Sep 24 2009 4:10PM

The Big Picture in Metals

Investors in the Western world remained focused on the US economy and on day to day headlines. That narrow and near-term focus misses the big picture in the metals markets.

The copper price chart for the past year is the best indicator of what is happening in the metals markets in the real world.

Before the financial crisis, analysts projected a long term average copper price of $1.25 to $1.50. Yet, copper only dipped to that level briefly at the bottom of the worst recession in seven decades.

With the Western world is still mired in recession, the copper price has already doubled from its low. In spite of that enormous gain, a headline today from a major news service announced “Copper dips on recovery doubts”. The recovery in question, of course, is the U. S. economy.

The people in the popular media try to explain the day-to-day variations in the markets by looking at the news in that moment. That approach may be important to day-traders in commodities. The big picture tells an entirely different story than the message that comes across from the short term and narrow focus of the popular media. There are important investment implications in the big picture.

The United States remains the largest economy and is an important factor in the economic outlook. Just remember, even though the country is in recession, consumers have not stopped spending, but merely stopped growing their spending habits. The pace of economic activity in the US has slowed only modestly from the level of the past couple of years. Every day we hear newscasters, even on business programs, making comments or asking questions that imply there is no demand for commodities.

Copper has more than doubled this year. It has outperformed most of the other base metals, but they have all enjoyed a big recovery from the lows earlier this year. Those moves are not driven by speculative buying nor stockpiling by the Chinese government, as the media would have you believe.

In regard to the metals markets, China is the most important determinant. The world's most populous nation is by far the largest consumer of metals. Imports of metals by China have been an important factor in the rebound in the metal prices.

Some commentators attribute imports of metals into China to building of stockpiles. Some even suggest the imports are the result of the government buying metals as a way to unload dollars. The reality is that thousands of metal processors across the country have taken advantage of low metal prices. They stocked up while prices were down in anticipation of further gains. That is simply a smart business move.

Some people still see the Chinese economy as totally export driven. Yet, with the Western economies still in recession, growth continues at 8%. The massive infrastructure development program in China is playing a role in that continuing growth.

Another important factor in Chinese growth is the emergence of the domestic consumers. In the latest period, China stepped into top position in the auto industry, selling more cars than the US, even with US car sales buoyed by the “cash for clunkers” program. China has also implemented a temporary measure to boost car sales. Nevertheless, the level of car sales in China certainly attests to the buying power of a consumer class that many people still refuse to acknowledge.

As the debates continue over the status of economic recovery and the various other factors impacting metals, the metal prices keep trending higher, driven by real demand. There will undoubtedly be further downs as well as ups. The trend attests to strong demand and underlines the importance of looking at the longer term picture. The big picture tells us that undeveloped metal deposits are a valuable asset, even though they get little respect from investors at the moment.

While metal prices have soared, prices of the junior companies in the base metals sector have barely budged. It is only a matter of time until there is more action in that space. This quiet period is the time to build positions.

Lawrence Roulston


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Kitco Contributed Commentaries 2006
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