Seven Metals: A Look Ahead

06/23/2006 12:00 am EST


Sean Brodrick

Editor, Supercycle Investor and Wealth Supercycle

“Metals prices have fallen to the canvas over the last month, but they aren’t down for the count,” says Sean Brodrick from the Weiss Research team. Here, he provides investors with an overview of the outlook for each of the major metals.


“Metals have 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. 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, demand is strong. Two months ago, Swiss bank UBS predicted a global copper shortfall of 200,000 tons. Then, last month, analysts at HSBC, said that copper demand will rise 5.2%. This year, China’s copper demand alone is expected to rise 6.8% to nearly four million tons. The 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 US, are all in need of uranium. And I expect demand to only increase as more countries embrace the idea of nuclear power.


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. The 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! 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. Bottom line: We’ve barely tapped the surface of demand for silver.


Metal #7: Gold. Prices have come down as the US dollar has had a short-term bounce. But make no mistake, the dollar is still in a long-term downtrendburdened 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.


“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 US Treasuries and US dollars, with only 1.4% in gold. As a comparison, the US keeps 70% of its reserves in gold. China is expected 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!


“Among the ways to play the trend in metals is through the US 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 their 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).”

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