Why Dr. Copper thinks skittish share investors are wrong to sell risk assets

The copper price is doing a very strange thing. The commodity chalked up its fifth straight session of gains on the London Metal Exchange (LME) as equity investors run for cover with the risk of an ugly trade war looming large.

The “risk-off” sentiment is sending the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index tumbled 0.8% in after lunch trade.

Someone must have forgotten to tell Dr. Copper or copper traders know something the rest of us don’t.

The red metal, which has been bestowed a “doctor” title as it is seen as a bellwether for the commodity market, gained 0.9% to US$6259 a tonne (three-month forward futures contract) last night and is up 2.5% on the week.

Why copper is rising

Experts interviewed on Bloomberg believe copper is gaining ground on hopes of a truce between US president Donald Trump and China’s chief Xi Jinping at the G20 summit next week.

A drop in copper inventories held at LME-registered warehouses is also supporting the positive sentiment towards the metal.

The rise in the copper price is one likely reason why the BHP Billiton Limited (ASX: BHP) share price and the Rio Tinto Limited (ASX: RIO) share price are defying the broader market weakness and is trading just above breakeven at the time of writing.

The diversified mining giants have exposure to the commodity although pure copper miners aren’t enjoying much love today with the OZ Minerals Limited (ASX: OZL) share price and the Sandfire Resources NL (ASX: SFR) share price losing more than 2% of their value.

Will the copper party last?

How long the positivity towards copper will last really depends on what you think is the major support for the commodity.

I don’t think it’s wise to bet on a de-escalation in trade tensions between the two superpowers as the recent APEC meeting laid bare a deepening divide between the world’s two largest gorillas.

However, I am bullish on copper over the medium-term as China is likely to step up its infrastructure building efforts to offset the impact of a trade war, while copper supply is likely to tighten due to underinvestment in finding new copper supply by the miners.

I believe investors should be overweight on the mining sector for 2019, although these aren’t the only stocks that are well placed to outperform.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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