long ago base metals were the hottest of commodities. In their bull markets the prices of
these industrial-use metals had soared to lofty heights to reflect the
speculative risk premiums brought on by greatly imbalanced markets. Copper, zinc, nickel, lead, and aluminum achieved staggering trough-to-peak gains of 574%, 523%, 1124%, 829%, and 151%!
mixture of robust infrastructure growth and hoarding led to demand far
outpacing supply. Global
stockpiles were being drained to alarmingly-low levels, the world’s
smelters and refineries were operating at full capacity, and the mining
companies couldn’t bring their metals to market fast enough.
fundamentals and exuberant speculators lifted base metals prices to all-time
highs. And investors
couldn’t go wrong buying the stocks of the base metals explorers and
producers. In this world of base
metals bliss the sky was the limit on how rich these non-ferrous beauties
could make you.
how things can change in such short order. The stock panic of 2008 wreaked havoc on virtually every asset class, and the base metals
were not immune to the carnage. Already
within corrective environments, the stock panic has bled the base metals to
dangerously unhealthy levels. Copper,
zinc, nickel, lead, and aluminum have seen
respective declines of 69%, 77%, 84%, 78%, and 61% from their recent highs.
losses have been devastating for investors and speculators who had positions
in anything base metals related. For
each of the big-five metals these sharp declines have lopped off not only the
speculative premiums but several years worth of
gains. And as I’m sure
you’ve heard by now, the price action of these metals is drawing Great
before I expound on this parallel and discuss what the future might hold for
these metals, it is prudent to assess their technicals. Anyone with any interest in base
metals ought to gain a foothold on the evolution of their bull markets. And there is no better way to capture
the essence of these bulls than to view them in visual chart format.
the massive gains the base metals have had in such a short period of time
there is no doubt they’ve experienced extreme volatility. And this volatility has occurred both
on the upside and the downside. The
last time I looked at their technicals, near the end of 2007, most of this volatility had an upside
bias. But the violent downside
action of recent has been something to behold.
chart of copper, the base metals bellwether, encapsulates the volatility seen
in the base metals bull markets in recent years. But extreme volatility hasn’t
always been prevalent. In fact,
for the most part the beginning of these bulls played out in orderly fashion.
low point of $0.60 occurred in late 2001, but its bull didn’t pick up
steam until 2003. And an
impressive upleg saw copper more than double to its
high in Q1 2004. After it
achieved this interim high copper’s price action acted out prototypical
bull-market behavior. A multi-quarter sideways consolidation
served to shed excessive greed, followed by copper easing right back into its
can see copper carved out a beautiful uptrend with multi-year support in the
first half of its bull market. But
coming into 2006, all sense of order would vanish. When it became apparent that China
was systematically ravaging the copper supply, fears of actually running out
would emerge. And this opened the
doors for a long season of extreme volatility.
wild early-2006 parabola put it on the map for mainstream investors. Any time an asset launches 91% in only
60 trading days it is sure to capture folks’ attention. And from this 2006 high over $4.00,
copper would spend the next two years volleying around with whipsaw-like
it was during this period of time that copper’s price would exhibit an
incredibly tight inverse correlation with LME stockpile levels. LME stockpiles are the
foremost measures of aboveground inventory for the base metals. So when they fell to levels that were
the equivalent of mere days of global daily consumption, huge risk premiums
would be placed on the metal’s price to reflect what was
a widening economic imbalance.
series of past essays and in the subscriber charts section of our website we update LME
stockpile and price charts for the base metals. And the visual depiction of this
relationship is quite compelling.
copper it was movements down to the 100k metric-ton range that cast fear into
the minds of traders. Every time
copper stockpile levels approached 100k metric tons over the last several
years its price would rocket higher.
The inverse applies as well.
In fact, it was a build that more than doubled LME stockpiles entering
into 2007 that was the impetus for copper to fall 41% over that same span of
with 2008’s stock panic infecting the entire global economy, a radical
shift in base metals fundamentals has been quick to decimate copper. With demand growth quickly slowing and
then shifting to declining, supply quickly caught up and the supply-deficient
imbalance all but disappeared.
September LME copper stockpiles have more than doubled and a sky-is-falling
type scenario has played out in copper’s price. It has plummeted 69% since its July high to levels not seen since
2004. In a massive breakdown that
was accelerated by the stock panic, copper has experienced a technical
though copper is still up 144% since the beginning of its bull, its relative
performance has been abysmal. The
red shaded areas in these charts represent the relative trading zones that
are currently under par. At Zeal
we use relativity to
measure where the price of an asset is relative to its 200-day moving
average, calculated by dividing the current price by its 200dma.
markets prices tend to outpace their 200dmas on balance, quite logical with
upward-moving prices. And in
copper’s case you can see that it has spent most of its time above its
200dma, or 1.0 on the red line. But
in this panic we are seeing relativity levels at extreme lows. The price of copper has fallen so hard
and so fast that it is way below
at the rest of the base metals you will see a similar picture. Zinc’s bull also started out in
orderly fashion. From its 2003
low zinc gradually rose higher, bolstered by multi-year support, gaining an
impressive 93% to its high in the first half of 2005. But like copper, order left the
building when a subsequent series of parabolic ascents launched zinc
most of the base metals, rapidly growing zinc demand would pilfer global
stockpiles down to dangerously-low levels. Zinc’s aboveground inventory was
ravenously devoured by hungry consumers that couldn’t get enough of
it. And this growing
supply/demand imbalance placed huge speculative risk premiums on zinc’s
zinc stockpiles rapidly falling, a mid-2005 to early 2006 parabolic surge saw
the price of zinc double in just 140 trading days. Then after a quick respite zinc
doubled again by May, this happening over only 58 trading days.
2007 LME zinc stockpiles had fallen by over 90% to less than 100k metric
tons, leaving the equivalent of only two days of daily global consumption
available to consumers. And after
another quick surge of 44% in only 48 trading days zinc had achieved all-time
highs, briefly trading at a once-inconceivable $2.00+.
can see, zinc’s late 2006 apex is flanked on both sides by lesser but
also sharp pops that formed a classic head-and-shoulders pattern. The right shoulder reflects a brief
rally off the sharp correction from the high, but it quickly faded and fell
down to form the infamous neckline that would prove to be zinc’s doom.
this type of pattern is common in the chart-technician world as a
trend-reversal pattern, very bearish.
At the time I was hopeful that zinc would beat the odds since its LME
stockpile levels were at record low levels, but it decisively broke through
the neckline to the downside and proceeded to plunge to the levels we see
decline accelerated into 2008 as suppliers were finally able to meet
demand. And LME stockpile levels
have continually risen since the beginning of 2008, more than
quadrupling. With the imbalance
swinging to a supply surplus zinc was already in the
midst of a healthy correction by the time the stock panic hit. But the stock panic was quick to add
to the pain, driving zinc to levels not seen since 2004.
though zinc is still up 48% since the beginning of its bull market, a 77%
decline from its high has placed suppliers and investors in a state of
wailing and gnashing of teeth. And
the current state of nickel isn’t any better. Looking at its chart, this base metal
simply oozes volatility.
uptrend indeed exhibited multi-year support leading into 2006, but its swings
are much more violent. Since the
market for nickel is on a much smaller scale than the rest of the base
metals, any change in interim fundamentals usually spawns wild volatility.
got out to a much faster start than the other base metals. Its late 2003 parabolic surge gave it
an early bull gain of an impressive 300%. But the fun was only beginning. From its 2005 low nickel took flight
in near-linear ascent, driving it to record highs in excess of $20.
massive upleg was driven by plummeting LME
stockpiles that saw nickel inventory fall below 5k metric tons, only one day
worth of global consumption. Considering
these insanely-low aboveground inventories, speculators attached an enormous
risk premium to nickel in an attempt to balance supply and demand.
2007 high, nickel’s bull-to-date gain ran an astonishing 1124%. And the incredibly high nickel price
eventually served to quell demand and ramp up supply. When nickel stockpiles started to rise in May 2007 the risk premium was quickly lopped
off. And in only 63 trading days
nickel plunged 54%.
the corner into 2008 nickel put up a fight and settled into a sideways
consolidation, but a further rise in stockpile levels eventually caused
nickel to break through support and continue its decline. Already trending down the stock panic
eventually joined the party, cutting the price of nickel in half yet again
before it finally bottomed in October at levels not seen since 2004. While nickel is still up 161% since
its late 2001 low, an 84% decline from the top has really damaged the
fortunes for this base metal.
deviating from the greater base metals theme, lead’s bull market also
started out with an orderly uptrend guided by multi-year support. But like nickel, lead’s
relatively small market is conducive to extreme volatility, both on the
upside and downside.
initial bull run was excellent, gaining 142% in less than two years and
surpassing the previous highs from a decade prior. And after the initial surge to its
early 2004 high, lead then entered into a long, slightly upward-trending
2006 lead fell behind the pack and bucked the base metals trend. While the other base metals were
launching into powerful uplegs, lead fell
hard. Interestingly in the first
half of 2006 lead’s LME stockpiles mounted a huge build, nearly
tripling. And the inverse
correlation between stockpile levels and price played out beautifully here.
these stockpile levels eventually turned the corner in mid-2006 and started to
plunge, lead’s bull stepped into high gear. Its first major run was a quick 93%,
98 trading day, pop from its 2006 low. And then after a short sideways
consolidation off the top, lead again launched northward in parabolic fashion
more than doubling in price in just 129 trading days.
course of this massive upleg LME lead stockpiles
plunged to shockingly-low levels, near 20k metric tons. With only one day of equivalent global
daily consumption lead soared to record-breaking levels over $1.80. But as soon as inventories turned
upward, lead’s premium was quick to fade. And the initial sharp correction of
39% over 44 trading days was the beginning of another massive base metals
recovered a bit after this plunge, forming a Quasimodo-type
head-and-shoulders pattern, but it quickly broke down. With the stock panic assisting in the
latest terminal descent, by the time all was said and done lead had shed 78%
off its 2007 high. Interestingly
lead’s stockpiles are again bucking the base metals trend and have been
falling sharply over the last several months. But prevailing sentiment has thrown up
a wall of fear that is preventing lead’s price from adhering to the
Aluminum is last but certainly not least
of the base metals. Measured by
volume it actually has the largest market of the non-ferrous metals. More aluminum
is mined and consumed each year than the four metals above combined. And it is because of this larger
market that volatility is not as extreme. In fact compared to the others aluminum’s action has been downright boring until
aluminum paints a similar picture to the other base
metals. Its strong initial uplegs and the velocity of its gains appear in line with
the others. But in reality there
is a stark contrast in magnitude.
While impressive looking in this chart, the first upleg
took about 4 years to eke out a gain of only
62%. Though inspiring in the
grand scheme of things, this vastly underperformed the rest of the base
bit of a pullback in mid-2005 aluminum then set
course for its version of a massive upleg. Now 88% is certainly nothing to turn
your head at, but again this vastly underperformed the other base
metals. After aluminum
achieved its 2006 apex, an all-time high, it then spent the next 2 years or
so volleying around in the $1.00 to $1.50 range.
this time LME aluminum stockpiles were hovering at
very low historical levels, reflecting a supply/demand imbalance, but they
got nowhere near the dangerously-low levels that the other base metals were
in the first half of 2008 aluminum was the best-performing
base metal. When the performances
of most of the other metals were actually negative, aluminum
had an impressive run that saw it climb 40% to a new all-time high in
July. And this was happening in
the face of rising stockpiles.
abnormal strength was the result of structural issues at many of the
world’s largest smelters. But
once the ship was righted in the global supply channel, aluminum
was in for a doozy of a breakdown. And as you can see it has been in a
freefall since its July high, plunging to prices that haven’t been seen
in 10 years. In only 7 months, aluminum’s entire bull market gains have
Aluminum’s dismal slide caps off a survey
of base metals technicals that is simply
dreadful. Most of these metals
were already in corrective environments as the gaps of years-long imbalances
were contracting as a result of demand growth easing and the miners steadily
ramping up supply. With these
markets coming to somewhat of a balance the speculative premiums were quick
to fade and prices fell to more realistic bull-market levels.
stock panic has transformed what could have been deemed as healthy corrective
environments into hyper-negative panic-driven downward spirals. And the price actions of the base
metals do indeed warrant depression-era-like comparisons. In the data I could find, during the
Great Depression copper, zinc, and lead saw respective declines of 68%, 62%,
and 65%. This depression carnage
looks awfully familiar doesn’t it?
problem I have with the depression parallel is two-fold. First, the Great Depression was an
economic contraction that in large part was an American phenomenon. America’s travails infected
foreign economies causing the depression to go global. But at that time many of the infected
economies lived by the American sword and died by the American sword.
today’s day and age many countries have stopped being merely the grease
wheels and have developed robust economies of their own. And the base metals trade also
conforms to these changing dynamics.
In the depression era a big chunk of the world’s metals demand
came from America’s
industrial machine. And
consequently the majority of the market makers were American.
the base metals trade in a truly global marketplace. Advancements in technology,
transportation, and commerce have given a great deal of transparency to this
market. And the developing
economies outside of America
have been driving a large portion of the demand growth.
I strongly disagree with the assertion that we are entering into another
Great Depression. In order for
this to happen the economy would have to be cut in half over a period of about 4 years. I hardly think this is possible in America, and
believe it is even less likely in the global economy. At Zeal we’ve done extensive
studies in our newsletters to back this up.
stock panic, caused by a near-collapse of the financial markets, has birthed
what is turning out to be a nasty recession. And a swift contraction of global
economic activity has rapidly altered base metals fundamentals. Demand has fallen off a cliff and all
of a sudden many of the base metals have supply surpluses.
it may take an extended period of time for supply-side imbalances to settle
prices into a logical range. But
ex-depression, I believe these depression-like slides are way overdone and
have created an environment that may breed another bubble-type atmosphere
when the world realizes it still needs base metals.
metals prices have fallen so hard and so fast that the mining industry is now
faced with a huge problem. In
many cases the production costs of these metals are well above where the
market prices are. And with
mining companies now losing money hand over fist, the only thing left to do
is halt the development and production of today’s and tomorrow’s
base metals mines.
have been countless anecdotal examples of this playing out in real-time
fashion. It seems as though it is
a daily occurrence where a mining company either goes out of business, halts
the development of a future mine, or cuts production at existing mines.
this is natural, as producers need to adapt to a new price environment, but
these exceptionally-low prices are causing companies and projects to fall
like dominoes. Too much supply
coming off the market too fast will quickly cause another shortage. And when the global economy pulls out
of this recession and demand begins to pick up, a broken supply channel will
cause a major imbalance in the other direction, thus rocketing prices
parabolic once again.
suspect base metals prices have or will soon find their bottoms. With many producers currently unable
to economically mine these metals, prices should rise again soon. Traders will eventually realize that
we are not going into a depression and that demand has not fallen to zero.
volatility is still likely to be the name of the game for base metals futures
and the stocks of the companies that explore and mine them. In the same fashion in which they were
overbought they have quickly fallen to a level of being oversold. And there are likely to be violent
price swings until this extreme level of fear has subsided.
we hold a contrarian belief that the markets are actually poised for a big up year in 2009. And if this is indeed
the case the elite base metals stocks that had been aggressively sold off
will be among the top-performing stocks in this rebound.
November issue of our monthly newsletter at the panic depths we initiated a long-term investment
recommendation of one of the world’s top base metals stocks. And now is still a good time to deploy
investment capital into this elite company. Subscribe today to see this and other high-potential trade recommendations that are
packaged with cutting-edge market research and analysis.
bottom line is base metals technicals are
ugly. The panic-driven percentage
declines of the world’s industrial metals indeed warrant
depression-like comparisons. But
since we are not in a depression I don’t believe these end-of-the-world
price declines are righteous.
insanely low base metals prices are sustained the supply stream will contract
to dangerously low levels. And
when demand picks back up and the world’s developing economies continue
their growth, there will be a reckoning that will ignite yet another
bubble-type atmosphere as more and more consumers bid for a constrained
supply. We will remain cautious
as this recession runs its course, but prudent investors and speculators can
position themselves for legendary gains when the base metals become bullish
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