Will Chile Follow Copper's Rally?

Concern over the inflationary impact of monetary easing from both the European Central Bank and Federal Reserve have been building as investors shift their focus away from deflation to forced reflation by SuperBen and the League of Extraordinary Bankers.

Metals have shown solid strength since early August, with the most recent spurt directly attributable to rising inflation expectations. Copper (JJC) itself -- along with the Copper Miners (COPX) on the stock side -- appear to be breaking out after a severe period of weakness and underperformance back to early 2011.

Comeback Play
One way of playing a comeback in Copper is to play the country that exports a lot of the metal. Take a look below at the price ratio of the iShares MSCI Chile Index Fund (ECH) relative to the S&P 500 (IVV). As a reminder, a rising price ratio means the numerator/ECH is outperforming (up more/down less) the denominator/IVV.

Bloated With Copper
It's estimated that Chile holds about 40% of the world's reserves in Copper, as exports make up a good chunk of its growth. Chile was a start performer relative to the U.S. for a large portion of 2012, but has since hemorrhaged, sending its price ratio to 3 year lows. While the trend appears to remain down, I suspect a turnaround is in the cards given 1) the extent of underperformance in Chile's stock market, and 2) forced reflation in Copper which should (in theory) benefit Chile overall. For those interested in a diversified way of playing the metal, the iShares MSCI Chile Index Fund might offer some strong return potential.

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