How to Invest in Copper Bullion, Stock, ETFs & Mutual Funds
Chances are you’ve seen commercials on TV trying to get you to buy precious metals like gold.
They may be trying to sell coins, bullion, or other collectibles made of these metals.
You may not be able to afford to invest in gold, but thankfully other precious metals exist.
One metal you may want to consider investing in is copper.
Unlike gold, copper is relatively cheap in its physical form. While gold can cost hundreds or thousands of dollars per ounce at any given time, copper only costs a few dollars per pound.
This means investing in copper is much different than investing in a precious metal like gold.
If you’re considering investing in copper, here’s what you need to know.
Ways to Invest in Copper
You can invest in copper in several ways, depending on your goals.
Physical asset
Technically, you can invest in copper as a physical asset.
It doesn’t make as much sense as investing in gold as a physical asset, though.
Its relatively low value means you need to hold a lot of copper to have significant enough value to impact your portfolio.
For this reason, most people won’t buy physical copper to hold.
That said:
Any physical copper you do own can be scrapped to earn some spare change.
Copper ETFs
If you want exposure to copper without physically owning it, consider a copper ETF that tracks the price of copper.
There aren’t as many copper ETFs as there are other precious metal ETFs, but they still exist.
These ETFs allow you to take part in the price swings of copper without the pain of physically investing in the asset.
The bad news is ETFs come with fees.
In order to maintain the copper investment, companies have to pay expenses that get passed on to you in the form of an expense ratio.
These fees will reduce your returns.
That said, the fees are likely cheaper than any physical storage costs you’d have to pay if you invested in physical copper.
Copper mining stocks
One way to avoid the fees ETFs charge is investing in companies that mine copper.
While you aren’t investing directly in the metal, these companies make money from mining and selling copper.
Investing in a company provides its own set of risks, though.
The company may be poorly managed. The copper mines may not produce copper as expected or may be more difficult to mine than anticipated.
The good news is the opposite can also happen. Companies could be well managed or beat expectations.
Mining companies don’t usually only mine one metal, though. The company may have other natural resources they mine and refine, as well.
This can dilute the direct impact of copper’s price on the stock’s price.
Copper mining mutual funds or ETFs
Owning a single mining stock can result in less than desired results. If the company performs poorly, your investment may decrease even if copper’s price is increasing.
To offset this risk, you can diversify your copper mining portfolio. One way to do this is by owning copper mining mutual funds or ETFs.
ETFs and mutual funds can invest in a handful of companies in the same sector, which is copper miners in this case.
Together, the overall fund should perform somewhat in line with copper.
Some individual holdings may perform poorly if a company misses its expected results.
Hopefully, other holdings within the ETF or mutual fund outperform to offset the underperformers.
By owning several companies through an ETF or mutual fund, you spread out the risk of a single company underperforming.
The downside is all companies are tied to copper mining.
If copper’s price decreases drastically, expect the mutual fund or ETF to decrease in price, as well.
Copper futures contracts
One way to invest in copper without physically owning it is through futures contracts.
Futures are contracts used to buy or sell a specific amount of something at a given price at a set date in the future.
Futures allow you to speculate on the future price of copper.
You pay a small amount for the contract. The price of the contract changes as the price of copper changes.
If you own the contract at expiration, the contract will settle.
This means you’ll pay or get paid the difference between the contract price and the market price at expiration.
Read the contract
When buying futures contracts, be careful only to purchase contracts that settle in cash.
If you accidentally buy contracts that settle in physical goods, you’ll have to take delivery of the copper if you own the contract when it expires.
Let’s say you have a contract to buy 1,000 pounds of copper at $4 per pound that settles in two months.
Two months from now, the price of copper is $6 per pound. This puts the entire contract’s value at $6,000.
The contract settles in cash. This means you’ll receive a $2,000 profit.
This is because the price of copper is above the price the contract requires you to pay for it.
Contracts can be sold before they settle, too.
In these cases, the price swings will impact the contract’s price but won’t be fully priced in.
You don’t get the entire value because the price can change again before the contract settles.
Things to Consider About Investing in Copper
Investing in copper isn’t like investing in gold or silver. It’s a unique asset with unique considerations.
Copper has many uses
Copper is a metal used in many aspects of our daily lives.
It’s used for building construction with copper pipes, electrical wires, and air conditioning units.
Electronic devices often use copper in one form or another.
Other uses include transportation equipment, consumer products and machinery.
When you think of how many ways copper can be used, you can begin to see why the price sometimes fluctuates.
As demand for items that use copper increases, the price of copper may rise as well.
Diversification
Precious metals are often seen as a way to diversify your portfolio.
Because copper is a physical good, there is a limited quantity in the world.
That said, copper is much more common than other precious metals, such as gold.
Even so, copper doesn’t always react to the same influences that some of your other investments may.
In general, copper’s price tends to track the economic cycles.
As the economy booms, demand for copper usually increases as more buildings get built and other uses increase.
When the economy cools off, copper’s demand and price usually drop.
If you have investments that work opposite of this cycle, investing in copper can help spread out the risk of investing.
If one investment performs poorly, your copper investment may perform well to offset those losses.
Inconvenient physical asset
When you think of precious metals, most people want to hold them in physical form.
This way, the metals can be used to barter if the world goes crazy.
Unfortunately, copper isn’t a metal you likely want to store in person.
You can easily store a couple of pounds of gold worth tens of thousands of dollars in a safety deposit box in your bank.
If you wanted to have $20,000 worth of copper stored, you’d need the space and physical capacity to move and store 5,000 pounds of the metal.
The logistics, space, and weight would not be worth physically storing the metal for use.
Additionally, copper is a more utility-based metal than value-based metal.
While people will buy copper scrap, most people want copper converted into the form they need to use it.
Transforming bulk copper into a copper pipe or copper wiring isn’t something you can do yourself.
Not a collectible for tax purposes
Some precious metals, including gold and silver, can be considered collectibles for tax purposes by the IRS.
As a collectible, these physical assets are subject to a higher 28% capital gains tax rate.
This means selling gold, silver and other collectible metals results in lower returns due to this higher tax rate.
Thankfully, copper does not qualify. Instead, it is only subject to the usual capital gains tax rates.
If you hold copper for more than a year, you qualify for the lower long-term capital gains tax rates.
Choosing the Best Copper Investment for You
Deciding how to invest in copper is a personal decision.
How you choose to invest in this precious metal depends on your goals for investing.
Some people may decide holding a small amount of physical copper is worth the cost of storage.
Others may decide owning a copper ETF, copper mining stock, copper mining ETF or copper futures contract is a better option.
If you’re unsure how best to invest in copper or whether it’s a good investment for you, consider consulting an expert.
A fee-only fiduciary financial advisor can help you figure out if copper fits in your portfolio.
These advisors get paid by you, not commissions, and must give you advice based on your best interests.
