store of value, in the entire world. Touted as the 'flesh of the gods,' interest in Gold has been elevated since 2019, due to rising concerns of the start of a contractionary phase of the business cycle since 2018, and since 2020, due to unprecedented increase in the money supply by all key central banks through Seigniorage, which is the printing of new money.


Concerns are, of course, high regarding the stability of Fiat currencies, especially of the currencies in the SDR (A SDR (special drawing right) is a basket of four leading currencies: Japanese yen (JPY), US dollar (USD), British pound (GBP), and euro (EUR)). This has increased demand for safe-haven assets"(Link).


Which precious metal yields/yielded a higher return, Copper or Gold?

The yearly appreciation (geometric mean) for Copper for the last 3 decades stands at 6.84%, which means an average nominal yearly yield for Copper stands at 6.84%; inflation-adjusted yield has been 3.44% (inflation in assessed period = 3.4%).


The yearly appreciation (geometric mean) for Gold for the last 3 decades is 8.12%, which means an average nominal yearly yield for Gold stands at 8.12%; inflation-adjusted yield has been 4.72% (inflation in assessed period = 3.4%).


Copper performance compared to Gold, copper vs gold, copper vs gold investment
Performance comparison. Source: IMF, IBA (FRED)

Another important issue worth mentioning here is that there isn't a strong relation or correlation between the returns of Gold and Copper, with a R-squared value of 0.06:


copper beta, copper gold correlation, gold and copper covariance, gold and copper relationship
Assessment of linear relationship


We can clearly see, nonetheless, that Gold's YoY yield is substantially higher than that of Copper. However, these parameters may be considered overly simplistic; therefore, statistical testing has been employed to test the returns and risk below:


H0: μcp – μxu = 0 versus Ha: μcp – μxu ≠ 0.

, where

μcp – the mean returns of Copper (XCU)

μxu – the mean returns of Gold (XAU)



Pooled variance test: Two sample t-test (pooled variance), using T distribution (DF=748.0000) (two-tailed) (validation)

1. H0 hypothesis

Since p-value > α, H0 is accepted.

The average of XCU's population is considered to be equal to the average of the XAU's population.

In other words, the difference between the average of the XCU and XAU populations is not big enough to be statistically significant. This possibility is not very likely, yet, it is still possible.

2. P-value

p-value equals 0.768808, ( p(x≤T) = 0.615596 ). This means that if we would reject H0, the chance of type I error (rejecting a correct H0) would be too high: 0.7688 (76.88%).

The larger the p-value the more it supports H0.

3. The statistics

The test statistic T equals 0.294042, is in the 98% critical value accepted range: [-2.3313 : 2.3313].

x1-x2=0.0013, is in the 98% accepted range: [-0.01000 : 0.001780].

The statistic S' equals 0.00436

4. Effect size

The observed standardized effect size is small (0.021). That indicates that the magnitude of the difference between the average and average is small.


What does this mean simplistically, is Gold more profitable an investment than Copper?

Statistically, the returns are the same, and we cannot proclaim that one has statistically higher monthly returns compared to the other. Nonetheless, the statistically insignificant yet persistent, small variations in Golds' favor have resulted in the long-term geometric mean, or growth rate, of Gold being higher.


Still, an investor, in terms of monthly returns, as per the statistical test, should be indifferent when choosing one over the other.


Our viewpoint here is that Gold has somewhat superior returns compared to Copper. Yet, it is also important to note that Copper has faced supply issues, and a severe supply shock can shoot up the price, because of demand and speculation.


What about the risk? Is Copper riskier than Gold?

For definitive answers, F test has been conducted to evaluate the difference in variance between the two. The hypothesis is constructed as:

H0: σ2XAU = σ2XCU versus Ha: σ2XAU ≠ σ2XCU,

, where

σ2XAU – the variance of the returns of Gold (XAU); and

σ2XCU – the variance of the returns of Copper (XCU).:


F test:

F test for variances, using F distribution (dfnum=374,dfdenom=374) (two-tailed) (validation)

1. H0 hypothesis

Since p-value < α, H0 is rejected.

The sample standard deviation (S) of XCU's population is considered to be not equal to the sample standard deviation (S) of XAU's population.

In other words, the difference between the sample standard deviation (S) of the XCU and XAU populations is big enough to be statistically significant.

2. P-value

The p-value equals 0, ( p(x≤F) = 1 ). It means that the chance of type I error (rejecting a correct H0) is small: 0 (0%).

The smaller the p-value the more it supports H1.

3. The statistics

The test statistic F equals 2.6242, which is not in the 98% region of acceptance: [0.7858 : 1.2726].

S1/S2=1.62, is not in the 98% region of acceptance: [0.8865 : 1.1281].

The 98% confidence interval of σ12/σ22 is: [2.0621 , 3.3394].


Comparison of Copper and Gold risk, copper investment risk, copper vs gold investment risk, comparison of gold and copper investment risk
Comparison of risk


What does this mean, simplistically? Is Copper a riskier investment than Gold?

This means that the variance of Copper's monthly returns is higher than Gold; for the past 3 decades, it has been riskier holding compared Gold, and this is backed by statistical evidence. In the future, it would be logical to expect it to remain a riskier investment compared to Gold. Put succinctly, an investor should know that Copper is a riskier investment compared to Gold, assessed as per the variance of the last 3 decades, with its returns resembling that of a commodity, and, of course, it is not a safe haven asset.


Putting it all together. Future prospects of Gold and Copper


"Gold is an established 'currency,' and a safe-haven investment instrument. This means Golds' demand rises when there is a decline in the yields of sovereign bonds, especially US bonds, as institutional money has historically shown a preference towards Gold in a low yield environment; Golds' demand also rises as overall financial risk perceptions increase, and institutional money moves into safe-haven assets, when this happens, Gold, usually, is on the top of the acquisition list.


However, there isn't significant evidence backing the assumption that Golds' price increases due to increased industrial demand, or is impacted by increased mining (this condition remains plausible with a significant increase in industrial demand or significant improvement in technology that substantially increases Golds' supply, such as novel extraction techniques making oceanic extraction feasible, or asteroid mining, for example).

Gold should be considered a currency with a 0 real rate, essentially.


This means, as per the covered interest parity theory, if the real interest rate in the US, for example, increases, Gold should rise in relation to USD. Due to these properties, we can state, deductively, that Gold is an investment-grade currency, one that is the oldest, most persistent, and most renowned" (Link). With a real yield of about 5% in the last 3 decades, Gold stands out as a prominent high yielding investment instrument, and this perhaps cannot be said about Copper:


Copper, presently, has increased interest from all areas, due to the expected electrification of all major economies in the coming decades. Investors and some institutions are expecting demand for Copper to substantially increase in the coming years, and thus, we are seeing capital allocations being made in Copper, both by investors and institutions.


It is logical to assume that electrification of the major economies will increase Coppers' demand, and so far, this line of reasoning seems rational. However, this may not be an acquiring logic that holds long-term.


There is continuous work being done on conductive materials, and the primary energy-transmitting-conductive material in the future (in 15-20 years), we have learned through discussions with various experts, is unlikely to be Copper.


Thus, as far as investing is concerned, yes, horizon 1, i.e., 3-7 years, may see a high demand for Copper; coupled with the fact that it has, and can in the future face supply related problems, we can state that horizon 1 for Copper demand is favorable.


Horizon 2, 7-11 years from now, we will start to see other conductive materials erode Coppers' hegemony, due to their specialized superiority. Around this time, its overall demand is likely to stagnate. Horizon 3, 11-15 years in the future, we are likely to see alternative materials overtake Copper, due to their lower cost and better conductivity. At this stage, its demand is likely to decline precipitously.


Copper investment strategy, copper demand, copper demand future, copper demand future analysis, copper demand predictions. copper demand analysis
XCU investment strategy (three horizons)


Finally, we shouldn't overlook the fact that presently, there is a lot of money chasing limited 'value' opportunities. This has increased inflows in many speculative instruments. Once we experience a price readjustment event, which readjusts the value of multiple securities across the board, we will most likely see that the excess inflows that might have elevated the price of Gold and Copper will retreat—readjusting the price of Gold and Copper as well.


Here, it may be argued, that we have heard talks of a contender overtaking Copper since the '70s, yet it is still the 'conductive king.' This is correct; however, in the years past, this was a common assumption that investors were 'sensing' without active work on emerging contenders being carried out.


This is not the case presently. We have materials Like graphene, etcetera, that demonstrate superiority over conventional conductors in multiple ways, yet lack of scale manufacturing is the primary factor holding them back. This is, of course, very likely to change in the future.

Copper Investing strategy (3 horizons approach)/ allocation in the portfolio/should you add it to the portfolio

For profiting from the 1st horizon, it makes sense to allocate capital in Copper. Presently, allocation of about 5% of the portfolio in, for example, Global X Copper Miners ETF (COPX) does make sense. Nonetheless, exposure should be reduced as the first horizon comes to an end.


Conservative investors, on the other hand, that do not want to allocate capital in Copper can allocate in secondary entities, i.e., companies that are likely to enable economic electrification, for example, Siemens, etcetera. Opting out of the play altogether does not seem sound, presently.


See also:


How Much Can Metals, Energy, & Grains Fall In a Market Crash? | Which Is the Best Commodity to Hold?


Do all financial assets fall in a market crash?


How can we know that inflation won't be an issue in the future?


Data and computations: