The rally in gold prices over the past 10 years has been nothing less than amazing, with the precious metal running from $300 per ounce in mid-2001 to more than $1500 now. The SPDR Gold Trust (NYSE: GLD) exchange-traded fund (ETF) has gained a whopping 250% since its inception in late 2004, while the market is only ahead by about 12% for the same period.

Yet, when investors or even analysts are asked to specifically explain why gold is now worth five times what it was 10 years ago, the only answer usually offered is a very basic “because the fundamentals are right.” It’s an ironic answer in most regards, as gold’s “fundamentals” are a speculation-driven moving target at best.

If you’re looking for true metal to invest in rather than just speculate with, then copper is your answer, simply because every ounce of its usage is for a clear industrial purpose.

Uses of mined gold, silver, and copper
Have you ever stopped to look at how these newly-mined metals are used? If you did, then you might think twice before counting on gold being bulletproof for much longer.

First and foremost, the copper-usage breakdown is quite one-dimensional. The bulk of it — 42% to be precise — is used for electrical purposes. The next biggest use is in construction, which consumes 28% of any newly-mined supply. Transportation (autos, mostly) takes up 12% of the supply and the remaining 18% is the miscellaneous portion of any newly-mined copper, including consumer uses (jewelry) but also industrial machinery. 

Compared to copper, how we use gold is almost embarrassing… and possibly hanging by a thread. As of last year, 50% of newly-produced gold is used in jewelry, which is actually down from 70% to 80% just a few years back. About 10% is allocated toward industrial uses, including healthcare. The other 40%? This portion is now driven solely by investor/speculator demand, compared with only 16% of demand from as recently as 2005.

That’s right, the increase in demand for gold because of investor speculation has more than doubled over the past five years, which not surprisingly is right around the time gold’s rally went on steroids.

Coincidence? Doubtful.

How hollow is that demand?
The underlying thesis here can be delivered with a not-so-rhetorical question: If push comes to shove, are you going to skip a jewelry purchase or are you going to yank the copper wires out of your house to raise some funds? Gold may be in demand now, but if the global economy really is as bad as the media makes it out to be, then the half the demand for gold — jewelry purchases — could dry up again like we saw in 2009.

But what about gold as inflation hedge? Consumer prices are 23.8% higher than they were in 2001, while gold is roughly 400% more expensive for the same timeframe. This is more than a dismissible disparity — it’s a bubble. More to the point, when speculators finally start to crunch the numbers, gold could come crashing down in a hurry. All that speculation-driven demand could be cut in half, back to 2005’s levels.

Copper’s not going anywhere
While copper prices are apt to move the same direction as gold, they won’t likely move as much. More important, demand isn’t apt to change dramatically, since we just can’t do without it like we can do without jewelry.

This is great news for Southern Copper (NYSE: SCCO), Freeport McMoRan (NYSE: FCX), Teck Resources (NYSE: TCK), and Ivanhoe Mines (NYSE: IVN). Each of these miners has or will have a very strong and somewhat under-respected copper mining operation.

With the exception of Ivanhoe — which is still developing what will be one of the world’s largest copper and gold mines — all these companies remained profitable through the recession, with minimal hits to their bottom lines. Copper demand only slumped about 30% between 2007 and 2009 (which believe it or not is minor), rebounded 5.6% last year, and is on pace to grow by another 6.2% this year.

To be fair, these miners may have had some extra earnings help at the time thanks to higher gold prices offsetting diminished copper demand. Between gold prices and copper demand though, the latter is the more reliable.

Action to Take –> While there are no “pure” copper mining plays, Southern Copper and Teck Resources are close. I see 40% to 60% upside for each through 2013 based on the forecasted 14.5% increase in copper consumption between now and then. After that, the expected demand growth starts to taper off, but by then, you can move on to better things.

I don’t know that I would want to take on the iPath Copper ETN (NYSE: JJC) though. It’s simply a copper-price trade, whereas the two companies above are actually ways to participate in the industry’s looming earnings growth.

P.S. — We found an obscure mining company that tossed back 19% in dividends last year (plus another 34% in capital gains). If you think that’s impressive, wait until you see this video…