Oftentimes I talk to
investors, even sophisticated ones, and I realize that they treat metals as a
group. Particularly in the subset of base metals, most point out the price
action of copper and conclude that all base metals are in a raging bull with
no signs of slowing down.
Close examination of
correlation between various metal prices reveals a very different story, as
we shall illustrate. (most charts here are from my friends at Kitco.com)
Phases of a market
"There is nothing
new in Wall Street. There can't be because speculation is as old as the
hills. Whatever happens in the stock market today has happened before and
will happen again." Jesse Livermore, Reminiscences of a stock operator
Each market invariably goes
through different phases of a bull. Starting with bottom, accumulation,
rise, mania, rolling over, crash, sucker' rallies, and then it
starts all over again. People can attribute various reasons along the way for
the rise and crash. The fact is price patterns are repetitive and can be
observed time and again. Let' start with oil:
Mania
Does oil seem stretched and
entering a short term mania phase? Yes. I wouldn't go short, but I would
certainly put a tight stop if I were long.
Rolling over
Copper seems to be rolling
over and unable to convincingly overcome the $4 level. $200 oil (possible,
but not too probable in my opinion) could propel copper past the $4 level.
Conversely, a correction in oil could break copper back to $3 in a hurry.
Crash
Lead staged a spectacular
crash in early 08 as prices went from $1.80 to now 80 cents in under 6
months.
Sucker' Rally
Nickel resembled Lead, except
the peak was established in mid-'07 instead of early '08. Since the $23 peak,
Nickel has staged several sucker' rallies and seemed to be settling down at
the $10 level.
Bottom-Accumulate
Zinc peaked ahead of Nickel at
over $2 in late 2006. Since then many have lost their shirts calling for
Zinc' bottom. Given Zinc peaked ahead of lead and nickel, it will likely be
on recovery mode faster with less risk of downside from here.
Accumulate - Rise
Gold has been on a steady rise
since the bull began in 2001. Throughout the bull it has stayed above 200 day
moving averages and yet it exhibits parabolic action, as oil did;
consequently, the chart suggests the blow-off phase for gold is yet to come.
Fundamentally, while gold is
not as cheap as zinc when measured in oil, nonetheless, based on historic
relationship, a $130 oil calls for a gold price that is substantially higher
than today' $900/oz.
The ratio of Gold to Oil
from 2006 to present (sitting at 6 currently). The chart is showing an
extreme bargain of gold relative to oil. If the ratio were to restore to the
peak in 1999 of 26, today' $130 oil price will equate to a gold price of
$3380/oz
Here is a chart of where I see
various metals markets are
Correlations between Price
and Inventory Unclear
Some accuse me of being overly
technically oriented and ignorant of fundamentals. Fine, there are some that
attribute base metal price action to inventory levels. If such a relationship
is held true, zinc should not be trading at roughly 1/3 of its 2007 high of
$2.2/lb, because the difference of inventory levels between now and then is
negligible by historical standards. In fact, inventory levels have never been
a good forecast for future metal prices.
Buy Low - Sell High
To borrow the overused Buffett
line, "buy low, and sell high". This is particularly applicable in
commodity investment since metals such as zinc will never be made obsolete in
my lifetime. Against rapid currency debasement and $4 trillion held at
central banks of emerging-growth countries around the world, my view is:
Oil and Copper - risky investment
Gold and Silver - Good value and entering a blow off
phase.
Zinc, lead, and nickel - Current prices will prove to be
extreme bargain (particularly zinc at 80 cents) looking back 2-3 years from
now.
Metals investment was the
focus of my workshop at the Cambridge House Investment Conference in
Vancouver (June 15-16). For those interested, the write-up of the conference
and my workshop presentation can be accessed here.
In part II, we shall examine
how various resource equities (energy, base metals, precious metals) fared
against the respective underlying commodities. Stay tuned!
