Metals prices have fallen to the canvas in the last month, but they aren’t down for the count.
They’ve got the one-two punch of the two most powerful forces in financial markets: Sinking supply and rising demand.
To me, this virtually guarantees that what we’re seeing is just a correction within a larger bull market.
Smart investors think ahead. So, today, I’d like to give you a quick review of seven metals that I follow. My goal is to give you the information you need to get your portfolio positioned before the natural resource markets take off again.
Metal #1: Copper. Supplies are still being hurt by labor strikes. Meanwhile, look at what’s happening with demand:
- Two months ago, Swiss bank UBS predicted a global copper shortfall of 200,000 tons.
- Then, last month, analysts at HSBC, one of the largest banking and financial institutions in the world, said that copper demand will rise 5.2% this year to 17.9 million tons. That represents a shortfall of 293,000 tons.
- This year, China’s copper demand alone is expected to rise 6.8% to nearly four million tons, according to the Beijing-based Nonferrous Metals Department Information Center. This is a lot higher than last year. It’s even higher than the 5.7% gain in demand last year!
Likely outcome: Higher prices.
Metal #2. Nickel. A lot of nickel is used in the production of stainless steel.
Why is that important to know? Because according to Goldman Sachs, China’s stainless steel production will climb 32% to 4.4 million tons this year. A similar increase is expected in 2007. And this alone should be enough to drive prices higher.
Add in the demand from other economies, and I don’t see how we could possibly avoid higher prices.
Metal #3: Uranium. While the prices of most metals have pulled back over the last month, uranium prices have just kept climbing. China, India, Russia, and even the U.S., are all in need of uranium.
And I expect demand to only increase as more countries embrace the idea of nuclear power.
For example, Australia officially has a “no-nukes†policy. But that might change. Ian Smith, head of the Australian Nuclear Science and Technology Organization, says Australia may need to build at least three nuclear power plants to meet greenhouse gas emissions targets under the Kyoto Treaty, which Australia has ratified.
Plus, Canada, which has long stalled on reviving its nuclear program, is now pressing ahead with a new $18 billion plan to refurbish existing plants and build new ones.
Metal #4: Aluminum. Smelting was supposedly going to increase in China, adding supply to the market and depressing prices. However, that doesn’t seem to be happening.
Reason: China still suffers rolling brownouts from a lack of electricity. And because aluminum smelting requires a lot of energy, the Chinese government is clamping down on supplies to smelters to help ease the country’s power crunch. Less smelting means less aluminum. And that means higher prices.
Metal #5: Zinc. If you think you’re still carrying around copper pennies, you’re almost a quarter-century behind the times. Zinc replaced copper in pennies back in 1982!
Why? Because the cost of copper had gone so high that a penny was actually worth more than a cent! Well, as Yogi Berra would say, “It’s déjà vu all over again.†Now, the price of zinc is soaring so much that the metal in a penny could soon be worth more than face value, again!
See for yourself. A website dedicated to coin inflation tells you exactly what all the metals in your piggybank are worth.
Right now, zinc prices have pulled back temporarily. But the industrial demand for zinc is tremendous. So don’t expect prices to stay contained for long.
Metal #6: Silver. Silver prices have taken a big hit, but it was all about speculative money temporarily exiting. The fundamentals driving silver have not changed one iota.
According to CIBC World Markets, there will be a deficit of 77 million ounces of silver this year alone. That’s a powerful force that cannot be ignored.
Meanwhile, the growth in industrial demand is showing no sign of abating. Now, add to that the fact that investment demand is also heating up. The amount of silver held by the new iShares Silver Trust (SLV) increased by more than 93 metric tonnes just over the past week. And that’s just one silver fund. Soon, there will be others.
Bottom line: We’ve barely tapped the surface of demand for silver.
Metal #7: Gold. Prices have come down as the U.S. dollar has had a short-term bounce.
But make no mistake: The dollar is still in a long-term downtrend – burdened by our country’s staggering federal and current account deficits.
On the charts, gold’s long-term rising trend isn’t even close to being broken. Yeah, the metal has fallen about 21% from the 26-year high it set last month. But remember: That was after more than tripling in the previous few years.
And even after the correction, year-to-date, it’s also still up 11%.
One important force behind gold will be China. The country has about $875 billion in foreign currency reserves, double what they had just two years ago.
Right now, China is still holding more than three-quarters of those reserves in U.S. Treasuries and U.S. dollars, with only 1.4% in gold. As a comparison, the U.S. keeps 70% of its reserves in gold. That’s why some prominent members of China’s government are becoming more and more vocal about getting the heck out of the dollar and shifting more to gold.
But even if China doesn’t touch their existing reserves, they still expect to add $100 billion in new reserves this year alone. If they put just 5% of that new money into gold, that alone would suck up close to 20% of the world’s production of the metal. Wow!
Global Growth Keeps on Trucking.
Make Sure You’re Ready
One thing that will keep pressure on all natural resources prices is a red-hot global economy. And global growth estimates keep climbing.
For example, in the latest edition of its World Economic Outlook, the International Monetary Fund cranked up its 2006 growth estimate from 4.3% to 4.9%. It also raised its 2007 forecast from 4.4% from 4.7%.
If the IMF’s expectations for 2006 turn out to be even half way right, this will be the fourth year in a row that the global economy has expanded faster than 4%. The last time we had a string of growth like that was in the 1970s. And I don’t have to remind you what metals prices did then!
And what about a potential slowdown in the U.S.? According to economist Paul Samuelson, a Nobel laureate, the global economy is better placed than at any time in the last decade to weather a slowdown in the U.S.
As for the rest of the world, Samuelson says that while the U.S. may be slowing, Japan and Europe are enjoying their first home-grown, sustainable expansions in a decade.
All this is very bullish for metals.
I’ve told you to look seriously at funds that can capitalize on this. If you missed my earlier issues, that’s fine. Thanks to the corrections, this could be an even better time to buy.
Among several I like right now is U.S. Global Investors’ World Precious Minerals Fund (UNWPX). The fund managers saw the gold correction coming back in April and lightened up, moving nearly two-fifths of their portfolio to cash. That’s a lot of cash for a fund that’s specialized in metals.
Now they think the correction is largely over, and they’re moving back into the market, aiming to slash their cash position back to 20%. I think they’re timing could be very good, and so could yours.
Don’t go overboard. But buying on weakness (like now) is a lot better than buying into a frenzy (like the one I see coming).
Yours for trading profits,
Sean Brodrick
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About MONEY AND MARKETS
MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. 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. Regular contributors and staff include John Burke, Colleen Collins, Amber Dakar, Ekaterina Evseeva, Monica Lewman-Garcia, Wendy Montes de Oca, Jennifer Moran, Red Morgan, and Julie Trudeau.
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