Dugald Malcolm, Montreal, Canada.

While US markets continue their climb higher this December, they still have a significant ways to go for re-establishing previous 2007 highs. This may be the case for the DOW and S&P 500, but other leading indicators have already recovered the lost ground of 2007 to 2009.

One such leading indicator is copper. The metal has long been referred to as Dr. Copper: the metal with the Ph. D. in economics. This is due to its reputation in correctly predicting the direction of economy through the direction of its price movement. Because of its malleability and ability to conduct electricity, copper is the popular choice for wiring. It’s use in construction is not only limited to your phone and electricity wires, however, as it is also present in piping, roofing and cladding. It is also present in the various motors in household appliances as well in the wiring of other household electronics, including computers.

It is easy to see why this metal is so closely linked to economic vitality: when housing and consumer demand increases, so does demand for copper. Judging by the following chart, one could surmise that despite all the fears and worries floating around that economically, we are doing alright.

Since putting in its low in December of 2009, 3 months before the major indexes reached theirs, copper has managed to regain its shine. Moreover, where indices like the S&P 500 are still 26% away, copper has managed to exceed previous highs made back in July of 2008. These new highs are definitely bullish for the broader economy. But you don’t only have to take Dr. Coppers word for it.

If copper has a Ph. D., then lumber definitely has a Masters degree. It too is a leading indicator, playing a crucial role in the construction industry as well as, of course, in pulp and paper.

While housing starts in the U.S. might be slightly feeble, the effects on the lumber industry are offset by increasing global demand. This is fueled in good part by the Chinese, who are increasingly embracing wood construction. This demand coupled with supply constraints such as the British Columbia pine beetle problem and the forest fires in Russia, have pushed the price of lumber ever higher.

Like copper, lumber has managed to claw its way up from its lows and exceed 2008 highs. While prices stumbled earlier this year, like global markets did everywhere, lumber prices have managed to recover. The recent golden cross of the moving average is certainly bullish, but to truly confirm what Dr. Copper is telling us about the economy, lumber needs to take out the highs it made back in April. If that happens, these two “academic commodities” could point to good economic health ahead in 2011.

Have a good weekend!