I admit, there is still some uncertainty to this trade, but I bought copper today. Here is my thesis…
An 8.8 magnitude earthquake bellowed Chile on Saturday. The magnitude was about 500 times that of the first quake in Haiti, yet might have less damaging effects as it was located offshore and deeper in the ground. Emergency crews are still swirling around cities, and from what I’ve gathered, looting has not been contained. The focus of Chile’s citizens is focused on the basics–food, water, and safety. In some areas, many are sleeping in the streets for fear that their structures will collapse; this problem has the potential to be amplified if aftershocks occur.
The economic impact is potentially global in nature. Chile is the world’s largest copper producer, accounting for 1/3 of the world’s output. Reasonably thinking, one can imagine that when the supply of copper is reduced, the price will rise. Now, some copper mines have and will reopen, but impasses still remain. Some mines are closed due to power outages, and highways to transport copper are impaired. Besides, if I am Chilean citizen, I’m more worried about ensuring my safety more than exporting copper.
(image from BBC news)
Pricing this trade was an issue. I read reports of copper prices soaring 5-8% on the news. However, JJC, the Copper ETN, was only up about 2% at the open and stayed relatively stable throughout the day. Obviously an investor would want to own the commodity before a supply shock. Here, I’m betting on continued chaos, power/transport impairments, or aftershocks.
From an allocation perspective, I have been eager to add commodity exposure since I’m a little light in that area. As for JJC, I owned (and sold) it years ago, but am always cautious with an exchange traded note. The trade: Bought 30 shares of JJC at $45.70.
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Last night I published an introductory piece on how options work. It is written for the novice stock trader. Feel free to take a look.
