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Gold and copper prices reached all-time highs in March 2022 when the precious yellow metal hit rose to over $2,070 per ounce, and the red industrial metal probed over $5 per pound. While gold and copper corrected from the record peaks, they ended 2022 at over $1,825 per ounce and above $3.80 per pound, respectively.
While gold and copper closed the year below 2021 levels, the metals turned in respectable performances considering the rise in U.S. interest rates and the rally in the U.S. dollar, the international pricing mechanism for most commodities, including metals.
Rising interest rates increase the cost of financing long positions, which tends to be bearish. Moreover, as fixed-income returns rise, investors drive capital away from stocks and commodities and into bonds and other interest-bearing assets. The rising dollar is a function of the rate’s trajectory, and a strong U.S. currency is another bearish factor for gold and copper as it drives prices higher in other foreign exchange instruments. Meanwhile, gold and copper prices held up well in the face of the rise in rates and the dollar, setting the stage for a potential move to even higher highs in 2023. Western Copper and Gold (NYSE:WRN) explores for the metals and could benefit from higher prices this year.
Some analysts are calling for higher copper and gold prices in 2023
In a May 2022 report, Goldman Sachs called copper “the new oil” because of its role in green energy initiatives. Electric vehicles, wind turbines, and other alternative energy applications require the red metal. Goldman Sachs’ analysts wrote, “As the most cost-effective conductive material, copper sits at the heart of capturing, storing, and transporting these new sources of energy. In fact, discussions of peak oil demand overlook the fact that without a surge in the use of copper and other key metals, the substitution of renewables for oil will not happen.” Goldman projected that LME copper forwards could reach the $15,000 per ton level by 2025. The three-month copper forwards settled at $8,372 per ton on Dec. 30, 2022, with nearby COMEX futures at $3.8105 per pound. A rise to $15,000 would put the COMEX futures at over the $6.80 per ounce level.
Meanwhile, Juerg Kiener, the managing director and chief investment officer of Swiss Asia Capital, believes gold prices could surge to $4,000 per ounce in 2023. Kiener’s thesis is that as economies face recessionary pressures, central banks will slow the pace of interest rate hikes, making gold more attractive. Gold held up well in 2022, posting a 0.13% loss on the year despite aggressive rate hikes and the strongest U.S. dollar index since 2002. Every significant correction in gold this century had been a buying opportunity, and nearby COMEX gold futures closed at the $1,826.20 level on Dec. 30, 2022.
On Tuesday, Jan. 3, copper was lower while gold prices were higher, with copper at $3.7665 per pound on the March COMEX futures contract. COMEX gold for February delivery settled near the $1,845 per ounce level.
Mining shares tend to outperform on the upside
In the world of commodities, the companies that extract gold and copper from the earth’s crust invest substantial capital to produce the metals at a lower cost than the market price. The investments create leverage that often causes shares to outperform the metals on the upside and underperform when prices decline.
The leading producing companies can shift gears during rallies, extracting lower-grade ores with higher returns during bullish price trends. The producers often mine higher-grade ores with lower production costs during bear markets in the underlying metals.
GDX and PICK are ETF products that gold senior gold and base metal mining companies. In March 2020, copper and gold reached bottoms as the global pandemic gripped markets across all asset classes, with gold futures falling to $1,452.10 and copper futures to $2.0595. Gold rallied 42% to $2,063 in August 2020. Copper reached $4.8985 per pound in May 2021, a 137.8% increase.
Chart of the GDX ETF Product (Barchart)
From the March 2020 low to the August 2020 high, GDX rallied from $16.18 to $45.78 per share or 182.9%, far outperforming the move in the gold futures arena.
Chart of the PICK ETF Product (Barchart)
From the March 2020 low to the May 2021 high in copper, PICK rose from $16.01 to $51.39 per share or 221%, outperforming the percentage move in the nonferrous metal.
Exploration companies are more speculative than miners and can turbocharge returns during significant copper and gold rallies
Junior mining companies explore for metal reserves and typically have limited capital. When a junior miner strikes gold or other metal deposits, it generally sells the property to well-capitalized mining companies with economies of scale that allow for cost efficiencies. Meanwhile, the junior miners tend to offer investors more leverage than the seniors. The GDXJ holds a portfolio of the leading junior gold mining companies.
Chart of the GDXJ ETF Product (Barchart)
The chart highlights the 237.8% rise in the junior gold mining ETF from the March 2020 $19.52 low to the August 2020 $65.95 per share high. GDXJ outperformed GDX, while both turbocharged the percentage gain in gold’s price.
WRN outperformed copper and gold from March 2020 through May 2021
Western Copper and Gold is a Canadian exploration company that searches for gold and copper reserves. The company also explores for silver and molybdenum deposits. The company’s profile describes its interest in the Casino mineral property:
WRN Company Profile (Seeking Alpha)
WRN’s website details its properties and projects, calling Casino “Canada’s premier copper-gold mine.” Meanwhile, mining giant Rio Tinto (RIO) purchased an 8% stake in WRN in mid-2021. RIO is one of the world’s leading copper and gold producing companies, and its investment was to “advance the Company’s copper-gold Casino project in the Yukon.”
From March 2020 through May 2021, copper’s price rose nearly 138%.
Chart of Western Copper and Gold Corporation Shares (Barchart)
Over the same period, WRN shares moved from 30.72 cents to $2.83, or 821.2%, turbocharging copper’s gains.
The potential for rewards comes with commensurate risks – WRN and other exploration companies require a plan and discipline
GDX, PICK, and GDXJ are diversified products, holding portfolios of senior and junior mining companies, mitigating the idiosyncratic risks of owning individual miners or exploration companies. WRN is a more speculative investment because of the risks of its management and specific properties.
Since the risk in WRN is higher, the potential for rewards is commensurately higher. RIO’s investment in WRN validates the investment potential for the company. At $1.80 per share on Jan. 3, 2023, WRN had a $269.20 million market cap. An average of 139,969 shares change hands each day.
The prospects for copper and gold prices are bullish in early 2023. If prices climb and reach new record peaks, we could see mining companies outperform the metals. WRN could do even better if the company succeeds with the Casino project. As with any investment, careful attention to risk-reward dynamics and a plan are critical for profiting from individual mining companies like WRN.