Metal as High as an Elephant's Eye

Gold and oil are not the only natural resources in short supply and ready to explode again in price.

Just look at copper!

Even if every single pound of copper ore in the world were mined and refined, it still wouldnt be enough to bring developing nations like India and China up to speed.

These countries still wouldnt come close to matching the infrastructure of North America. They still wouldnt have enough copper for power transmission, construction and other services. Theyd still need a lot more copper.

Ditto for zinc, the primary metal in most of Americas copper pennies.

This vision comes from researchers Robert Gordon and Thomas Graedel, authors of a recent Yale University study, Not Enough Metals In Earth To Meet Global Demand. The study is extremely credible, with no ax to grind; its conclusion, hard to refute.

So, tough luck for China and India, right? Guess again, buckaroo.

Those countries have their sights set on being world-class economic powers. They want it so badly they can taste it. That means they must get all the copper and other metals they need, no matter what it takes.

All this just lays the groundwork for another version of the Great Game I told you about one week ago. (If you missed it, go to this address to read it on our website.)

That report was about the three-way race for energy. But in the Olympian-scale race for natural resources, its not just about oil and gas.

Developing nations are going to compete for all sorts of scarce global resources, and that includes base metals like copper, zinc, lead, iron and many others.

The basic rule: The more they chase these metals, the higher their prices will go … and the more the metals are worth, the bigger the profits will be for the companies that mine them.

What about precious metals such as gold and platinum? There the situation is also getting critical sooner rather than later.

What Does That Mean for Most
Metal Prices This Year? ZOOM!

UBS recently raised its 2006 forecast for zinc by 46%, the second time the investment bank has raised the bar for zinc in just two months. UBS also raised its forecasts for copper by 8% and aluminum by 31%. Bank of Nova Scotia announced similar upward revisions.

Meanwhile, industry experts at Macquarie raised their nickel forecast by 17.8% … copper by 37.5% … zinc by 46.9% … lead by 46.7% … and aluminum by 14.3%.

And mind you, theyre making these forecasts while prices for these metals are near record highs.

Metals prices are not right at their record highs. Theyve pulled back recently. In my view, thats the kind of buying opportunity you dont see every day, but Ill get to that in a moment.

Chinas Demand for Base Metals Is
Rising by More Than 20% per Year!

Whats driving these prices? Simple: Demand! With a huge chunk of it from China.

China currently consumes …

26% of the worlds output of steel
23% of the worlds output of aluminum
22% of the worlds output of copper
16% of the worlds output of nickel

I could go on, but you get the point.

China just surpassed Britain as the worlds fourth largest economy. It should continue to grow at around 9% a year. And those estimates may be on the low side.

All last year, economists (who shall remain nameless) lined up to predict that Chinas economy was about to fall on its face. We can see how well that prediction panned out.

And it didnt take them long to throw in the towel: By the end of the year, the grudging consensus was that China would grow by 9.4% for the year. Then Chinas growth came in higher still 9.8%. Nay-sayers can take that stat and shove it where the yuan dont shine.

Meanwhile, despite the best efforts of mining companies, supplies of most metals are flat, and supplies of copper are actually falling. Thats not likely to change certainly not in the near term.

Why not? In my book, its as simple as 1-2-3:

Reason #1: Were slowly exhausting the metal deposits in Western countries. When you remove a mineral from a mine, it doesnt grow back. And many of the Wests major deposits were discovered 30, 40, even 50 years ago.

Reason #2: In most countries where there are new deposits, the governments or the people dont like mining companies very much. There are exceptions, and there are hopeful signs that attitudes may be changing. But all it takes is one militant organization to disrupt a multi-billion-dollar investment for a long, long time. (Just look at whats happening right now in Nigeria!)

Reason #3: CEOs of large mining companies grew up in a 20-year bear market for base metals. So despite the recent upsurge in prices, most are still very cautious and not rushing to invest in new mines.

Yeah, you and I may be confident were in a commodities supercycle, and prices will go higher, faster and further than at any time in our lifetime. But we dont sit on the board of BHP Billiton. Those are the kind of guys who believe it only when they see it.

Why Iron Is High. And Why It
Can Go a Heck of a Lot Higher

Last year, the price of iron jumped 71.5%. Wall Street lined up to say: Gee, its a one-time event. The price of iron has gotta go down in 2006.

I think not.

Again, demand from China drives the equation: Chinas 2006 iron imports are expected to rise 13.5% to 295 million tons … all despite the fact that China will produce 517 million tons of iron ore.

Hah! It was only a month ago that Chinas ministry of commerce was saying very loudly that iron prices would almost certainly go down this year. But they say that because thats what they want to see, not necessarily what they really expect to see. (The Chinese government frequently tries to manipulate the price of raw materials from oil to iron to nickel. Sometimes it works. Sometimes it blows up in their faces.)

Bottom line: Iron ore prices should go up anywhere from 10% to 25%. And the bull market upshifts again.

Not Everything Looks So Bullish.
Avoid Steel at Least for Now.

Im not blindly bullish on all metals. For example, Id steer clear of steel for the time being. Reason: Chinese steel production is achieving ramming speed. Theyre building their own steel plants like crazy!

Chinas annual steel production increased from 297 million metric tonnes in 2004 to 360 million tonnes in 2005. It will probably hit as much as 500 million tonnes by the end of this year.

By July of this year, Chinas Taiyuan Iron and Steel plans to triple the capacity of its stainless steel plants, to 3 million tonnes a year. That would make it the largest stainless steel manufacturer in the world.

Globally, steel production is expected to rise 4% this year, despite any declines in steelmaking capacity in Europe, the U.S. and Japan.

Meanwhile, the growth in Chinas demand for steel is expected to decline this year to anywhere from 6% (the low estimate) to 10% (the high estimate). Even the high estimate is down sharply from a 20% growth rate last year.

So, despite a merger mania going on in steel right now, Id be a bit skeptical of the industry right now.

But heres a nugget for you: Guess what you need to make stainless steel! Nickel lots of it. Not to mention the iron used to make the steel.

Now you know why Im bullish on nickel and iron. But not on steel.

Outlook for Base Metals:
Get Out Your Bull Horns!

To sum up, heres where we stand on each major base metal:

Copper: Supply will fall short of production by 147,000 tons in 2006, according to Morgan Stanley. And the same kind of supply/demand squeeze sent prices up by about 40% in 2005!

My view: The only thing holding back rampaging global supply is price. If prices go down a bit more, China and India will buy copper with both hands.

Could we see a bigger correction than the one weve seen so far? Perhaps. But Id see it as a major buying opportunity.

Nickel: Nickel had a crummy middle of 2005, only to see demand rebound toward the end of the year. Going forward, the outlook is bright indeed. All those new stainless steel plants in China are going to need nickel.

And you know those hybrid cars that are all the rage? They use an awful lot of nickel in their batteries.

Meanwhile, production is dropping at some big mines. So nickel supplies probably wont be able to keep up with demand in 2006. Thats a recipe for higher prices.

Aluminum: Global consumption should increase about 4.9% in 2006, up from 4.5% in 2005, according to Alcan. Meanwhile, the company expects global production to fall short, increasing by only 4%, compared to 6% in 2005.

What does that mean? Another global supply/demand squeeze probably about 300,000 metric tonnes, according to both Alcan and Deutsche Bank.

Zinc: We should see a global supply deficit of 180,000 metric tonnes in 2006, according to Deutsche Bank. That may be down from the 300,000 metric shortfall in 2005. But it makes the third year in a row of supply failing to meet demand. That means stockpiles are being depleted, and the implication for prices is huge.

Plus, it could be even more explosive than currently expected: Other industry analysts put the shortfall at 310,000 metric tonnes bigger than last year.

Chinas net imports of zinc doubled toward the end of last year. Heck, it wasnt that long ago that China was the worlds biggest exporter of zinc.

Tungsten: Its still considered a base metal, but its getting more scarce all the time. China produces 80% of the world’s tungsten, but Chinas domestic demand is overtaking supply. Theyve eliminated export subsidies for their tungsten producers, and about half their mines have closed.

The U.S. used to produce tungsten, but those mines are also closed, and most are unable to reopen due to environmental concerns.

Right now, the U.S. imports 75% of the tungsten it uses; the remaining 25% comes from recycled scrap, down from 46% just five years ago. This means we have to import more and more tungsten all the time.

Canada has tungsten mines two of em in fact. Theyre both owned by one company, and my Red-Hot Canadian Small-Cap subscribers know it well. Its in their portfolio and showing double-digit open gains … with a lot more to come, Id wager.

Dead Ahead: Full Metal Profits

As you can see, this should be a very exciting year for metals.

We did see prices pull back recently, and as I said, I think thats a buying opportunity.

How to play it? Well, you could try a mutual fund.

However, most of the best natural resources mutual funds like US Global Investors Global Resource Fund (PSPFX) or Van Eck Global Hard Assets (GHAAX) are more heavily weighted toward energy than base metals. Nothing wrong with that. Theyre still good funds.

Two solutions:

Solution #1. You can get into one of the base metals funds my friend Steve Chapman told you about on Friday. (Just click here to read it on our website.)

Solution #2. Go for one of the big base metal miners like BHP Billiton (BHP), for example.

BHP is one of the worlds largest suppliers of iron ore and also produces copper, nickel, manganese, titanium, aluminum, and uranium as well as diamonds, gold and silver.

Many people value a company based exclusively on earnings. In a situation like this, though, I think you need to also look at earnings growth. And BHP trades at just 0.65 times earnings growth. (Any time that ratio gets under 1, the stock is probably cheap.)

And looking at its chart, you can see that its come down to its long-term uptrend. To me, it could be a good time to get in.

Outlook for Precious
Metals is Equally Bright

We just saw precious metals go through a sharp-but-short correction, exactly what youd expect in a bull market. We could see further corrections, but I think this is a great time to get in. UBS expects silver to rise 35% this year, and the outlook for gold is just as bright. If you arent in precious metals yet, consider buying now.

What to buy? All the answers are in my special report, The Great Gold Rush of 2006.

The stocks I recommended in that report got knocked down a bit, along with the rest of the gold sector. But despite the correction, only one of the stocks is under water, and only by a slight amount. One is still showing a gain of over 20%, and all the rest have single-digit gains from the initial recommendation on January 18.

And looking ahead, I dont think theyre going to stay in neutral for long.

So if you missed the earlier round, this gives you a second chance. Look at some of the news:

One of my recommended companies just reported that its gold sales tripled in 2005. Its cash cost of mining gold is rock-bottom. And despite record production, it was able to replace proven and probable reserves. This stock is on the launch pad!
Another reported near-record gold production plus record copper production. Its cash costs are plummeting. And the company expects to be debt-free by the middle of the year. I think its in a great position to expand its own operations or buy up competitors. Another stock poised to go through the roof.
Ive saved the best news for last: With just one acquisition, one of the companies I recommended has already increased its gold production by more than 32% this year. It should increase production by 100% next year and 140% in 2008. This stock is already moving, but I think its got a long, long way to go.

My outlook: What weve just seen is the last correction youll get for a long, long while. And by the time the next correction comes around, Ill be moving on to a whole new set of fresh recommendations, with a new special report, possibly in a different sector.

So at the end of this week, Im removing my Gold Rush of 2006 report from circulation. If youre interested, I suggest you purchase it for immediate download right now.

Just since the lows of a few days ago, weve already seen a nice bounce. And the long-term trend is certainly up.

Yours for trading profits,

Sean Brodrick

About MONEY AND MARKETS

MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Beth Cain, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.

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