The Coming Boom in Metals

02/02/2009 10:58 am EST

Focus: GLOBAL

Lawrence Roulston

Editor and Publisher, Resource Opportunities

Lawrence Roulston, editor of Resource Opportunities, says metal prices won’t stay at their current depressed level, and he sees a major rebound ahead.

After the worst year on record for the resource industry, there are some bright spots in 2009 and beyond.

Gold is beginning to recover. The flight to safety over the past few months saw enormous amounts of wealth from around the world going into US Treasury bills. So popular are T- bills that the interest rate has now fallen to near zero. Factor in inflation and investors are effectively paying the US government to hold onto their wealth.

That situation is not sustainable. The dollar will inevitably soften. The gold price already reflects that reality, having gained substantially from the low point it reached as the financial crisis unfolded. Demand for physical gold has been very strong.

The pain of the recent financial turmoil will see more investors purchase gold to protect their wealth. That increase in real demand comes as mine production of the metal is in decline.

A declining US dollar will have a double impact on gold. It will automatically show up as gains in the nominal gold price, and the knowledge that the dollar will soften is increasing real demand for gold, thereby pushing up its value in real terms.

The silver price was also pounded down. Some silver holders, such as exchange traded funds (ETFs), were forced to sell as a result of redemptions. The large industrial component in the silver market was a further impetus to sell, as investors fear the impacts of recession. There will be a rebound from the current oversold position. Investor demand will begin the upward move, but the big gains will come with economic recovery.

Platinum reached $2,300 an ounce, propelled by speculative demand. With the biggest component of the platinum market in industrial applications, primarily in catalytic converters for automobiles, and with platinum ETFs forced into liquidation, the price has fallen to an unrealistically low level. Production is being cut back and expansion plans are being put on hold, setting up a tight supply situation once the liquidation dries up.

Base metal producers have reacted swiftly to the collapse in prices, shutting down production and deferring expansion and development of plans. In the last downturn, base metals kept flowing at high levels well after demand dropped off, resulting in inventory build ups and extremely low prices. That is clearly not the case now. Prices are set to rebound, once the economic outlook picks up.

Uranium has already bounced off the bottom. The energy metal soared from $10 a pound at the start of the decade to $140 in 2008. The spot market price has now rebounded to around $50. There is a looming shortage of uranium over the next few years: Mines produce only about 60% of the amount consumed by power companies.

The recent takeover offer for uranium company Forsys (TSE: FSY.TO) values the company’s low-grade Namibian deposit at $6.00 per pound. The mining industry will recognize the values in the current situation more quickly than will most investors. Fresnillo (Mexico: FRES.MX), operator of the world's largest silver mine, recently bid to take over its Canadian junior company joint venture partner MAG Silver (TS: MAG.TO).

The majors are watching carefully for opportunities, but it is highly unlikely that the majority of shareholders in the good companies with sell at anything like the current prices.

The majors are aware of that, and are sitting by waiting for the appropriate time to make offers. The offers will come, but at prices above the current over-sold levels. Investors, especially those closest to the resource industry, are beginning to recognize that share prices have swung too far to the downside.

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