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Cramer: This Rally in Copper is Real

Tuesday, 21 Dec 2010 | 7:33 PM ET
Demanding Profits?
Are you poised to profit? Cramer tells you what to watch out for.

"Enough with the skepticism," Cramer said Monday. "The skepticism is killing you. It's keeping you on the sidelines. It's keeping you out of incredible rallies."

Being as many are quick to call anything positive a bubble, Cramer was surprised he didn't hear that about the current run in copper. After all, he noted copper once became a bubble that burst in 2008, leading to a greater economic collapse. On Tuesday, copper revisited its May 2008 highs.

The last big run-up in commodities was in 2007 and 2008, Cramer noted. It was a move driven by hedge fund buyers, who by using margin, borrowed money to trade commodities for a profit — just like with stocks or bonds. But this time, however, the move in raw materials is exactly what it looks like — a product of constrained supply and rapidly increasing demand. There are no traders trying to corner the market.

"This move is just what it appears to be," Cramer said. "A product of worldwide growth and the inability to find materials fast enough to meet the consistent, persistent demand from emerging markets. High demand, low inventories."

Yet many remain skeptical of the emerging markets, Cramer said. They think they're also bubbling out of control, but these fast-growing countries are experiencing the same rural to urbanization that occurred in the U.S. 160 years ago. When a population goes from living in the countryside to living in the city, it needs electricity because people require appliances. In turn, the demand for copper goes up and now many third-world countries are growing their gross domestic products at 8 percent. Demand is therefore causing the move in copper, not the futures market like it had in 2008. Copper continues to climb because as demand increases, there is little supply right now.

Traders who have refused to admit these moves are real have missed out of some of the greatest stocks in this market, like Freeport McMoRan , Vale and BHP . Caterpillar and Joy Global , two companies that help dig copper out of the ground, are also benefiting from copper demand.

"The laws of supply and demand haven't been repealed and replaced by the law of gravity. It's okay to be skeptical, we have to ask whether the commodity rally as represented by copper and oil, where we don't have enough to meet US demand let alone satisfy China's voracious appetite, might be a bubble like last time," Cramer said. "But when we analyze the demand side, you have to admit that this stuff is not being bought by hedge funds that will eventually dump it in a panic. It's being bought by China, India and Brazil, countries that are petrified there won't be enough of the stuff to meet their needs."

The bottom line: not everything that goes up is a bubble.

When this post was published, Cramer's charitable trust owned Caterpillar and Vale.

Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

Questions, comments, suggestions for the Mad Money Web site? madcap@cnbc.com

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BHP
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CAT
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FCX
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VALE'A
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