As the world increasingly becomes digitalized, I believe longer term that the case for commodities will only improve. Ironically, as technology advances, so will demand for the physical facilitation of those innovations. But over the past few years, this concept generally hasn’t worked well for companies like Freeport-McMoRan (NYSE:FCX). During the trailing five-year period, FCX stock has dropped 44%.
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Why? Mostly, the commodities sector, particularly precious metals like gold and silver, peaked early this decade. Subsequent trades have attempted to push the physical assets market higher, only to be met with biting disappointment. Of course, that didn’t suit Freeport-McMoRan stock well. The underlying company specializes in the industrial metals copper and molybdenum. It also has exposure to the gold market.
Frankly, FCX stock was on track to be a disappointment this year as well. Up until late October, shares were down compared to January’s opening price.
However, Freeport-McMoRan stock experienced a dramatic resurgence the day after Halloween. Since the unofficial holiday, shares have jumped 33%.
Naturally, with such a strong spike, investors question if enough momentum remains for 2020 and beyond. If that’s you, all I can say is, oh yeah! FCX stock is primed to rock and roll. Here are three reasons why:
The Federal Reserve’s Dovish Stance
Among the many people not on President Donald Trump’s Christmas card list is probably Federal Reserve Chair Jerome Powell. Routinely, Trump has bitterly complained that Powell refuses to aggressively cut benchmark interest rates. Just in that context, that might not appear beneficial for Freeport-McMoRan stock.
But the reality is that the Fed has been more than accommodating for the administration and the broader economy. Powell has several times noted that he and his team of central bankers will monitor economic conditions and act accordingly.
Irrespective of executive pressure, Powell is doing the right thing, applying a balanced, rational but nevertheless dovish strategy. And the best news of all came recently. According to the Washington Post, Powell sees no need to raise interest rates anytime soon.
It’s not what Trump wanted. However, it’s good news for him, the economy and FCX stock. At the end of the day, the Fed is still accommodative. Naturally, this provides inflationary upside for commodities, something that Freeport-McMoRan hasn’t seen for some time.
Copper Prices Will (Finally) Support FCX Stock
As I briefly mentioned up top, Freeport-McMoRan is a major player in the copper market. Barring extremely unusual circumstances, high copper prices (demand) is always good for FCX stock.
If you need math to convince you, consider this: from January 1995 to through November 2019, the correlation coefficient between Freeport-McMoRan and the copper price per metric ton stands at a whopping 88%. In other words, as copper demand goes, so too does FCX.
Click to Enlarge
Source: Chart by Josh Enomoto
And that’s very good news for stakeholders and prospective buyers, according to Capital Economics’ commodities expert Ross Strachan. He wrote:
Constrained supply growth and surging demand from electric vehicles mean that we think that the price of copper will rise by over 60%, to nearly $10,000 per tonne, by 2025 … This rally is almost three times higher than consensus estimates.
Perhaps surprisingly to many readers, “green” technologies use substantial amounts of copper. Strachan notes that this is especially the case for “electric vehicles, which use a lot more copper than cars with internal combustion engines.”
But copper has conductivity and other vital attributes that are critical for most industries. Furthermore, as developing nations transition to developed status, copper (and other metal) demand will surely increase.
That’s positive for copper prices and therefore Freeport-McMoRan stock.
Golden Bonus for Freeport-McMoRan Stock
Although the industrial metals are where FCX stock makes its most money, Freeport-McMoRan is nevertheless an important gold player. While gold has been a temptress – skyrocketing in the summer but shedding momentum in the fall – I believe this market will also turn around.
Again, consider the Fed’s dovish policy. While it doesn’t meet the aggression standards of Trump and his goldbug followers, it’s still aggressive enough. Apparently, we are going to get our inflation: the bickering is over the magnitude.
Beyond monetary policy, I think investors are anxiously eyeing both U.S. politics and geopolitics. Like gold, a meaningful resolution to the U.S.-China trade war has seductively eluded investors until just recently. But even then, things can go from great to terrible in a blink of an eye under this administration.
If any fissures develop, gold is back on the upswing. And I believe that the uncertainties of the 2020 election will help boost the precious metal. Either way, I think you’re looking at a positive, inflationary environment for Freeport-McMoRan stock.
As of this writing, Josh Enomoto is long gold and silver bullion. He is also considering a long position in FCX stock in the next 72 hours.
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