Metals and Mining Stocks in the News

FXSTREET.COM reports that metals futures closed sharply lower in volatile trading Thursday, amid growing signs that the market lacks conviction about the sustainability of prices for precious and industrial metals.

Hmmm. Sounds ominous. So what does that actually mean?

Time of Uncertainty. Basically, the prices for metals like gold, copper, zinc, lead, tin, aluminum fell this week, as did the associated mining stocks, on fears of a global economic slowdown. This week ushered in a period of short-term uncertainty.

According to Robb M. Stewart, the gold price has been up recently [chart] in large part due to weakness in the U.S. dollar and gold’s perceived ability to act as a hedge against inflation [see a photo of a natural crystal of gold in quartz]. The dollar, though, has not been doing so badly as of late. Carolyn Cohn pointed out that, according to some analysts, there has been a broad rally in commodities, in part, because they are priced in U.S. dollars, so as the dollar weakened over the past three-years, until the end of last year, commodities rose, in part, because the value of the currency went down (in part - however, most of the "rally" in commodities is due to increased demand).

Some see the Chinese economic engine slowing, and they warn commodities investors about it. Yet, China still has a power grid that needs to be significantly beefed up, and about half of China’s imported copper currently goes into its electrical power infrastructure.

So Copper will continue to be in short supply through the end of 2005, and most analysts concede that copper prices [chart] should remain well-supported in at least the first half of 2005. As I have said before, China accounts for about 1/5 of world-wide copper consumption, and the rate is still rising. Still, it is worth pointing out that whereas global copper inventory levels are still at record lows, Bloomberg reports that Standard Bank London analysts have forecast that copper production would exceed demand in 2006, following three years of deficits. Morgan Stanley also estimates that output will outpace demand in 2006. So the gains to be made in metals may be made on multi-month time scale: as far as the present and near future are concerned, global copper stockpiles have declined 79 percent this year, according to Bloomberg’s calculations. There are a number of wild cards in the deck, however. One involves the current worrying trend in the economy, and the other is the fact that the largest supplier of copper in the world, the Chilean national mining company, Codelco, supplies about 1/3 of the planet’s production of the reddish brown metal [see a photo of copper in its natural state], and can easily affect market prices by adjusting its ouput.

Psyched Out. On the down side, commodity stocks, as well as energy stocks can continue to slide due purely to psychological factors: people are getting jittery for a variety of reasons, rational or irrational (e.g., the growing trade deficit, the effect of high oil prices on consumer spending), and they may dump certain stocks as a consequence. This increases the supply of the stock, resulting in a drop in the stock price, even if the company is otherwise doing well. That is, the company’s stock price may drop, even though earnings are strong (and consequently, the Price to Earnings ratio, P/E, will drop).

So, one can say that metals took a double wammy hit, with fear of a slowing economy, together with a dollar that just won’t fall as much as the naysayers think, or want it to. I think we are seeing here a minor price correction in a year that will still see growth in metals prices.


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