Why the Metals Rally Is Nearly Over

06/17/2011 7:00 am EST

Focus: COMMODITIES

Andy Waldock

Founder, Commodity & Derivative Advisors

A commodities expert boldly predicts that a host of global factors, including politics, monetary policy, and debt problems, will bring an end to the epic bull market in metals like copper and platinum.

The mineral and industrial metal commodities may be nearing the end of their decade-long rally. I think a very good case can be made for the highs to be put in at some point within the next 12 months.

Political agendas and inaction should support the metal and mineral markets heading into 2012, however, declines in global demand, a slowdown in infrastructure creation, higher production taxes, and the eventual global debt crisis will bring these trends to an end.

First of all, the supporting case comes from a global political cycle that is determined to maintain the status quo. In the US, QE2 is set to end in June. Most of the money that went into this program and was intended to stimulate the economy never made it out the front door of the lending institutions that received it.

The money was instead used to strengthen the banks’ internal lending reserves, rather than passing it on to the public at the low rates at which they received it. Therefore, the individuals and small businesses never received the assistance and won’t miss it when it ends.

Furthermore, the debt ceiling, which has been kicked down the line until August, will find a way of being raised, extended, supplemented, etc. Neither US political party wants to be responsible for causing a government work stoppage or promoting an unpalatable solution in an election year.

Globally, support comes from both the European Union, determined to postpone the situation in Greece as long as possible, as well as the upcoming Chinese elections. This most certainly means bigger problems down the road.

Until then, the EU and China will both keep throwing good money after bad in two of the largest economies in the world. Europe has no solution to the Greek debt problems, and the Chinese leaders vying for President will keep their individually governed areas rolling in the fiscal stimulus and distorted GDP figures until after their elections in January 2012.

Unfortunately, the headwinds facing the industrial metals and minerals markets have been gaining traction for quite some time and are far more widespread.

The obvious follow-up is the pending global slowdown.

The debt issues in Europe and the US must be reckoned with. When this is combined with cutting Chinese building subsidies and severely raising the mining taxes in Africa and South America, the markets will be forced to absorb the excess capacity of the Chinese buildup in the face of declining profit margins at the mines.

Platinum, copper, and mineral mining have increasingly shifted to African countries. Many of these countries have not received the compensation from the development of these industries they had expected.

Some of this is due to corporate accounting that kept revenues off the books. Let’s face it, if General Electric (GE) can avoid paying US income tax—like it did in 2010—it shouldn’t be too hard to assume that corporate accountants for multinational mining companies can evade the tax collectors in third-world economies like Tanzania, Zambia, and Ghana.

Those local governments, feeling slighted after the metal and mineral price run-up in 2008, are enacting much tougher tax laws and strengthening their central governments in order to nationalize (seize) assets that have underpaid. These actions are similar to state-run South American enterprises and will make ownership of publicly traded companies less attractive.

Finally, there is no question that global liquidity is at an all-time high. Currency depreciation will continue to influence the metal markets as investors look for a safe-haven store of value. However, if government-stimulated demand dries up, or if the sources are overtaxed, we will be left with empty buildings and unemployed workers.

This decline in demand will outpace the draw on warehouse stores and lead to a decline in metals prices as the global economy finally comes to terms with itself in 2012.

By Andy Waldock of Commodity & Derivative Advisors

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