Great Investment Articles

The Six Biggest Myths About Gold

2009-10-08T12:46:00.000-07:00

By Nick Barisheff

Nov 18 2008 12:25PM
www.bmsinc.ca

Gold. People either love it or hate it. There aren’t many who feel ambivalent toward it. Unfortunately, gold is deeply misunderstood by investors, and that misunderstanding is hurting their portfolio returns. Many in the investment community trot out the old myths about gold: that it is a bad investment; that it is very risky; that it is not a good inflation hedge. But is there anything behind these assertions? If investors take the time to examine the facts, these commonly held beliefs simply do not stand up to scrutiny. It is precisely because these myths have become so prevalent that gold is still undervalued. Once the general public realizes these beliefs are not valid, the price of gold will be much higher.

Myth 1:

Gold Is A Bad Investment

A frequently cited argument is that since it peaked at $850 per ounce (all amounts in U.S. dollars unless otherwise noted) in 1980, gold’s return has been poor compared to the major stock indices. However, that peak price was a short-lived, single-day aberration. Investors who avoided the mania phase and purchased gold one year earlier in 1979 at its average price of $306 per ounce also avoided any significant losses during the subsequent bear market. The performance of different asset classes varies from cycle to cycle. The previous cycle from 1968 to 1980 saw the Dow Jones Industrial Average remain flat with significant volatility, while gold increased by 2,300 percent. In the current cycle, which began in 2002, gold has posted a compounded return of 14 percent, while 15 of the 30 Dow components are negative.

Many studies compare gold to equities over periods as far back as the 1700s. But these studies ignore the fact that gold’s price was fixed until 1971. Prior to that time, gold was money and not an investment. Interestingly, virtually none of the stocks listed in the 1700s still exist today. Instead, the returns of major indices such as the Dow are boosted by the removal of bankrupt companies and poor performers, which are replaced by high performers. Three of the 30 companies that made up the Dow in 2000 have since been replaced.

From a strategic portfolio allocation viewpoint it is easy to see why Ibbotson Associates, one of the world’s most highly regarded asset allocation specialists, determined that holding between 7.1 percent and 15.7 percent in precious metals bullion reduces portfolio volatility and improves returns.

Myth 2:

Gold Is Not A Good Inflation Hedge

The arguments against gold as an inflation hedge are usually based on calculations arising from the intra-day price spike in 1980. While gold did not keep up to inflation using daily prices from 1980 to 2002, the annual average gold price has kept up extremely well since 1971, when the price was no longer fixed, Figure 1. During the same timeframe, the U.S. dollar lost about 80 percent of its purchasing power. In fact, all the world’s major currencies have depreciated by significant amounts due to continuous excessive increases in the money supply. The impact of this devaluation on real returns is significant.

Figure 1 - Annual average gold price vs. annual inflation rate since 1980

Gold had increased in purchasing power since 1971.

Conversely, gold has not only maintained its purchasing power but increased it against all major currencies. It will continue to do so as long as the world’s central banks keep increasing the money supply by a greater percentage than their country’s GDP growth.

More importantly, gold maintains its purchasing power not only during inflationary periods, but also during deflationary periods. An extensive study, published by Roy Jastram, analyzed the purchasing power of gold in England and the U.S. from 1560 to 1976. Jastram concluded that gold held its value remarkably well over time. The purchasing power of gold and precious metals actually increases during deflationary periods because other assets decline in price by a much greater amount than precious metals do.

As central banks continue to accelerate the pace at which money is printed, inflation will increase, and the purchasing power of paper currencies will decline. This will result in more and more astute investors fleeing to the safety of gold. As a consequence, gold’s price should rise far in excess of the Consumer Price Index and the true inflation rate. In order to protect portfolios from rising inflation, Wainwright Economics concluded that an all-bond portfolio would need an 18 percent allocation to gold, silver and platinum, while an all-equity portfolio would need 40 percent just to stay ahead of inflation.

Myth 3:

Gold Is A Risky Investment

Risk means different things to different investors. A pension fund may perceive risk as a failure to meet its liabilities, whereas an asset manager may view risk as a failure to meet its benchmark. Most investors, however, associate risk with a loss of their capital or underperformance of their investments in comparison to their expectations. “Risk comes from not knowing what you are doing,” according to Warren Buffett.

There are many kinds of risk: currency risk, default risk, market risk, inflation risk, systemic risk, political risk, interest rate risk and liquidity risk. While all of these apply to financial assets, many do not apply to gold bullion. Physical bullion is not subject to default risk, liquidity risk, political risk, inflation risk or interest rate risk. In the rare circumstance of strong currencies, gold may be subject to short-term currency risk and, at times, to market risk. Unlike financial assets, however, gold bullion cannot decline to zero. Gold is the only asset that can protect wealth from non-diversifiable systemic risk.

Precious metals provide high returns at low risk

Volatility or standard deviation are often used as measures of risk, and gold is considered to be quite volatile. However, when annual compounded returns are plotted against standard deviation, the individual Dow stocks are all more volatile than gold, and all but two of the Dow stocks had poorer performance than gold, silver, and platinum over the past eight years. Figure 2.

Returns are important, but even more important is to compare risk-adjusted returns. Clearly, an investment that has higher volatility may still be attractive if the returns are appropriately higher. Nobel prize-winning economist William Sharpe devised the most commonly used measure of risk-adjusted performance: the Sharpe Ratio. This ratio measures the amount of excess return per unit of volatility. The interpretation of the Sharpe Ratio is straightforward: the higher the ratio the better.

Bullion is unlikely to suffer underperformance risk in the near future. Demand for gold, silver and platinum is increasing for both commodity and monetary attributes, while annual mine production is declining. As the price of oil continues to rise due to production declines and increased demand, inflation will accelerate. As central banks increase money supply at accelerating rates, the purchasing power of currencies will continue to decline. As these two major trends interact with each other, the price of gold will continue to rise.

Myth 4:

Gold Does Not Pay Dividends or Interest

The Bank of England used this argument to justify selling half the country’s gold holdings at the bottom of the market in 1998. It wanted a “safe” investment, one that would generate interest, and it chose U.S. treasury bills. The gold was sold for under $300 per ounce. In the months following that sale, the price of gold tripled, and the value of the U.S. dollar lost 30 percent against the British pound. The currency exchange losses plus the opportunity cost resulted in billions of pounds in losses, significantly offsetting any interest income the Bank might have received.

The same is true for bond investors. In an inflationary environment, the “real” or inflation-adjusted interest rate they receive is often negative. Gold, like any other asset that sits in a vault, will not earn interest or dividends, but neither is it at risk. No asset class generates income unless you give up possession and take the risk of not getting it back. However, gold’s capital appreciation is many times greater than the prevailing interest yields, while not being subject to any of the risks that interest-bearing investments are subject to. For a comparative analysis of holding bonds versus a systematic withdrawal program for BMG BullionFund units.

Myth 5:

Gold Is An Archaic Relic

A comparison of bullion to the larger producers shows gold has outperformed mining stocks since March 2007

Gold is often referred to as an archaic relic with no monetary role in today’s modern digital society. Several facts contradict this view. The world’s central banks still hold 29,000 tonnes of gold in their reserves. Gold, silver and platinum trade on the currency desks – not the commodity desks – of the banks and brokerage houses. The turnover rate of physical gold bullion, between the nine members of the London Bullion Marketing Association, currently averages $24 billion per day. Trading volume is estimated at seven to ten times that amount. Clearly, gold is still trading in its traditional role as an alternative currency.

Myth 6:

Mining Stocks Are Better Investments Than Bullion

While mining stocks can generate impressive returns during an uptrend in precious metals prices, they do not always outperform bullion. It is unfair to compare junior mining companies to bullion because of the huge disparity in risk. While successful junior miners can generate impressive returns, over 90 percent of precious metals discoveries never become productive mines. A better comparison would be the larger producers. While mining stocks have outperformed bullion during the early stages of this bull market, gold bullion has outperformed the major mining indexes since March 2007. Figure 3.

Mining stocks tend to be significantly more volatile and risky than bullion, and during sharp market declines they tend to follow the broad equity markets downwards – even if the price of the metal is rising. During the late stages of the bull market of the 1970’s, mining stocks underperformed bullion. In order to adequately compensate investors for the higher risk, mining stocks would have to outperform bullion.

Conclusion

Investors who take the time to carefully evaluate the benefits of bullion will realize that these commonly held myths do not hold up to scrutiny. Those investors stand to reap significant rewards. Investors who believe these myths are missing out on the opportunity to add an asset class that diversifies portfolios, protects against inflation, and may provide better returns than traditional assets, such as stocks and bonds.

Under a worst-case scenario of systemic risk, bullion may be the only asset that holds its value. As these myths are dispelled and the price of bullion rises, as many mainstream analysts predict, informed investors will benefit from purchasing bullion at today’s undervalued prices.

When the public at large becomes fully educated with respect to precious metals, it will bid up the price. Considering that global financial assets are estimated at over $180 trillion, while total global above-ground gold is only $4 trillion (and above-ground bullion is less than $1.5 trillion), a massive wealth transfer event is likely to occur. It is interesting to note that even a 10 percent switch from financial assets to gold would result in a 450 percent to 1,200 percent increase in the gold price.

The first and second editions of this article are published in Canadian MoneySaver September 2008 and Wealth Management Review 2008 Volume 2

The BMG Special Report: "The Six Biggest Myths About Gold" is required reading for sophisticated investors and advisors. This report provides a more detailed and technical evaluation of the six myths. Please visit www.goldmyths.com to download the report.

Nick Barisheff
President, Bullion Management Group Inc.
November 2008

***

Nick Barisheff is President and CEO of Bullion Management Group Inc., a bullion investment company that provides investors with a cost-effective, convenient way to purchase and store physical bullion. Widely recognized in North America as a bullion expert, Barisheff is an author, speaker and financial commentator on bullion and current market trends. He is interviewed monthly on Financial Sense Newshour, an investment radio program in USA. For more information on Bullion Management Group Inc. or BMG BullionFund.

Warren Buffet: Buy American. I Am.

2008-10-17T11:51:00.000-07:00

By WARREN E. BUFFETT
Omaha

THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.

Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.

Teck Cominco sees higher long-term zinc price

2008-03-11T06:08:00.001-07:00

By Carole Vaporean

NEW YORK (Reuters) - As marginal zinc mines begin to shut down in the surplus environment projected for the Western World, prices will firm again, likely in the next year to 22 months, according to Canadian mining giant Teck Cominco Ltd. (TCKb.TO: Quote, Profile, Research) Chief Executive Don Lindsay on Tuesday.

"Zinc will go back up, it's a question of when," Lindsay told the Reuters Global Mining Summit in New York.

"If you roll the clock forward to December of 2009 -- 21 months away -- at that point, plus or minus six months, a number of mines start to shut down. And the Western World becomes quite tight," said the CEO of the world's second biggest zinc miner.

Western World is a term in mining circles that usually refers to all areas of the world except China.

The two key factors he said he was focused on were tighter supplies of Western World zinc because of mine shutdowns in a more difficult market and the possible imposition of an export tax on China's super-high-grade zinc.

Referring to Teck's own zinc mine portfolio, Lindsay said it has two marginal zinc mines currently under review for possible closure. Both lost money last quarter.

"I don't want to do that much longer," he said.

In addition, the executive surmises that an analyst's review of zinc mines would find about 10 Western World mines that might shut in the next couple of years.

"It hasn't occurred yet and we think when it does in combination with when China's position on export taxes gets clarified, those two factors will drive zinc much higher. But when that occurs we don't know," he said.

The London Metal Exchange MZN3 zinc price has fallen from its $4,600 per tonne all-time high in December 2006 to $2,580 a tonne at Monday's close.

"As the zinc price is down, by more than 50 percent, that makes a big difference," said Lindsay.

"We are reviewing those (marginal) operations and we might re-engineer them to shorten the mine life," he said, adding that the review might take several months.

If Teck Cominco shuts its two mines and Xstrata's (XTA.L: Quote, Profile, Research) large Brunswick mine in eastern Canada closes, Lindsay said those three operations alone would add up to 350,000 tonnes.

"There goes your surplus and you're into a deficit. Then all hedge funds would be playing zinc again," he said.

"We could end up having less zinc production two years from now. Which makes the market tighter and the price higher. So we'll probably make more money with less zinc production."

Xstrata's Brunswick mine, which in 2006 produced 272,000 tonnes of contained zinc, is the world's fourth largest and is projected to run out of reserves in 2010.

Lindsay said a survey of the top 10 zinc analysts are generally calling for a zinc surplus in 2008 and 2009 ranging from about 200,000 to 600,000 tonnes.

"If you see many more production disruptions there won't be a surplus in zinc. It doesn't take much to eliminate a 200,000 tonne deficit," he said.

He said the market produced 11.3 million tonnes in 2007.

On the positive side, he pointed out that LME zinc inventories have fallen to about 125,000 tonnes currently from over 700,000 to 800,000 tonnes 3 years.

The other key question is whether China chooses to impose a much anticipated tax on super-high-grade zinc exports, which would crimp supplies. China is one of the world's top miners.

"If they do do that, and China becomes a zero sum game relative to the Western World, it won't be that long before zinc becomes very tight again," said Lindsay.

Lindsay said he expects Teck Cominco's operating income this year to be close to its $1.18 billion made last year.

Analysts too low on metal price forecasts

2008-02-07T12:22:00.000-08:00

No Decline In Sight

John Morrissy, Canwest News Service
Published: Thursday, February 07, 2008

OTTAWA - Mining analysts are getting it wrong on metals, says a new study by Ernst & Young that argues current pricing is a return to sustainable levels after a lengthy period of artificially depressed values.

"Most mining analysts are off the mark in their repeated predictions of a sharp decline in metal prices," the report said. "While analysts are wary of straying too far from the comfort zone of historic averages, the mining companies … are taking a far more realistic view."

Since 2005, analysts' estimates have been off the mark on where prices have settled -- anywhere between 20% and 200% below actual values -- resulting in most mines and mining companies being "materially undervalued."

But mining companies have been busy ignoring repeated calls for price collapses. Instead, they're acquiring competitors whose shares don't fully reflect the value of the commodity.

In the recent past, this apparent value has led to takeovers, worth more than US$100-billion, of Canadian mining icons Falconbridge, Inco and Alcan, as well as Phelps-Dodge. And mining companies are still taking advantage of the situation, as evidenced by mining giant BHP Billiton upping its bid yesterday to win control over rival Rio Tinto.

Tom Whelan, Ernst & Young's Canadian mining analyst, said the report examined the past century and discovered that what were interpreted as cycles in the mining industry were actually the result of specific events.

Weak prices in the 1990s, for example, were the result of the collapse of the Soviet Union. The event triggered the release of 50 years of accumulated stockpiles of minerals and a sharp decline in domestic demand in the former Soviet states. Such events weighed on prices, but are unlikely to be repeated in the near future, Mr. Whelan said.

The rise in metals prices over the past three years -- with bellwethers like copper trading under US$1 a pound until 2004 before rising to current prices of more than US$3 -- is representative of "the new normal," the report said.

"Our view is that we're not at the top of the cycle," Mr. Whelan added, saying it's more of "a return to sustainable prices after a period of artificially depressed prices."

He cited the report's data, which show that prices for copper, nickel and aluminum, adjusted for inflation, are much lower today than they were a century or more ago. In 1895, for example, aluminum traded at more than US$14 a pound. By 2006, the metal traded at about US$2 a pound.

The consulting firm said it expects more acquisitions to occur in the sector, "while investment analysts underprice commodities relative to the corporates themselves."

China sucking up world's zinc mine output

2007-10-30T09:46:00.000-07:00

China Commodities Weekly
October 29, 2007

• China was a net importer of zinc in September for the first time since May. In September, China’s exports of refined zinc fell to 12,325 tonnes, down 44% MOM and 18.5% YOY. Imports more than doubled compared with August, to 13,029 tonnes. Domestic refined metal production remained modest. In September, China produced 324,800 tonnes of zinc, up 13.9% YOY.

• On the input side, China imported 294,408 tonnes of zinc concentrate in the month, up 280.6% YOY, a record high. Domestic mine production only grew 13.1% YOY to 222,600 tonnes in September.

• We view the September zinc data as very positive. In the first nine months, China grew its concentrate imports by 178% YOY to 1.557 million tonnes. With this, China is only a very small net exporter of the refined metal (143,504 tonnes) and a small net exporter of galvanized steel (195,718 tonnes). This shows that on a net basis, China has been sucking up the world’s growing supply of zinc mine output, turning it to refined metals, and then using it for domestic consumption. In the first nine months, China’s galvanized steel output grew 51.9% to 15.08 million tonnes.

Base Metals Bears

2007-07-28T11:34:00.000-07:00

By David Galland (Casey Research)
27 Jul 2007 at 12:50 PM GMT-04:00

STOWE, Vt. (Casey Research Advertorial) -- It is not our purpose here at Casey Research to massage the data to fit our point of view. In fact, we are nothing if not open minded. Recently, we asked readers to propose scenarios that might cause things to break in a direction other than that we expect. In response, a subscriber forwarded an article from Bloomberg with a very sound-sounding bearish view on base metals. You can read the entire article by clicking here.

To save you some reading time, the theme of the article is that, due to high prices, the supplies of base metals coming onto the market will quickly reach the point where they’ll overwhelm demand, driving prices down. This scenario will be exacerbated, according to the base metals bears, because China’s rocket-like economic expansion must surely slow, thereby simultaneously reducing the demand at the same time supplies are increasing.

According to the Bloomberg article, despite the strength of their argument, these same bears, most notably the folks at JP Morgan, have been wrong about the base metals for some time now. To quote:

“An investor who acted on the advice of JPMorgan, the third-largest U.S. bank, missed gains of 67% for nickel, 30% for copper and 41% for lead, the best-performing commodities in the 26-member UBS Bloomberg CMCI Index.”

Even so, just because they have been wrong in the past doesn’t mean they are going to continue to be wrong, and so one shouldn’t use that as an excuse to dismiss their arguments. (We have also been cautious on the base metals, but rather than eschew the sector altogether, we have simply tightened the criteria a base metal play has to meet before we recommend it in the pages of our monthly International Speculator newsletter.)

Always happy for a second opinion, I forwarded the Bloomberg article on to long-term friend Clyde Harrison, the brains behind both the Rogers International Commodity Index and now the Bridgewater Index.

After reading it, he gave me a call. His view can be summed up as “They may be right, in the short term. But a year down the road, the base metals are going to be trading much higher than they are today.”

Why?

According to Clyde, the debate about China’s growth is already over, underscoring that contention by sharing just a few data points.

For instance, there are currently 168 power plants being built in China. In addition to the massive amount of metal used in constructing those plants, consider the copper wire those power plants are going to be connected to. “Will there be a fall-off in demand for copper? Not likely,” Clyde replied, answering his own question.

He also noted that China built and sold as many cars as the U.S. last year.

And it is important to understand, Clyde continued, that today one billion people use 2/3 of the world’s natural resources. The balance of 5.6 billion people use the other third, but they are quickly becoming more successful, setting up a serious competition.

Which goes a long way toward explaining why there are now 50,000 students studying geology in China, versus 900 in the U.S. (of which 300 are foreign). And why the Chinese are increasingly showing up in remote corners of the world, checkbooks open, eager to trade our dollars for tangible resources. Unlike businessmen from the U.S., the Chinese buyers don’t insist that the sellers start labor unions or clean up their pay practices, they’re just there to do business.

In that regard, the Chinese have no qualms of passing across a briefcase full of cash if that’s what’s required to get the deal done. That’s something a U.S. executive would go to jail for. Behind Door A is a briefcase full of cash. Behind Door B is a Happy Meal and nothing else. Who do you think is going to get the deal?

Then there’s this.

According to Clyde, historical data shows that when a country starts to industrialize, per-capita usage of oil typically goes from about 1 barrel (bbl) at the beginning of the industrialization, to between 17 and 27 bbl per capita by the time the industrialization is completed.

That China is just beginning to industrialize, and has much further to go, is evident when you consider the Chinese currently consume just 1.7 bbl per capita per year. And the citizens of India use just 0.9.

Like Clyde, we believe there is no putting the Chinese genie back in the bottle. In fact, in our view, what we are witnessing in China is evidence that when the mainland Chinese, while preparing to take Hong Kong back from the British, came to the realization that free market capitalism with little hindrance from the state was the only way forward.

A New Economic Age in the Making?

The implications of that shift in thinking are making itself felt around the world, with the world’s largest nation now super-charged by the world’s best economic system.

That is not to say that there won’t be rough spots in China’s future - the level of stock market speculation there is bound to cause a problem - but the trend in China, and elsewhere, is well entrenched and not going to change any time soon.

If you take another step or two back, it is worth noting that Dubai, a patch of desert with little in the way of natural resources, has used the same laissez-faire economic approach to transform itself into a global economic powerhouse. It is not out of the question that other countries may begin to take note, and follow suit. In which case, the future is bright indeed… as is the case for all the natural resources.

© Casey Research 2007

David Galland is the managing editor of Doug Casey’s International Speculator newsletter, now in its 27th year, dedicated to bringing investors unbiased research on precious metals investments with the potential for 100% or better returns within 12 months.

$200bn ‘super cycle’ intact

2007-05-26T05:30:00.000-07:00

Investors to pour a further $15 to $25bn into commodities, metals & related indices, during 2007.

Barry Sergeant
22 May 2007

For years bulls and bears have fought over the notion of a "super cycle" in commodity and metal prices. Bears are now poised to again end this year with bloody noses. According to an analysis by Daniel Raab, MD of AIG Financial Products Corp, investors have this year already placed $8bn into commodities, metals and related indexes.

He estimates that the figure for the full year could come in at about $15bn, aided by the launch of more exchange-traded funds (ETFs), and other passive investment strategies for commodities and metals.

The unprecedented flow of funds into commodities, metals and related indices is consistent with the theme developed over the past few years by the likes of Alan Heap at Citigroup in Sydney, Melbourne-based Peter Richardson, London- based Michael Lewis of Deutsche Bank, and Goldman Sachs's Jeff Currie in London. Citigroup has defined a super cycle as a prolonged (decades) trend rise in real commodity prices, driven by the urbanization and industrialisation of a major economy.

The commodity and metals story continues to gain new dimensions, in line with increasing fund flows. With more than five years of an apparent super cycle in the bag, investment bank Lehman Brothers this year anticipates growth of about $25bn in the broader field of commodity investment. Analysts have put the cumulative figure-to-date at between $150bn and $200bn.

The current cycle has seen a significant growth in commodity indexes such as Dow Jones-AIG, Reuters-Jefferies, and S&P Goldman Sachs Commodity Index (GSCI). The rationale behind the latter index (as an example) was creation of an easily traded instrument providing investors with a reliable and publicly available benchmark for investment performance in the commodity markets, comparable to the S&P 500 or FT equity indices.

The S&P GSCI represents an unleveraged, long-only investment in commodity futures, broadly diversified across the spectrum of commodities. Specialised investors can go further, into related instruments, such as the S&P GSCI futures contract (traded on the Chicago Mercantile Exchange), or over-the-counter derivatives, or the direct purchase of the underlying futures contracts.

ETFs are also playing an increasingly important role, having attracted around $2bn in the first three months of this year alone. ETFs are open-ended securities that can be bought and sold by investors on a regulated exchange, in the same way as stocks and bonds. ETFs give investors exposure to commodities without the need to set up futures trading accounts or taking physical delivery of a commodity or metal.

The growing respectability of investing in commodities and metals - raw materials in the broad sense - has been fuelled by investors seeking a hedge out of stocks, bonds, and even cash. There is also the diversifier factor: if the price of crude oil declines, it could potentially be supportive to the equities side of a portfolio, if it reduces inflationary pressure, supporting, in turn and in time, lower interest rates. It has been noted that the US's Calpers, a giant pension fund with assets of more than $230bn, invested $450m into the S&P GSCI in March, just ahead of another rally in crude oil prices.

On the fundamental side, there is no question that serious investor interest in commodities and metals is now increasingly attracted by the merits of the "super cycle" story. According to Heap, there have been two super cycles in the past 150 years: late 1800s-early 1900s, driven by economic growth in the USA, and 1945-1975, prompted by post-war reconstruction in Europe and by Japan's later, massive economic expansion.

Deep research by Citigroup shows that in 1800, the Chinese and Indian economies were by far the largest in the world, dominating global gross domestic product (GDP), with Germany and Japan playing distant second fiddles. During the next few decades, the US economy really started moving, and took over as number one economy soon after 1900.

According to the Bank Credit Analyst, the odds are good that the commodities and metals bull market that began in 2001 has not yet run its full course. Chinese industrialisation and "rapid trend growth in the entire developing world will act as key forces to sustain structural demand for commodities". Heap's team has long stated that the key driver of the super cycle is without doubt materials-intensive economic growth in China.

Few prices go up in a straight line, and speculators inevitably contribute to the story. In January last year, the Citigroup global metal and mining team put it riotously: "A flood of investment funds is driving base metal prices much higher than can be supported by fundamental analysis of supply and demand. It's a bubble which could grow a lot bigger before bursting". There have been some bouts of savage profit taking in commodities and metals, but the fundamental story remains intact for the meantime.

Still bullish on base metals

2007-05-24T04:52:00.000-07:00

Coxe, Laciak convinced rally just getting started

Sean Silcoff
Financial Post

Wednesday, May 23, 2007

Don Coxe has a theory about cyclical sectors that have been in hibernation for a long, long time. Those companies that survive "are left in a sustained state of shock and fear," the global portfolio strategist for BMO Financial Group says. After things have been down for so long, the sector's key players have a hard time accepting the upturn is more than another false start.

"The greatest investment opportunities come from an asset class where those who know it most love it least, because they've been disappointed most," Mr. Coxe says.

Not surprisingly, he's one of the biggest bulls around on base metals and other commodities, putting him at odds with a lot of skeptical market watchers. They believe that after a few hot years, prices for zinc, copper and nickel will fall, and fall hard.

Mr. Coxe doesn't, and neither does one of his disciples, Steve Laciak. In fact, Mr. Laciak, a former star analyst who now manages money for Dundee Wealth Management, has invested a full 20% of his portfolio in base metal companies. He is convinced that Mr. Coxe is right: that firms in the business of extracting base metals from the ground have just started basking in high metal prices and earnings. And he believes that the market doesn't love them nearly as much as they will, eventually.

"I believe that the pricing will stay strong and these stocks will be revalued upwards," Mr. Laciak says, citing Canadian-listed AUR Resources, First Quantum Minerals, FNX Mining Company, HudBay Minerals, Inmet Mining, and Teck Cominco as those most likely to benefit from an increase in valuation multiples. Those stocks currently trade for between five and seven times earnings, net of cash. Mr. Laciak predicts the multiples will rise to above 10.

To understand his enthusiasm, look back to 2004 to see what happened to another longsuffering commodity: steel.

Back then, industry players pinched themselves as the price soared to US$700 per ton of hot rolled steel, breaking out of a longterm range in which prices drifted down to the low $200s, making the sector a palliative care unit.

Nobody quite believed it. As profits rose, valuations trailed. After selling off through 2005, you could buy Nucor for six times profit. Prices did indeed cool off -- but to US$500 to US$600, not $300, as before. Add in a period of consolidation, and these firms now trade for 10 to 13 times profit.

"Over time, people got comfortable with the earnings durability of those companies and valuations increased," says Mr. Laciak. "The same thing should happen to the base metal companies."

Many analysts still don't believe copper is worth US$3.40 a pound or nickel US$24. In fact, the sector suffers from a Charlie Brown mentality. BMO Nesbitt Burns analyst Victor Lazarovici says base metal stocks usually peak before prices and profits do, as investors call the top of the cycle, often prematurely.

Funds stop flowing into the sector, multiples fall and eventually, the pessimists are proven right, he says. With stocks on his watch forecast to earn an average 44% return on equity this year -- the longer term average is under 10 -- "the only question is how long does the cycle last and when will it correct -- and how low it will go," Mr. Lazarovici says.

Of course, the reason why Mr. Coxe and Mr. Laciak are bullish is the fact the world, led by China, is undergoing a broad economic expansion. But Mr. Coxe sees a sustained tightness of supply and demand due to the sector's Charlie Brown mentality.

"In 1982 there were more commodity than tech analysts" he says. "What you should have done then was dump commodities and buy tech." That delayed reaction, he believes, is matched by underinvestment by mining firms.

Miners will encounter high costs for energy, steel and skilled workers, since the world is undergoing a hot engineering and construction cycle. Plus, mines take longer to build than they used to, as environmental and legal challenges are routine. "It will take years to get a full supply side response," Mr. Coxe says.

Jeff Rubin, chief economist and strategist with CIBC World Markets, agrees. "To exit the commodity market today would be to leave a lot of money on the table. I would say low double-digit multiples is probably where we'll head up to."

As an analyst, Mr. Laciak made brave bets, advising others what to do with their money. Now he's got his own funds on the line. He doesn't sound worried. "Steel stocks used to get zippo respect," he says. "The time for these base metals companies will come to get respect as people become more comfortable with these prices."

ssilcoff@nationalpost.com

"Crazy" to ignore commodities plays: JPMorgan fund

2007-05-24T04:47:00.000-07:00

Tue May 22, 2007 9:11AM EDT
By Dominic Lau

LONDON (Reuters) - Investors who think it is too late to get into commodities-related stock because the market has risen so much are "crazy" as prices will only go higher due to tight supply and growing demand, JPMorgan Asset Management said.

Ian Henderson, fund manager of the UK-registered JPMorgan Natural Resources Fund, told Reuters in an interview that China's latest move to rein in its booming economy would dampen speculative activity but metal inventories remained low.

"I think people are crazy not to be in it (commodities). I just can't imagine anybody being so naive as to imagine this is not a revolution like the way people have never seen before in their lifetimes," Henderson said late Monday.

"It's absurd to imagine that with the enormous amount of infrastructure going on, whether that be railroads or roads or power stations or subways or airports, this is other than a revolution in terms of demand going on."

The fund, which invests mostly in stock and is 1.18 billion pounds ($2.33 billion) in size, has handed investors more than 22 percent in returns this year as of the end of April.

Its portfolio consists of: base metal and diversified 37 percent; gold and precious metals 27.5 percent; energy 25 percent; diamonds/other 8.2 percent, with the rest in cash.

Henderson, with 35 years of investing experience, also said there was no risk in investing commodities.

"For mineral producers the current situation with the arrival of China, India and other emerging markets as major commodity consumers sitting down to the table, can be likened to a hostess having prepared a dinner for eight having a further eight guests arrive for whom no food has been bought or prepared," he said.

The fund manager said that the emerging economies accounted for 29 percent of the world's gross domestic product, bigger than the United States, and were growing by 5 to 10 percent a year, supporting the demand for raw materials.

"The basic outlook is that most people imagine that mining companies will be able to bring new projects into production on time and on budget," he said.

"The honest truth is that at least in the past five years people's expectations for production growth had been almost twice as great as the actuality."

Energy supply would also remain tight as companies were finding it difficult and expensive to accelerate their exploration programs, said Henderson, who has run the fund since 1992.

As for stock picks, the fund manager said he liked "small and micro cap" companies, where half of his fund is allocated, but he declined to give any names.

But, he added, there was good value in the larger companies.

"Among the big companies, I would buy almost all of them today. All the major companies are undervalued quite a lot. And if I have to rank them in this very minute, I would be buying Norilsk (GMKN.MM), CVRD (VALE5.SA), (RIO.N)," he said.

"Their commodity mixes are quite favorable. The markets are not valuing them using sensible forward earnings estimate. In addition, in the case of Norlisk there will be an $8 billion return of equity by way of a distribution of their energy subsidiary next year."

John Hussman: Gold/XAU Ratio Signals Buy for Mining Stocks

2007-03-15T14:00:00.000-07:00

Note: The Gold/XAU ratio closed over 5.0 earlier this week, and the headings are ours, not Hussman's.

Part 1 -- Why the S&P 500 isn't a great investment for the next decade

Near-term considerations for the stock market aside, I am sometimes asked what the prospects are for stock returns perhaps 5 years ahead. In general, a 10-year horizon is more reliable because speculative influences wash out to a greater extent, but some observations on this may be useful.

I've noted for some time that S&P 500 earnings are at the very top of their long-term 6% peak-to-peak growth trendline – a level of earnings that has typically been associated with an average price/earnings multiple of 10 (not the current 17). See last week's market comment for a review of these conditions. Meanwhile, the dividend yield on the S&P 500 is about 1.9%.

We can imagine a few reasonably optimistic outcomes. First, suppose that record profit margins are persistently maintained, so that earnings continue to grow along the very peak of their 6% growth trend. Rather than assuming the price/earnings multiple on these peak, record-margin earnings will fall to anywhere near 10, let's assume that 5 years from now, the multiple merely touches 15 (just two points lower than presently). Given that assumption, the 5-year S&P 500 total return would work out to be:

1.06(15/17)^(1/5) + .019(17/15+1)/2 – 1 = 5.41% annually.

Alternatively, we could assume that given extremely wide profit margins and rising unit labor costs, earnings will be flat over the next 5 years. We can identify many historical periods where earnings did not, in fact, grow over a 5-year period. Indeed, for earnings to be flat over the coming 5 years, assuming continued revenue growth at 6% annually, profit margins would still have to be above their historical norms 5 years from now. But let's not be too dour. Let's also assume that the price/earnings ratio on the S&P 500 will increase to 19, which would still be a rich valuation on earnings at that point. Given those assumptions, the 5-year S&P 500 total return would be approximately:

(19/17)^(1/5) + .019(17/19+1)/2 – 1 = 4.05% annually.

In my view, neither of these assume particularly negative outcomes, but they imply quite unsatisfactory long term returns, which underscores the point that rich valuations rarely deliver pleasant long-term results.

In order for the S&P 500 to achieve a “normal” annual return of about 11% over the coming 5 years, we have to assume a maintenance of record margins, sustained top-of-channel earnings growth (which has never before been sustained for such a period), and an expansion of valuations to a multiple of 20 times peak earnings (the same multiple as at the 1929 and 1987 peaks, which is double the average historical multiple on top-of-channel earnings). Investors should think now about whether these assumptions are plausible, because they may find themselves wondering later why they ever did.

My impression is that the probable expectation for total returns on the S&P 500 over the coming 5-years is below 5% annually, in a likely interval that includes zero. It takes implausibly optimistic assumptions to move substantially above that range.

As for 10-year returns, for which the historical evidence has typically allowed tighter confidence intervals, the following chart updates the study that appeared in the February 22, 2005 market comment (“The Likely Range of Market Returns in the Coming Decade”) using the same methodology. Note that actual market returns moved outside of the typical range only during the late 1990's bubble, and that the most recent 10-year return of about 7.6% since 1997 has been at the top of the expected range precisely because current valuations are at the top of historical norms.

Currently, the likely range for S&P 500 returns over the coming decade is between a -3% annual loss and a 5% annual return, centering in the low single digits. That range will seem preposterous to some investors, but remember that it took the late 1990's market bubble to move actual returns even 5% outside of this set of bands. Unless investors anticipate a repeated excursion into similar valuation extremes, it would be a good idea for them to recognize now, rather than later, that stocks are unlikely to produce satisfactory long-term returns from current valuations.

Part 2 -- Why mining stocks are a great investment now

For now, both stocks and bonds appear priced to deliver relatively unsatisfactory long-term returns for the risks involved. Stock market investors are still expressing a preference to speculate, at least on the basis of price/volume behavior, but we are not far from the point where stocks could again be characterized as overextended.

In the Strategic Total Return Fund, we continue to hold a short-duration investment stance, mostly in Treasury Inflation Protected Securities. The Fund also holds about 20% of assets in precious metals shares. It's worth noting that the fairly simple but generally useful Gold/XAU ratio is now pushing close to 5.0, though it has not breached that level.

To reiterate my remarks on the Gold/XAU ratio from the May 2, 2005 comment:

“To put some historical context on this measure, since 1974, the Gold/XAU ratio has been greater than 5.0 about 15% of the time. When the ratio has been this high, the XAU has followed with annualized gains of 89.6%, on average – a figure that remains high even if the data is split into multiple samples. When the ratio has been greater than 4.0, the XAU has followed with average annualized gains of 27.4% (though the finer profile of returns has been sensitive to other conditions such as interest rates, economic trends, and inflation). In contrast, when the ratio has been less than 3.0 (meaning that the gold stocks are very elevated relative to the actual metal), the XAU has declined at an annualized rate of -36.6%, on average.

“Importantly, the return/risk profile for precious metals shares is strengthened further if the economy is experiencing weakness. For example, when the Gold/XAU ratio has been greater than 5.0 and the ISM Purchasing Managers Index has been less than 50 (indicating a contracting U.S. manufacturing sector), gold shares have appreciated at an average annualized rate of 125.6%. In contrast, when the Gold/XAU ratio has been less than 3.0 and the Purchasing Managers Index has been greater than 50, precious metals shares have plunged at an average annualized rate of -49.9%.”

Such strong periods for gold are also generally associated with weakness in the U.S. dollar. Something to think about as the economic picture evolves in the months ahead.

It's Time To Separate The Men From The Boys

2007-02-12T06:08:00.000-08:00

By Mike Hoy
February 8, 2007

...If my thinking is correct those funds and investors that have the ability to recognize companies that are “real” with projects that are worthy of attaching the word “production” have the opportunity see returns beyond their wildest dreams. Unfortunately this probably will not happen for the vast majority of investors. Why? Because the vast majority of investors and funds are “BOYS!”

“THE BOYS”

The “Boys” are investors who think in terms of percentages. These investors have very little respect or understanding for the value being developed in the assets they own. Many are traders who allow a formula to dictate their entry and exit points giving no credence whatsoever to the accomplishments of management. Many are private placement buyers who understand the necessity of Venture Exchange Companies to raise capital. They know that after their holding periods are up they can sell their shares at a percentage profit and keep their warrants with absolutely no risk and no capital tied up. In the end, many of the “Boys” that play this game have never had a trade in the open market except for a sell. The sale of these shares gives them percentage profits, which normally turn out to be pretty good percentage returns, but in no way reflects the true value of the investments they may own. I call these people “Boys” because they do not differentiate companies that are very well managed with a future from those that are nothing more than trading vehicles. A classic example of this is trading a silver dollar for pennies. No one in their right mind would make an exchange like this if they knew the difference.

“THE MEN”

The “Men” on the other hand, are in search of the “Silver Dollars.” The “Men” recognize the potential of companies that are very well managed with corporate teams that have been successful in developing resources that are worthy of being put into production. The men recognize that share price weakness in these companies is an opportunity to build positions and redistribute shares from the hands of the “Boys” into strong hands that want “Silver Dollars” instead of pennies. The Venture Exchange has no shortage of companies that fall into this category. The “Men” recognize that as a company develops their projects, shareholder value multiplies making their original investments pocket change in relation to what should be reflected in the current market share price of their investments.

Many times the current market share price has nothing in common with the value that has been built as a result of successful programs. It is at times like this where you have a true separation between the “Men and the “Boys.”

At times when the share price does not perform in a manner that one would naturally assume it should as a result of positive behind the scene developments the “Boys” will constantly gripe and complain about the poor price of their shares. The “Men” on the other hand will sit back and quietly take advantage of the mistakes made by the “Boys” as they dump their shares and move on in search of “what they think” are more plentiful hunting grounds.

It is at this stage that the “Men” recognize that owning shares is no longer the main focal point of their investment as they turn their attentions to owning percentages of the company rather than just shares.

The World’s Biggest Ponzi Scheme

2007-02-02T00:05:00.000-08:00

This is a great article that explains why a significant drop in the U.S. dollar as more and more dollars get printed doesn't mean a collapse is imminent for the global economy. Globalalization has changed the dynamics of the world.

"In the past five years, the world economy has grown the fastest since World War II. We believe the trend is only going to continue, if not accelerate due to the free-flow of excess capital and uneven distribution of global wealth."

"The GDP per head in China is some 1/30th that of the U.S." It's not going to stay that way forever.

By John Lee, CFA
January 31, 2007

http://www.goldmau.com

From Closed to Open:

Before 1990, economies were relatively localized. Global trade was thin and technologies such as “email” and “the internet” barely existed. Phone, letters, and faxes were the means of communication. Companies predominately produced and marketed goods locally. Internationalization was unheard of besides a few large brands such as Coca Cola.

Source: WTO, Statistics Database

As you can see from the chart above, it took nearly ten years for world trade to double from 1990 to 2000. From 2001 to 2007 the same feat took only 6 years.

From the perspective of money movement, in the 1980s and early 1990s international equity investing was mostly reserved for the large institutions. Mutual funds were not popular until the mid 1990s.

Things have changed today. Now one can buy or sell a piece of an international market from anywhere in the world through ETFs and mutual funds. What is more you can do it all in the comfort of your own home, online, with commissions that are only fractions of what they once were.

As I shall demonstrate in this paper, an open global economy with an increasingly integrated workforce and expanding consumer markets has diversified the risk of a systemic fiat currency crisis and the collapse of the dollar. I will elaborate the claim with observations on money supply, currencies, foreign reserves, and economic growth. I will then conclude with my views on the current investment climate and my investment outlook moving forward.

Tying the Dollar’s Fate to Globalization?

In closed economies when money supply grows 15% a year and budget and trade deficits exceed 6% of GDP, a currency crisis often ensues. Examples abound from Turkey, Brazil, to several Asian countries involved in the mid 90s crisis. I can hear the question: so why hasn’t there been one in the U.S.?
The answer can be found in the following chart.

Figure: Foreign Exchange Reserve Asset Holdings (USD Billions)

Source: IMF, World Economic Outlook

Recall that the eventual collapse of a Ponzi scheme is not necessarily caused by the size of the scam, but the inability to recruit new participants.
Instead of circulating in the U.S. economy and causing price increases, excess U.S. dollars have gone to Asia in exchange for Asian goods. Asian central banks in turn have soaked up the dollars, printed local currencies from thin air, and pumped the liquidity into their local markets.
In a way, the U.S. is exporting inflation in return for real goods. You would be amazed at how far the dollars bills have traveled, from the high mountains in Mongolia to small streets in Bangladesh. No doubt, a money supply growth of $12 trillion would have caused hyperinflation in a closed U.S. economy with 300million people. But in an open international economy that same $12 trillion is spread out among 5 billion people. In addition tens of trillions of U.S. MBS (mortgage backed securities), US corporate bonds, and US treasury bonds are now owned by institutions and retirement funds worldwide. Indeed globalization is postponing dollar’s fate of demise.

The Collapse of “Export Oriented Economies” During a Global Recession Debunked

If a person saves more than he spends, that person becomes wealthier. By the same logic, if a country exports more than it imports, she becomes richer. I grin every time well known analysts call for China’s slowdown and collapse, should U.S. consumers spend 5% less on Asian goods.
An “export oriented economy” implies that the economy depends on exports to survive. I don’t think that there is any empirical evidence to back up such a dependency. While an economy might have a positive trade surplus, its well-being is not necessarily tied to the need to constantly export more than it imports. In other words, when an economy is enjoying a trade surplus, it is in savings mode; and when it is in deficit, it is in spending mode. The mode can certainly switch back and forth. An economy in savings mode (i.e. an export-oriented economy) is only saving up pent up demand, which will come out of the woodworks at a later date.

I want to give you a concrete example.

China has been in savings mode for the last six years and has accumulated more than $1 trillion dollars in reserves. Does the Chinese economy really depend on exporting more goods in return for ever-depreciating paper bills? Hypothetically, if US consumers spent $100 billion less on Chinese goods, China could just print $100 billion in local currencies and hand them out to the hungry and needy to pick up the slack. The effect of such charity is the same as exporting goods to U.S., except of course that

- China wouldn’t receive the $100 billion from the U.S., which is irrelevant with the $1 trillion war chest she already has

- The goods stay in China and improve the quality of life in China rather than in the U.S.

In a wacky way, reduced U.S. consumer demand actually is a blessing in disguise. Local Asian economies are rapidly becoming self sufficient, witnessed by the strongest Chinese GDP growth in a decade at 10%+ despite lackluster U.S. growth. The double digit consumer spending growth in China has continued annually since 2001 (vs anemic sub 5% in the U.S.)

What Do The Following Trends Have In Common?...

Weakening dollar, Surging Commodity Prices, Rising Trade Deficit, Staggering Accumulation of Global Foreign Reserves, and Rapid Global Economic Growth.

Answer: these trends all occurred at about the same time in 2002. While most U.S. readers recognize and acknowledge most of the above trends, few realize that the only time that the world economy has grown as fast as it has over the last five years was right after World War II.
It always has been difficult, if not impossible, to determine cause and effect in markets. For example, arguing the cause and effect between a strong stock market and a robust economy is no different from the perennial chicken and egg debate. Even economic statisticians have reported no clear historic relationship between the stock market and the economy as measured by GDP growth.
Regardless of cause and effect, in my view it was no coincidence that the above mentioned trends started at about the same time in 2002. Let me expand:
Prices today are set in dollars. So what affects commodity prices?

- The demand and supply of the good (such as oil)

- The demand and supply of the dollar.

Most people understand the first but rarely think about the second point.
Thirteen times more money has been printed since oil reached $40 in 1980. Commodity prices, measured in dollars, naturally go up as more dollars get printed and as the dollar weakens against other currencies.

Figure: CRB Commodities Index 2001-Present

Figure: U.S. Dollar Index 2001-Present

The price jump comes to center stage when money reaches the hands of the masses instead of concentrating in a few hands.
The distribution of money to the masses has much to do with the trade deficit. The trade deficit enabled Asian and Russian central banks to accumulate an unprecedented amount of dollars. These banks in concert with the government use the dollar to import copper and oil; and subsidize those commodities for domestic consumption, bidding up prices well past historic levels.
So you see that it is only partially correct to attribute high oil prices to peak oil theory and Chinese demand. Oil production has been ever climbing to date; the 1 billion+ Chinese (who have been on earth since 1980’s) with no dollars are not the same as the 1 billion+ Chinese with $1 trillion dollars to spend. In short, it is not the demand and supply of oil that has changed, but rather the demand and supply of the dollar.

Those Wishing For Another Asian Currency Crisis Will Have To Wait
Foreign Exchange Reserves of Countries with the Largest Holdings (2001-2005)

In 2006, the Fed stopped publishing M3 (a common measure of money supply), citing expense as the reason for its removal. M3 has grown thirteen-fold since 1980, going from 800 billion to over 10 trillion today. This averages out to over 10% a year. The rise was particularly alarming in the last five years with annual growth exceeding 15%.
By the end of 2005, four of the top five countries with the largest holdings of foreign reserves were Asian (Japan, China, Taiwan, Korea) and the country with the fifth largest reserves was Russia, a large exporter of oil. Over the past decade, exports from Asian countries have soared and their foreign reserves, largely denominated in US dollars, have skyrocketed.
The key cause of the Asian monetary crisis of the late 90s was excessive corporate and government borrowing. The debts were issued by international banks in U.S. dollars and at some point the borrowing countries were not able to pay up due to a lack of dollars in their central banks. Such instability caused international capital to flee the countries. Local currencies were converted to dollars, which further exacerbated the downward spiral of local currencies and economies. Such phenomena were seen over and over again throughout the 90s in Mexico, Russia, Latin America and Asia.

The picture decidedly changed in 2001 when the dollar index peaked and the U.S. trade deficit started soaring. The U.S. trade deficit allowed various countries like China, India, Japan, and Russia to start accumulating dollars. Lacking dollars was no longer a concern.
Today, if capital flight were to happen in South Korea, once plagued by a monetary crisis:

- Where will the capital flee to, given South Korea now has over $200 billion in foreign reserves?

- With foreign reserves nearing 50% of her GDP, the Korean government has enough reserves to support its currency and keep the equity market from failing.

In fact, the numbers are really quite stunning; Taiwan has enough foreign reserves to give every single citizen (child or adult) USD $8,000, which is nearing the average annual salary of a new college graduate.

Excess dollars has removed much of the fear associated with Asian currencies and thus stabilized investment and made long term investment planning possible. The Asian growth this time is permanent and less speculative.

The GDP per head in China is some 1/30th that of the U.S. Those who believe that .Asian equities have topped are missing the picture. The disequilibrium in GDP will be quickly bridged with the ease of investment capital flows, and with the technology and infrastructure that can raise the productivity of the workforces of developing countries on par with the rest of the world readily available. Asian equity markets will continue to outperform Western equity markets in the long run.

Eg: Thai Stock Exchange, The Long Term Chart Looks Bullish

Conclusion:

The collapse of the dollar index since 2001, aided by the chronic U.S. trade deficit, drove capital away from dollar and dollar centric investment themes (Nasdaq, U.S bonds). It is no surprise that commodity prices rose at the same time of the peak of the dollar, and that Asian foreign reserves started build up thanks to a burgeoning U.S. trade deficit. When one billon Chinese and Indians are armed with over one trillion dollars to shop, commodity prices naturally go up.

The U.S. continues to print dollars with reckless abandon. The bulk of those dollars are exported to the banking systems of developing countries. Excess dollars parked at foreign central banks enhance the stability and attractiveness of investing in emerging markets and have eliminated the possibility of capital flight. This has facilitated the long term growth of developing nations and the global economy.

There is no doubt that globalization has extended the life of the fiat currency system by bringing in more participants that believe in making and saving fiat money. Labor, money, and goods now freely travel across borders. Technology and infrastructure will help to quickly bridge the gap in productivity and GDP per head between the East and the West.

In the past five years, the world economy has grown the fastest since World War II. We believe the trend is only going to continue, if not accelerate due to the free-flow of excess capital and uneven distribution of global wealth. Long term equity bears should reassess their bearish position.

We like gold because of its international status as money. Gold has survived the test of time like no other form of money has. While we are bullish on gold strictly because it is undervalued relative to current copper and oil prices, we are not married to it, as we anticipate the pendulum will swing the other way as gold eventually becomes overvalued relative to equities, real estate, and other commodities. By then it will be time to make a switch. As Warren Buffet puts it succinctly, the rule of successful investing is “Buy Low, Sell High”.

Gold Relative To Oil Since 1991

John Lee, CFA
john@maucapital.com
Visit http://www.goldmau.com/ to sign up for email stock updates, past comments and charts.

The rising liquidity wave!

2007-01-26T21:09:00.000-08:00

This article is a great argument for investing in commodities, and mining stocks in particular.

By Puru Saxena

January 26, 2007

www.purusaxena.com

Capital markets powered ahead in 2006. As expected, the big winners were the emerging stock-markets led by Peru, Vietnam, Venezuela, China and Russia. The laggards however were the stock-markets of the “developed” world – no surprises here for my regular readers. Over in the commodities arena, several base metals (zinc, copper and nickel), precious metals (silver, palladium and gold) and grains appreciated significantly.

So, how can we explain the simultaneous rise of so many uncorrelated markets?

During the past 12-months, the ongoing monetary-inflation, credit-growth and expanding liquidity environment drove up prices in various markets. Apart from rising interest-rates and unrest in the Middle-East, we did not get any major negative developments on the economic front, which also helped the global markets. Finally, the US housing slowdown did not curb borrowing and affect consumer spending, thereby preventing a recession. So, what can we expect in 2007 from the various asset-classes?

STOCKS - Going forwards, I expect the liquidity environment to remain supportive of asset prices resulting in another good year. If my assessment is correct, emerging-market equities and commodities should (once again) be the biggest beneficiaries in 2007. Even the US stock-market may surprise to the upside.

Figure 1: Dow Jones rallies after mid-term election year

Source: Chart of the Day

This is a pre-election year (US elections are scheduled for November 2008) and history has shown that during pre-election years, American stocks have done well. Moreover, each mid-term election year in the US since 1950 has provided investors with an opportunity to profit from a significant rally (Figure 1). The current rally began in June 2006 (prior to the mid-term elections) and if historical patterns remain intact, the Dow Jones should advance strongly over the coming year.

The US economy is currently undergoing a mid-cycle slowdown and the chances of a full-blown recession are slim. Over the coming months, I expect US housing to deteriorate further but a crash is highly unlikely. In other words, I anticipate a soft-landing in the US economy. For sure, the world’s largest economy has severe problems (record-high indebtedness and sky-high deficits), however other nations want to sell their merchandise to the US and are willing to finance its deficits. As long as this continues, the US economy should be able to live on borrowed time.

I am of the opinion that despite a slowing US economy, growth in other parts of the world may remain unharmed. Asia is advancing at a blistering pace, Latin America has turned around and Eastern Europe is developing rapidly. In fact, the “developing” world is expected to outperform the industrialised nations in the future (Figure 2). Accordingly, our managed-accounts are invested in the fastest-growing regions of the world. At present, my preferred stock-markets are Brazil, China, Mexico and Russia. Furthermore, I may add that assets in the US will continue to disappoint for as far as the eye can see.

Figure 2: World economic-growth trends

Source: Morgan Stanley

COMMODITIES - Over the coming year, I expect commodities to resume their bull-market and make headlines all over the world. Despite all the negative news surrounding natural resources, the fundamental factors have not changed. In fact, the recent consolidation has made commodities even more attractive. Global demand for “things” is rising, supplies are tight and monetary-inflation continues worldwide.

As China and India continue to urbanise, it is estimated that more than 150 million surplus workers from rural areas will move to cities by 2020. It is interesting to note that roughly 60% of China’s population and 70% of Indians still live in rural areas. These numbers are shockingly high when compared to a more developed Asian nation such as Korea, where over 80% of the population live in cities!

Back in 1980, over 80% of the China’s population resided in rural areas (versus 60% today) and this number is expected to decline further to 40% by 2030. India is lagging in this department as its rural population has not fallen much over the past 30 years, but the downtrend is expected to accelerate in the years ahead (Figure 3).

Figure 3: Major population shifts ahead!

Source: United Nations

I am sure you will agree that people in cities generally earn more money when compared to rural areas. For example, the per-capita income of rural households in China is US$510 whilst it is US$1,400 in the case of urban households.

Once the millions of Asians move to urban centres and become wealthier over the coming years, they will demand a better quality of life and all the “creature-comforts” you can possibly imagine. These people will want bigger homes, washing machines, televisions, refrigerators, motorcycles, cars and so forth. Now, unless you are a central banker and have the ability to create something out of thin air, it is safe to assume that the demand for all these goods will require an immense quantity of raw materials such as cement, steel, copper, rubber, zinc and energy.

Now that we have established the case for a sustainable rise in the demand for natural resources, let us examine the supply dynamics. Throughout the 1980’s and 1990’s, prices of commodities were caught in a vicious bear-market. The devastation was so severe that the majority of the commodity-producers did not invest in spare capacity. After all, there was no incentive to spend more money and increase supply when prices were falling sharply! So, when the demand for commodities suddenly began to rise 4-5 years ago, nobody was prepared for it. Even today, despite the surge in the prices of raw materials, spare capacity and stock-piles are extremely low.

Figure 4 shows the price and inventory levels (shaded area on the chart) for both copper and zinc. Since December 2002, both these base-metals have risen sharply to all-time highs, yet their inventory levels are close to or at record-lows.

Figure 4: Base-metal inventories extremely depleted!

Source: Raymond James

These days there is a lot of noise about the copper “bubble”. It is my observation that asset-bubbles are usually accompanied by an over-supply of the item in question and build-up of its inventories. Yet, if you take note of the copper inventories on the London Metals Exchange (Figure 4), you will quickly realise that the “bubble-talk” is totally absurd! On the contrary, supply-shocks in the near future may cause inventories to diminish further as Bolivia plans to “industrialise” a river that supplies water to Chile’s Atacama Desert, thereby threatening the world’s largest copper-mining district.

I suspect copper (like many other commodities) is simply consolidating within its ongoing bull-market and its price in real (inflation-adjusted) terms is still way below its all-time high recorded in the 1970’s. Over the coming days, copper may decline somewhat more but once the correction is over, I anticipate copper to resume its uptrend in the latter part of 2007. Utilise any weakness in the near-future as an opportunity and consider investing in copper-mining companies that have huge reserves and cash-flows.

Furthermore, it seems to me that the multi-month consolidation in precious metals is now almost complete and we are likely to see upward moves over the coming weeks. Both gold and silver have built a huge base and they have recently shown strength in the face of a strong US dollar – impressive action. It is my belief that this maybe the final opportunity for investors to buy precious metals and quality mining stocks at these depressed levels – it always pays to buy when the sentiment is negative.

Finally, as the central banks continue to debase their currencies through monetary inflation, precious metals and other tangible assets should appreciate significantly over the coming years.

The above is an excerpt from Money Matters, a monthly economic publication, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly reports, subscribers also benefit from timely and concise "Email Updates", which are sent out when an important development in the capital markets warrants immediate attention. Subscribe Today!

Puru Saxena

puru@purusaxena.com
www.purusaxena.com

Trends in Energy and Base Metals: Identifying the Drivers

2007-01-26T21:04:00.000-08:00

This is a great 54-minute presentation from U.S. Global Investors with lots of good information and a 36-slide presentation you can flip through with informative charts. Anyone interested in commodities investments should spend the time to listen to this webcast (free registration required), or at least flip through the slides:

http://www.vcall.com/CustomEvent/NA012124/index.asp?ID=112930

Thursday, January 25 4:30 pm (ET)
Featuring: Frank holmes, CEO and CIO, U.S. Global Investors
Brian Hicks, CFA, Natural Resources Analyst
Evan Smith, CFA, Natural Resources Analyst

Commodity Super Cycle to Last Several Decades

2006-11-16T12:21:00.000-08:00

Supply Inelasticity Meets Rising Demand
StockInterview Chats with Technical Chartist: David Fuller

Adjusted for inflation, the historic CRB chart shows there may be more to the commodities bull market than many believe.

StockInterview talked with David Fuller, a career analyst, writer, lecturer and investor. He is one of the world's most highly regarded independent market commentators, frequently appearing on CNBC or quoted by The Wall Street Journal and other major business-orientated media. David Fuller is a director of Stockcube Research Ltd, where he is Global Strategist and writer of Fullermoney, his unique and highly regarded international investment newsletter. Visit his website: http://www.fullermoney.com/

StockInterview:
Many people are wondering: Is the commodity bull market intact?

David Fuller:
Absolutely, beyond a shadow of a doubt. This is a commodity super cycle, and it will be the biggest commodity super cycle in history to date. This could go on for several more decades – thirty to forty years.

StockInterview:
The longest timeframe we’ve been told about is through the year 2020.

David Fuller:
Commodity cycles can often last longer than that. I have generally stated a ‘generational long process.’ I think this will go on for much longer than would be logical with a commodity super cycle.

StockInterview:
And why would that be?

David Fuller:
There is one main over-riding reason why this is so different from what we saw in the 1970s. I lived through that as a financial analyst so that is still a vivid memory of mine. Then, we had inflation fears. We did have some strong global growth. But the main problem was that we had the political decision to cap production from OPEC. This sparked a lot of interest in commodities, and that was quite a powerful cycle. That’s the one people use as a benchmark. This time it is different because the demand is vastly greater.

StockInterview:
But critics would argue Western countries are more energy efficient.

David Fuller:
Yes, they are. But, look at all the additional gadgets we have that use energy. We use it more efficiently, but we don’t use less of it. We still use an enormous amount of it. The key change – far more important than what I just mentioned – is the conversion of all these previously undeveloped economies. Some, which had been formerly moribund economic systems, have been converted to capitalism. We have China embracing capitalism. We have India embracing capitalism. That’s brought 2.2 billion people into play as very ambitious earners, who aspire to middle class status. If we take Asia , there are 3.5 billion people who aspire to the same middle class lifestyle many of us in the West take for granted. If we look further beyond Asia , this same phenomenon is evident with many other developing countries. We see it in parts of the Middle East with the Dubai city-state as an example.

StockInterview:
Is this, then, a worldwide phenomenon or restricted to Asia and a few other areas?

David Fuller:
Look at Central and South America . Again, we’ve seen a stronger move to the capitalistic economic model, although there are inevitably backlashes there. My guess is those will be temporary. Even if I’m wrong on that point, these economies are major exporters of commodities. Their GDPs are going through the roof relative to what they had previously seen. And that is increasing demand for resources within those countries as infrastructure building takes place. There are 5.5 billion people in the underdeveloped, or developing, world, who are living in countries that are now seeing GDP growth expand quite rapidly.

StockInterview:
What do you see as the main reason for this?

David Fuller:
This process is greatly aided by globalization, which has encouraged the adoption of capitalist economic systems. Part of globalization is the export of technology, which also helps these countries to grow at a far more rapid rate than we have seen in previous decades. This is putting an unbelievable demand on industrial sources, which I think we’ve only just begun to see. Previously, there would be a surge in demand which would last a few years and then drop off very rapidly.

StockInterview:
Won’t China slow down at some point?

David Fuller:
I see articles than tend to be China-centric and mostly bearish. How many times have I heard someone forecasting a China hard landing in the last three or four years? Of course, it hasn’t happened. At some stage, they’ll inevitably get a recession, as all countries do. We should not be thinking in China-centric terms.

StockInterview:
Why not?

David Fuller:
China is important in leading this process among developing nations, but there all the others. It’s far easier to not list the countries now growing very rapidly, far easier to mention the exceptions: Cuba , Cambodia , Burma and North Korea .

StockInterview:
Is it all coming from demand?

David Fuller:
When we look at the supply side, the supply has been very tightly, partly because of the previous 21-year bear market for resources. That meant obsolescence, a loss of manpower. People got older, retired and moved into other professions. There have been major impediments in increasing supply. Supply is increasing and will continue to increase. But, we’re now reaching the stage where it isn’t so easy to find replacement natural resources, aside from the costs which are considerable. If we take oil as an example, the 35 billion barrels of oil we are currently consuming each year, the ability of the world to find replacement oil on that scale is questionable. Certainly we won’t find it from conventional oil.

StockInterview:
Do you see steepened curves as commodity-rich countries will change the economics in those countries?

David Fuller:
You could really say there is an inverse ratio between the price of the metal and the freedom of western companies to actually extract that metal and market it. It’s the same we see with oil. If oil is $20/barrel – Russia , Venezuela – they’re very happy to have Western oil companies come in and produce the stuff. When it gets to $60, $70, nearly $80/barrel, then they’re saying, ‘Wait a minute. Let’s rewrite the contracts, or even nationalize. The important Fullermoney investment theme, for the past four years is: Supply Inelasticity Meets Rising Demand.

Adjusted for inflation, it appears the price of gold has a long way to go before it surpasses the previous peak price.

StockInterview:
And that leads to higher prices?

David Fuller:
It’s very difficult to increase the supply of these resources sufficiently to meet rising demand. It does mean higher prices, but we must never overlook the fact that markets are inherently volatile. So, I’m not talking about exponential trends. When we get a steepening rate of ascent, this becomes unsustainable and leads to a fairly significant correction. It will be a very powerful, but erratic, bull market just like any other bull market. To define that more precisely, it will be punctuated over different time spans, as we’ve already seen, with medium-term corrections. I would define a medium-term correction as a reaction that lasts for at least a few months. They sometimes last for a year or two, but very seldom more than three years. Then, the primary bull market reasserts itself once again. We have seen a series of medium-term corrections in the resources sector, most of these starting around the April-May period. Now, they’re picking up again, with the exception of oil. But, that’s not going to be long, I feel, before we see that picking up again.

StockInterview:
But uranium has not corrected at all?

David Fuller:
It doesn’t have a futures market. That’s the big factor. The price is certainly rising, but with a futures market, you get the big leverage coming in. You get hedge funds rushing in and plenty of other speculators. You get them buying, and they’re short-term players. The absence of a futures market and the constraints on owning uranium metal really restrict that. As we’ve said all along, it’s been a Fullermoney premise that uranium was the best of the energy bull stories by far. That’s an obvious point, particularly with all the concern over carbon emissions.

Ongoing uranium bull market price chart

StockInterview:
How do you see uranium now that its price has soared so high in such a short number of years?

David Fuller:
In terms of long-term demand, it can only rise and rise enormously. I don’t see any other solution to the energy problem, let alone the clean energy problem, other than nuclear. Any elasticity meets rising demand. There is very little incentive for any major mining company to increase the production of uranium because they would be locked-in, depending on the contract. Some perhaps at $20, or possibly even worse. Anybody who really knows understands the resource in the ground is infinitely more valuable. Is China going to quibble over the cost of uranium? Are the French? I doubt it very much. This has been, still is, and will remain by far, in my view, the most bullish of the energy stories.

Ten Reasons to Buy Mining Stocks

2006-11-09T21:38:00.000-08:00

This 44-page report from Credit Suisse goes into great detail, but the key points are summarized in this list of ten reasons to buy mining stocks:

Ten reasons to buy mining shares

1. Mining shares in our universe trade at 18-year valuation lows. Investors’ apparent preoccupation with a US-led global slowdown means there appear to be good buying opportunities in our universe. If supply remains constrained and demand is better than market expectations, we believe it is only a matter of time before investors realise that 2007 is likely to be significantly better than 2006 in terms of metal prices and earnings.

2. Many investors believe commodities are in a bubble. How many times do we hear that the rally in commodities is a bubble that draws parallels with ‘tulip mania’ or the ‘tech bubble’ of 2000? We understand investors’ concerns given that many commodity prices are at all-time highs and their charts look ‘interesting’. This goes a long way to explain why the shares in our universe continue to de-rate—investors appear to expect a major correction soon. The reality is, however, that while speculators have played a part in driving up prices, the lack of supply and strong demand have pushed copper, nickel, zinc and aluminium into substantial deficits for 2006. Going into 2007, the big four metals (aluminium, copper, nickel and zinc) are likely to be in deficit again, even in a benign growth environment.

3. Infrastructure in emerging economies is more important than US housing starts. Investors’ apparent preoccupation with US economic data and their slowing momentum is providing good buying opportunities in the sector. Our analysis illustrates that the infrastructure programme build globally is more important than consumer-driven swings. In China, the country is spending more money on underground and overland rail networks in the next five years than the rest of the world has spent in the last 20 years. Russia has just announced a major investment spending programme to reinvigorate its electricity industry. Even in Europe the necessary buildout of electricity generation is likely to require an additional 1 million tonnes of copper over the next ten years. Finally, India’s infrastructure is just beginning. We predict it will add 1% to global metals demand every year for the next five years.

4. Supply, supply, supply Copper supply disruptions from strikes and lower-than-expected mine output should remain a key theme in 2007. We believe there is potential for the copper market to experience supply disruptions of up to 642,000 tonnes next year. The growing deficit in copper concentrate means smelters are likely to take downtime in the near term, which could lead to further tightness in an environment of low inventories. New capacity remains constrained and we expect delays in projects reaching full capacity. Added to this, companies have in recent years not been incentivised to build new mines or smelters and instead appear to prefer to use their growing cash piles on special dividends and share buybacks. This all adds up to a supply story for 2007 that will underpin metal prices and profits.

5. Copper could spike to US$12,000/t in 2007. In recent weeks, tin, lead, zinc and nickel have broken out to new highs. Only copper and aluminium remain the laggards. Copper is holding firm and any signs of a breakout to new highs would likely send a message to investors that they may have become too bearish on the 2007 outlook. Copper is key because it represents 32–51% of the Big 3 earnings. Investors do not appear positioned for positive demand shocks and seem to be factoring in a worst-case scenario for demand in 2007 given their pre-occupation with the US economy.

6. China restocking could return and surprise our demand forecasts. The key question is when will China return to the copper markets and restock its inventory? So far this year the copper statistics from China have been confusing and bolstered the bears’ belief that China is slowing. The Chinese State Reserve Bureau is believed to have released up to 200,000 tonnes of refined copper into the market, leaving it, we believe, with limited strategic stocks. In addition, copper scrap availability has increased by as much as 200,000 tonnes. Both effects have led to a 20% drop in Chinese semi copper imports, which implies that Chinese copper growth is slowing. With limited stockpiles, the risk is now that China returns to the market and restocks. This could have the effect of increasing Chinese copper demand growth from 4% in 2006 to 8% in 2007.

7. M&A is likely to hot up in 2007. Pressure is likely to build on our corporates to take part in value-creating M&A deals. If metal prices do stay strong, companies will come
under pressure to take part in the consolidation of the industry. So far, 2006 has been a disappointing year for M&A among the big 3 mining companies. In a Brave New World
(11 January 2006), we had predicted 2006 would be a busy year for M&A. While the Canadian sector has enjoyed a brisk year, the big 3 mining stocks haven chosen to sit it out. In our view, there is still significant undiscovered value in many potential targets. Higher long-term commodity assumptions that reflect the higher cost structure of building new mines and smelters are sending a message to companies that the first option for growth appears to be M&A.

8. Potential emergence of financial buyers and Chinese consortia. If the mining companies in our universe do not leverage up their balance sheets, they may find someone will do it for them. We are surprised that private equity has not been active in base metals and believe that coal would be a likely candidate for their attention. Perhaps their need for ‘safe less cyclical businesses’ has stopped them so far. Nevertheless the ability to sell forward production and the growing realisation that our universe is enjoying what seem to be sustainably high margins could change this lingering perception. As China has adopted an aggressive downstream growth strategy in aluminium, cobalt, zinc, steel and copper, it has increasingly grown dependent on imported feed. The country’s lack of self sufficiency in these commodities could be rectified by acquiring foreign producers. The recent shortage in cobalt concentrate and the impact it is having on producers in China who are struggling to feed their furnaces is a good example of China’s growing dependency on imports.

9. The ‘snowball effect’ means the industry may not be able to catch up with the annual leaps in consumption from emerging economies. Four years into the commodity bull market, the industry is simply not responding fast enough to build new capacity. Each year of delaying new projects is a year that the emerging economies continue to grow and increase the gap between new demand and new supply. In short, this cycle could extend for at least another 3–4 years.

10. With limited gearing and strong cash flows, share buybacks and special dividends will continue to increase because mining companies are reluctant to build new mines. We think miners will come under increasing pressure to leverage up. Our analysis in Figure 4 shows that at 50% gearing it would be earnings accretive for the sector by 21%.

Zinc May Increase to $5 per Pound: Analyst

2006-11-08T15:50:00.000-08:00

BALTIMORE, MD -- (MARKET WIRE) -- November 08, 2006 -- Zinc prices have increased 187.6% in the past twelve months. But because of severe supply constraints and skyrocketing demand, one analyst is still calling zinc "The Most Undervalued Metal on the Market Today."

Zinc prices hit an all-time high today of $2.0713 per pound, representing an impressive 292.1% increase since mid July 2005. Luke Burgess, managing editor of GoldWorld.com, compares zinc's remarkable 16-month move to the price changes of other major metals over the same time period:

-- Aluminum, +54.9%
-- Copper, +102.3%
-- Gold, +49.4%
-- Lead, +104.5%
-- Molybdenum, -23.1%
-- Nickel, +130.6%
-- Palladium, +77.4%
-- Platinum, +37.9%
-- Silver, +81.0%

There's simply no comparison. But the obvious question is, have investors missed the big moves?
According to Burgess, "No way. The strong fundamentals that have driven zinc this far are still in place."

Burgess recently published a report on the galvanizing metal titled "The Most Undervalued Metal on the Market Today". In it he claims, "I expect zinc to be selling over $2.50 a pound in 2007. After that, sky's the limit. With the right conditions I believe we could be looking at $5 or $6 zinc within a few short years."

What would account for such a move?

Burgess claims it's a simple matter of supply and demand. He says, "Production and warehouse stock levels are plummeting while demand is relentlessly marching higher."

Between 1960 and 1990, global zinc consumption grew at an average annual rate of about 2%. But since 1993, annual worldwide demand has been growing by roughly 3.2%. And by all accounts this is just the beginning. The International Lead and Zinc Study Group (ILZSG) says global demand for refined zinc will increase 3.9% over last year's demand to 11.06 million tons in 2006.

And what about production?

"Because of decades of low prices, there's has been little serious investment in zinc mining," Burgess says in his report. "This has led to a peak in zinc's global production."

Current global zinc demand is outstripping mine production. We've been able to make do with warehouse supplies and recycled material. But that's a problem, too.

"In April 2004, London Metal Exchange zinc warehouse stocks topped off at about 784,000 tons," Burgess says in his report. "Today, only two and a half years later, these stocks have plummeted a whopping 86.5% to about 105,000 tons. In the past 12 months alone these warehouse stocks have fallen 78.1%."

In fact, the LME supplies have gotten so low now that there's only enough stockpiled to satisfy the world's total demand for four days!

So what does that mean for investors?

Simple: There's a boatload of money to be made by investing in zinc exploration and production companies.

Burgess says he personally likes "the upside of junior explorers right now, especially those trading on the TSX Venture Exchange." He recommends "looking for junior mining firms with savvy management, a proven track record and a decent land package in a geopolitically safe country." He continues in his latest report, "These firms should also have mid- to advanced-stage properties. Historic production and drill results are always a plus."

In "The Most Undervalued Metal on the Market Today," Burgess explains in detail why he believes we'll see such a climb in zinc prices and gives advice on how to look for potential investments.

China in a Bull Shop

2006-10-25T08:28:00.000-07:00

This is a great article countering the commodity skeptics' view that China's growth is "unsustainable."

By David Coffin & Eric Coffin
October 24, 2006

www.hardrockanalyst.com

Editorial Comment from the HRA Journal

The reason for this revisit to the “BRIC” story is the enormous amount of press about the “burst bubble” in commodities this month. It’s an important, some might say, critical, topic. How we should act and react in the market is intimately related to the type of market we are in. Viewed in isolation, a bear market rally will look pretty much like a small piece of a bull market rally. But while you might be looking for periods of weakness to accumulate positions in a bull market you’d be much more likely to be watching like a hawk for any weakness as a sell signal in a bear market rally.

Much of chatter recently focused on “unsustainable” growth in China. This is said to prove the point that commodity prices have to fall.

We look at metals and energy commodities as individual cases (and so should you) but some general clarifications have to be made. There is too much erroneous information out there and too many analysts comparing Chinese oranges to North American apples and proclaiming them equal. There are several parts to the bear case and we’ll touch on each briefly:

1) Unusual Length
We find it surprising that this one comes up any more but it does. We won’t know just how long China’s (or India’s or …) secular expansion lasts until it’s come to an end. What we do know is that if it looks like recent periods of above trend growth in the region, namely Japan and South Korea, it will last for at least 25-30 years.

This is not wild eyed optimism. Similar growth periods moving through mass industrialization in both Europe and North America had similar time frames. That is about how long it takes to move to and through the process and to upgrade infrastructure (both public and private) to the level where it becomes sustainable. There is absolutely nothing unusual about the length of the China expansion and we expect the one just starting in India will fit the pattern as well.

2) Unusual Strength
Another common concern is that the growth rates being experienced by China are so high that they must denote an overheating economy. Again, there is no evidence to support the idea that growth rates are unusually high, especially if one lops a percent or two off the “official” numbers, as most observers do.

China’s growth has averaged about 9% over the past 20 years. An impressive number, but not unusual under the circumstances. During their own periods of rapid industrialization and economic development other Asian countries managed the same feat. Japan grew at an annual rate of 8% for 30 years (1950-1980) and Hong Kong and South Korea managed averages of 7.7% and 8.1% respectively for over 35 years from 1960 until 1995. There is nothing “magical” about China’s performance. It is not out of line with its Asian neighbors or, for that matter, with North America during its late 19th - early 20th century industrialization.

3) Zero Sums
Basically, the zero-sum argument holds that any increase in commodity usage is merely a diversion of resources from other countries. In other words, China is acting as a giant assembly line, which is partially true, and most of the “usage” is simply parts and sub assemblies that are moved from other places to be fitted together and shipped out again.

It’s easy to see the political appeal of this theory. Job losses and trade deficits can be blamed on cheap labour and westerners, especially Americans, can smugly assume that any gains made are just accounting fiction that involved some level of cheating.

Whatever the emotional appeal of this theory it doesn’t stand up to close scrutiny. Yes, there is a lot of assembly and remanufacturing going on in China but that is not the main area of commodity consumption. A boat load of DVD players or kid’s shoes does not contain a lot of metal. Power lines, wiring, and sewer pipes do. That is where the bulk of the consumption ends up. It is not substitution; its addition. More to the point, it’s additions to infrastructure and durable goods. It’s not stuff that will get recycled in two years. Economics is not a zero sum game. If it was, all attempts at development and economic betterment would be pointless. And North Americans would still have the living standard of their great great grandparents.

4) It’s inherently unstable
This argument is based on concerns about economic imbalances and overinvestment. It’s another popular one with politicians which usually leads to them blaming the US Current Account deficit on “excess saving” elsewhere on the planet. Excess saving?

Although this argument sounds the silliest it’s ironically closest to the truth. One of the most interesting outcomes of our study of periods of rapid growth was the apparent underlying cause. It’s not some form of selfless Asian togetherness or good karma or a form of government suited to whipping up the populace into a homogeneous production line. It’s savings. Period. High levels of savings were the most consistent predictive data across all the economies that saw extended surges of growth in the past 50 years.

High savings levels that allow for high investment levels at a relatively low cost of capital are the secret to the success of one Asian tiger after another. All of the countries noted earlier in this article have and had extremely high levels of savings in relation to GDP. Most of them range from 30-40%. That’s a level unheard of in the West and it easily explains the high capital formation and enormous levels of investment. Why do they invest so much? Because they can.

It’s All About Savings
Like its predecessors, China has seen surging savings levels in recent years. There was a dip during the Asian Crisis in the late 1990’s but the rate moved back up to the 40% level in the past five years. Based on current rates the strong growth profile of China is expected to continue for some time.

Western economists have warned about these levels. They assume they must be too high and that they imply overinvestment. We see no reason to assume there is less “dumb money” in Asia than anywhere else but, in the end, it doesn’t seem to matter much. China, like the US, has an economy that is efficient (some would say ruthless) about punishing firms that build the wrong things at the wrong time.

The important thing is that the money is there to keep the investment coming. It’s also very important to note that most of the savings are domestic. Yes, China is the poster boy for Foreign Direct Investment (FDI) lately but most of the funds still come from domestic sources or from nearby Asian neighbors.

So far, there is no evidence that savings rates are slackening. Chinese companies are generating profits that can continue the party, though their return on capital is lower than the West. Again, this makes sense. When there are huge pools of money looking for a home those funds have to and are willing to accept a lower return. Its supply and demand. It’s also something we shouldn’t be complaining about. All those “excess savings” help explain the relative popularity of US Treasuries and America’s ability to hold down real interest rates.

One final promising note on savings rates deserves a mention. India, most people’s choice for the next country to see a growth lift off, is seeing its own rapid increase in savings rates. It started much later than China’s but India’s domestic savings rates has moved through 30% in the past year or so. While there are some growth impediments to deal with like an overweening bureaucracy the evidence is that savings alone will ultimately trump this. As with China, India’s growth surge will include intensive commodity usage. Evidence suggests that the savings rate alone is the best predictor and it’s pointing to a longer and stronger boom.

Not enough Copper, Zinc, Platinum in the world

2006-10-19T13:38:00.000-07:00

Here's a great article from Scientific American.com on a Yale study showing there's not enough copper in the world for everyone to enjoy a developed standard of living.

January 17, 2006

Measure of Metal Supply Finds Future Shortage

Copper is used in everything from automobiles to ordnance. Copper allows electricity to be generated, transported and conducted to the various outlets in a modern home. Copper is also relatively scarce compared to other metals like iron or aluminum that make up a good portion of the earth itself. So copper serves as an excellent metallic bellwether for potential future resource scarcity, according to a group of researchers who compiled data on its extraction, use, recycling and discard to estimate whether there is enough copper available to make a developed standard of living available to all the world's people. The short answer is: no.

"We have gathered together the information on these metals that is the stock in use," says team leader Thomas Graedel of Yale University. "This tells you how much copper it really takes to provide electricity, plumbing, road systems. We can say considerably better than people have been able to say in the past how much does it take if the world is going to live like a person from a developed country."

Graedel and his colleagues drew on archaeological, historical and modern data to determine how much new copper has been brought out of the ground and into use as well as how much has been discarded over the course of the 20th century. North America alone mined 164 million metric tons of the reddish-brown metal. Then, based on current discovery rates and existing geologic surveys, the researchers estimated that 1.6 billion metric tons of copper exist that could potentially be brought into use. This figure relies on the broadest possible definition of available copper as well as a lack of energy constraints and environmental concerns. In contrast, the U.S. Geological Survey predicts there is only 950 million metric tons of the metal that could be recovered.

"Certainly every square meter of earth hasn't been dug up but there aren't many places that haven't been investigated pretty thoroughly," Graedel notes. "We're not going to suddenly discover a new continent."

The researchers went on to examine per capita use of copper in the U.S. and other developed countries. While some theorists had predicted that metal use would decline as economies advanced beyond building metallic infrastructure, the teams' data showed that overall copper use in the U.S. climbed to a high of 238 kilograms per person by 1999. Declines in areas like manufacturing and railroads were more than offset by increases in areas like motor vehicles and domestic devices. In fact, residents of Canada, Mexico and the U.S. required an average of 170 kilograms of copper per person. Multiply that by overall population estimates of 10 billion people by 2100 and the world will require 1.7 billion metric tons of copper by that date--more than even the most generous estimate of available resources.

The same dynamic also holds true for other critical metals such as platinum, required for catalytic converters and other pollution control devices, and zinc, used to galvanize steel. While iron, aluminum and other more abundant metals could conceivably be used as substitutes, more research would need to be directed into such technology shifts, the team writes in the paper published online this week in the Proceedings of the National Academy of Sciences. And certainly as much currently processed copper, platinum and zinc should be conserved as possible; the world needs it. "Either the rest of the world can't live like the developed world or we need, as a society, to think more about the technology of providing these services with less intensive use of at least certain materials," Graedel explains. "We need to do a more diligent job of good housekeeping." --David Biello

Base Metals and Manipulation Theories

2006-10-10T19:19:00.000-07:00

By Steve Saville October 10, 2006

Below is an extract from a commentary posted at www.speculative-investor.com on 8th October 2006.

December copper futures dropped to test support at 320 last week and then reversed upward (see chart below), thus prolonging the consolidation that began in May. The copper chart doesn't look particularly bullish and the next drop to 320 will probably be the one that's followed by a breakdown, but until the breakdown happens there will remain a significant chance that copper will surprise the market by breaking-out to the upside.

The reason we think an upside breakout would surprise the majority of market participants is that the opposite -- a downside breakout -- has been discounted in the share prices of copper producers. Based on current valuations it is clear to us that the stock market is expecting the copper price to drop to the low-to-mid $2 range at some point over the next several months. We've also considered a decline of this nature to be the most likely scenario, but the potential for an upside surprise needs to be taken seriously. This is especially so given that recent stock market strength suggests that we are still at least a few months away from the start of an economic downturn.

With regard to the stock market's economic message, a sizable stock market decline will not necessarily be followed by a substantial slowing of economic growth, but a substantial slowing of economic growth will invariably be preceded by a sizable stock market decline. In other words, as a leading indicator of economic recession the stock market tends to generate many false positives but no false negatives.

But, the conspiracy theorists will say, the strength in the US stock market over the past few months is largely artificial. It is, they claim, mainly the result of the US Administration's efforts to paint an unrealistically rosy picture in the lead-up to the November elections.

This conspiracy theory has many logical flaws, however, one of the most important being that the US stock market's performance over the past several months has been consistent with what's been happening in stock markets throughout the world. To be specific, global stock markets have rallied in synch from their June-July lows with each market's relative strength generally being determined by its level of commodity exposure (in general, the more commodity-oriented a stock market the worse its performance has been since the June-July lows). For example, one of the first stock markets to reach new highs for the year was the commodity-light Hong Kong market.

Another big problem with the above-mentioned conspiracy theory is that a significant driver of the GLOBAL stock market rally has been the relentless decline in the oil price, a decline that has, in turn, been driven by a rise in oil supply relative to oil consumption. That is, the decline has resulted from what's been happening with the supply of and the demand for oil in the spot market, not by what's been happening with oil-related derivatives. Furthermore, the bearish near-term supply/demand situation in the oil market has been exacerbated by the fact that there haven't been any hurricane-related supply disruptions this year. Should we therefore conclude that the US Government has figured out a way of controlling the weather?

Getting back to the base metals, the likelihood of global economic growth remaining fairly strong for another 1-2 quarters is one bullish factor. Another bullish factor is the stubbornly-low levels of metal inventories relative to daily consumption. For example and with reference to the following www.fullermoney.com chart, although the amount of copper stored in LME-approved warehouses has drifted higher over the past year the total copper inventory remains very low by historical standards (the sum total of current LME copper stockpiles is equivalent to less than three days of global consumption). And it's not like the tight supply situation is confined to copper. Lead stockpiles have shrunk to near multi-year lows over the past three months, zinc stockpiles have been trending lower in relentless fashion for almost two years, and nickel remains immersed in a high-profile supply squeeze that has not yet shown any signs of abating.

If copper is going to breakout to the downside (a daily close below 320 in the December contract would constitute such a breakout) then the coming 4-week period probably affords the best opportunity for it to do so. After that we enter the seasonally-strong period for base metals and the shares of base metal producers.

With no major growth downturn looming in the near future, with metal stockpiles low relative to demand and with 'investors' having dumped commodity stocks en masse over the past few months in anticipation of the downturn that has, to date, failed to materialise, the coming seasonally-strong period could be particularly strong.

Commodity `Supercycle' Not Over, Morgan Stanley Says

2006-10-05T06:54:00.000-07:00

By Saijel Kishan

Oct. 5 (Bloomberg) -- The commodities ``supercycle'' isn't over and prices may rise because of production shortages next year, said Morgan Stanley, the world's biggest securities firm by market value.

Global supplies, which are three to five years behind demand, may test record lows in 2007, the New York-based bank wrote in a report today. ``The next leg upward in the commodities cycle'' will happen in the next 12 months, it said.

``The best-ever fundamentals for the sector remain fully in place,'' analysts led by Wiktor Bielski said in the report. ``We believe that we may not yet have seen the highs for commodity prices and therefore the commodities supercycle is just pausing for breath.''

The Reuters/Jefferies CRB commodity Index has slumped 19 percent from its May 11 record, ending a rally in prices that began in 2001, because of concern that rising interest rates and slower global economic growth may curb demand for raw materials.

``We believe these fears are overdone,'' Morgan Stanley said. Consumers in Europe, Japan and other Asian countries will replace the slowdown in U.S. consumer spending, the bank said. An increase in company expenditures and the effects of globalization will limit the slowdown in U.S. housing.

Economic expansion in China, the world's most populous country, a shortage of mining supply and investor demand for commodities will drive prices higher for a ``number of years, although we of course expect pauses and bumps in the road,'' the bank said. Pension and mutual funds have invested $120 billion to $150 billion in commodities, it said.

Forecasts Raised

Morgan Stanley raised its 2007 forecast for average copper prices by 17 percent to $3.50 a pound and $3.15 a pound for this year, compared with its previous 2006 forecast of $2.98 a pound.

The bank also increased its forecast for nickel prices next year by 30 percent to $10.75 a pound. Iron ore prices may rise 15 percent next year, Morgan Stanley said.

The bank cut its forecasts for coking coal, used to make steel, by 9 percent to $105 a metric ton for the Japanese financial year 2007 and 2008.

Morgan Stanley also reduced its forecast for aluminum by 16 percent to $1.05 a pound in 2007, and forecast a ``modest decline'' in steel prices early next year.

Bielski's views on commodities conflicts with those of Morgan Stanley chief economist Stephen Roach, who said last week that a correction in commodities has only just begun. ``As always, there will be fits and starts and possibly some tradable rebounds along the way. But a China slowdown, in conjunction with a downturn in commodity-intensive U.S. homebuilding activity, will challenge the widely held belief in the commodity supercycle,'' he said in an e-mail response to questions.

Investing in a world of rapidly changing geopolitical and economic trends

2006-09-15T07:44:00.000-07:00

This webcast with Marc Faber is extremely valuable for understanding the big picture in the world markets. He goes into great detail to explain why we're in the early stages of a commodity bull market driven by Asian growth.

It's 44 minutes, but it's well worth taking the time to listen to it and review the graphs, which are very informative. We think it's a must for any investor.

Resource Stocks Prepare to Rise

2006-08-27T08:58:00.000-07:00

By: Dr. Richard S. Appel

Friday, 25 August 2006

www.financialinsights.org

I believe that the vast majority of exploration shares have posted their correction lows. They are now in the process of building important bases before resuming their Bull Market. After staging a major price rise between the summer of 2005 and May, 2006, the wind was abruptly let out of their sails as they followed gold sharply lower. Now, I am confident that the tide has begun to change in their favor.

The yellow metal peaked at $730. It then began a downward journey and quickly found itself at its July $550 low. Today, the eternal metal is priced $75 above that nadir. Yet, the junior resource stocks continue to languish. Given the large paper and real losses sustained by most investors, why shouldn’t we all just throw in the towel and liquidate our stockholdings like so many commentators suggest? It would certainly lessen the pain.

Why? Because this is likely the worst possible moment to take such action. Great Bull Markets tempt onlookers by laboriously working higher over an extended period. This moves numerous observers to berate themselves for not having the courage to earlier invest.

They watched from the sidelines while others garnered substantial profits. Gradually, one by one, many of these investors are drawn in by the fear of missing the entire Bull Market or by the allure of fast, easy profits. Purchases that are fostered by these motivating factors typically occur during a periodic, exciting up-wave such as we experienced leading to the May peak, or at a Bull Market top. Unfortunately, these investors tend to not only add to the frantic price rise, but they typically find themselves making their purchases near or at its ultimate high.

Later, after suffering large losses and all of the froth and excitement is drained from the market, they may even sell. They will do this for fear of sustaining even greater damage to their asset base. The average investor is ruled by his emotions. This is why he historically buys near market tops and sells at lows.

If individuals truly believed that the Bull Market was real they would not act in this fashion. Even if they did and chose the very peak of any intermediate up-wave to make purchases, the bull would ultimately carry them with him and turn their paper losses into real profits. If they only had the courage to believe in the Bull Market, they would ride it towards its ultimate breathtaking high.

Herein lies the rub of remaining invested in any Bull Market! Prior to the final stage, all Bull Markets experience one or a number of periodic, terrifying price and breadth declines. These generate sufficient fear or doubt in investor’s minds to force all but the greatest believers from the bull’s back. It is damaging to those, who left the market licking their wounds, but is good for the future of the market and those investors who remain.

In this fashion hoards of interested onlookers are available to plunge into the market during its final, excited ascent. Even those who sustained earlier losses may return, caused by the allure of a later major bull advance.

Terminal periods in all Bull Markets are accompanied by not only wild excitement, overinvestment, and outlandish price predictions, but by a general feeling of euphoria and the belief that this bull will live forever. Further, is at these times when comments such as “we’re in a new era” or “this time it’s different” become the mantra of the day. These act to soothe and placate the fears that begin to well up in the hearts and minds of those who sense that something isn’t right, and that prices have lost touch with reality. This keeps many of them fully invested as they approach the precipice.

At the end of all Bull Markets greed-driven feelings have replaced the fearful ones which prevented their owners from taking earlier investment positions. Only then do these emotions emerge to take control of their masters. This causes them to jump aboard the bull, and drive prices to their final dizzying heights.

Eventually, the last bullish investor invests his last dollar. The rest is history! The Bear Market is then born, and losses accrue to all those who remain invested and are carried by the bear on his inexorable downward journey.

Any experienced resource stock investor, or for that matter any sophisticated market player, has many times been through trying periods such as face us today. These act to test our mettle! If I am correct, this is but another hair-raising price decline that this resource bull has placed in our path. Be prepared, it will not be the last!

“All price movements whether primary or secondary are ultimately corrected.” The recent explosive price run that ended in May was destined to be followed by a corrective phase. They always are! These act to remove the earlier excessive enthusiasm, reduce the overextended prices, and allow the market to stabilize at a new higher level. This is normal price action for all markets.

THE PRESENT PRICE REVERSAL IS THIS BULL MARKET’S MOST SEVERE

The first major resource stock decline began in the spring of 2002. It lasted about twelve or thirteen months before a broad-based, multi-month advance permeated the sector’s stock board. The next great down-wave had its birth in the spring of 2004. This one took over fifteen months before the excesses of the earlier great price advance were bled from the market, and an across the board skyward rise ensued. In both of these primary corrections it was not surprising for a junior company to fall 60% or more from its earlier peak.

The current price reversal stands alone to date. This is due to the rapidity with which these nascent companies shed their earlier hard fought for gains. The first important declines unwound like slow, grinding water tortures, compared with the recent waterfall-like breadth collapse. The present one saw many solid junior companies fall 40% to 50% or even more from their peak prices, in the space of but a few brief months. In both of the earlier cases once the stocks resumed their northward trend, a multitude of stocks struck new bull highs, and many of the more successful companies multiplied in price.

I believe that the recent historic price collapse has reversed investor sentiment. It is now near comparable levels where stocks arose from the two earlier major declines. If I am correct, the junior companies are now on the bargain counter for the taking.

True to form, few investors today have any interest in making purchases. This can be attested to by the low level of trading volume, and general indifference if not disgust with which most investors view this market. The resource bull has been successful in disillusioning and chasing from his arena all but the most staunch believers of his existence!

As difficult as it might be to believe, it is at times like these for which seasoned investors and traders yearn. This is especially true of resource stock investors.

Exploration and development companies require long time-frames to advance their projects. All companies are faced with extended down-times when the flow of news virtually halts. Time delays may occur when a company is waiting for the exploration season to begin. It may take many months before a geologist can even set foot on a project. Explorers must first receive government permits, create an adequate access to their property, or acquire a drill-rig or a seasoned crew. Or, they may be delayed by the need for a replacement part, waiting for assays from a lab before planning their next step, or for any number of other reasons. All of these issues often work to the detriment of their share price, but they can benefit an astute investor.

No matter how important the project, the absence of positive news is normally met with gradually declining share prices. This is accentuated during weak market periods. In fact, recently, many instances where companies presented good news to the market were met with yawns if not sales. Sell orders, because the news generated some buying. This allowed anxious individuals who were forced to raise capital the opportunity to do so. They could liquidate some of their stock without seriously affecting its share price. This maintained the value of their remaining stockholdings in the equity. If they sold other stocks they would find few bids. This would drive the stock price lower before they could sell their entire position, and widen their losses.

Knowledgeable investors look forward to periods such as now after the resource stocks have suffered severe declines. They also wait until trading volumes are low and the selling appears to have subsided. This allows them to acquire solid companies that have sustained the most severe losses, or those that had the opportunity to importantly advance their major projects, without a commensurate increase in their share prices. In both instances, wise investors can pick and choose the best risk vs. reward candidates in which to invest, knowing that they should lead the next advance.

Adding to the softness of the resource sector is the fact that we are in the period known as “the summer doldrums”. This is characterized by vacations when time spent with the family dominates the minds of most investors and brokers. This timeframe ends in early September when all of the players return and are ready for action.

Historically, the junior market begins to firm by mid-September. It then launches its seasonal Fall rally that normally continues to the end of October or into November. In fact, the past three years have witnessed strong price advances in the major and junior mining stock groups during this time.

HIGHER PRICES ARE IN THE OFFING

There are a number of factors that lead me to believe that we are destined for sharply higher share prices in the foreseeable future, if not within the next few months. First, I do not believe that the current prices for both the precious and base metals have been fully factored into the stock prices of the companies which mine or explorer for them. Copper is trading at $3.40, nickel at $15 and zinc is priced at $1.50. Nickel is posting all-time highs while copper and zinc are within striking distance of their recent record high prices.

Despite the fact that these and other metals are at historic highs, neither the marketplace nor most experts believe that they are lasting. To my mind, barring a major worldwide economic slowdown, I believe that the rise of China, India, and Brazil as well as a number of other countries will continue to place upward pressure on these and other metals for at least the next several years. If this analysis is correct, investors will eventually realize this inevitability and re-price upward these companies. When this occurs, a virtual stampede into the junior exploration sector will ensue.

Gold and silver stocks are not immune to this occurrence! The term “gold fever” is a euphemism that has been repeated throughout mankind’s history. During times of fear or uncertainty, and whenever a government destroyed the purchasing power of its currency such as the U.S. is now in the process of achieving, gold was a major beneficiary.

The common man purchases gold in his effort to protect himself. “Gold fever” occurs whenever a sufficient number of ordinary citizens become frightened by the declining purchasing power of their local monetary unit. When this tipping point arrives they jettison their nation’s currency for the safety of gold.

Silver on the other hand has been in an ongoing supply deficit for over a decade and a half. Further, virtually all of the available above ground stocks have been absorbed to fill this gap. Additionally, if Ted Butler, Gold Antitrust Action Committee (GATA.org) and other experts are correct as I believe they are, the white metal’s short interest is at a record level. These conditions set the stage for a breathtaking silver price rise. If these beliefs are true, both gold and silver stocks will follow the approaching explosive rises of their respective precious metals.

Another reason I anticipate higher exploration stock prices this Fall is that gold should soon add wind beneath their wings. We are entering the period that is typically marked by a vibrant gold market. This is spurred by jewelry and other companies when they purchase the yellow metal to satisfy their Christmas Season needs.

Further, the past few years have witnessed resource companies spend billions upon billions of dollars in exploration. This has allowed a number of companies to progress to the point where I believe the odds greatly favor the announcement of one or more major discoveries. These may come as soon as during the present field season. This market is driven largely by greed. I believe that the reporting of one or more such events has the potential to explosively ignite this small market. When investors see vast fortunes accrue to other shareholders caution is often thrown to the wind, and their purchases soar in the hope of achieving similar personal success.

Finally, Barrick Gold announced a hostile take-over bid for Nova Gold. If they or a yet-to-be announced “white knight” succeed, Nova’s shareholders will be rewarded with $2 C. billion or more by the sale of the their stakes in their company. Most of Nova Gold’s shareholders will use some or all of their proceeds to acquire other junior resource companies. They will do this in the hope of finding yet another Nova Gold, and similarly riding it from the pennies it was worth but four years ago when many bought it, to its $19 C. range of today. This amount of fresh money reentering the exploration market is sufficient to alone launch a major sector advance.

The summer is still with us and we are continuing to experience weakness among the junior shares. Yet, despite this fact it is difficult to acquire important positions in many of these companies without driving their prices substantially higher. I believe that we are witnessing an important watershed. The selling is drying up and the buyers are slowly beginning to return. It is only a matter of time before the share prices begin to rise and reflect this occurrence.

I am confident that the resource bull is far from dead. We will again be rewarded for our courage and belief, as one by one the above factors come together and incite him with a vengeance, back into action.

China's Zinc Demand to Increase 56% by 2010, Antaike Forecasts

2006-08-23T21:41:00.000-07:00

Interestingly, this analyst with a great track record says this forecast is "definitely conservative"...

By Chia-Peck Wong

Aug. 24 (Bloomberg) -- The demand for zinc in China, the world's biggest consumer of the metal, may rise 56 percent by 2010, Beijing Antaike Information Development Co. has forecast.

The country may need 4.8 million metric tons of zinc by the end of the decade, from 3.08 million tons in 2005, as it requires more of the metal to coat steel to prevent corrosion, Feng Juncong, a senior analyst at Antaike, a research agency that advises the government, said yesterday at a conference.

``As China's construction and transportation sectors grow, consumption has entered its peak growth rate,'' she said in a presentation in Inner Mongolia, a region in western China.

Zinc prices in London have surged 75 percent this year and reached a record $4,000 a ton in May on expectations China's expanding economy will require more metals, while smelter output in China has been stymied by a lack of mined material.

``China will definitely need to rely on imports to fulfill its annual needs'' in the next few years, said Feng, who has been tracking the industry for 12 years and correctly forecast China would become a net importer of refined zinc in 2004.

The domestic supply of mined zinc is likely to lag behind demand by more than 10 percent this year, pushing up concentrate prices, she said. She didn't provide an estimate of China's zinc production in 2010, saying that the country is likely to remain a net importer till then.

This year, China's net imports of zinc products, including mined output, or so-called concentrates, are likely to be stable at 860,000 tons, little changed from last year, as higher internationally-traded prices led Chinese smelters to export more, she said.

Record Forecast

Zinc prices in London, which have fallen about 16 percent from their record, are likely post a new peak in the fourth quarter as stockpiles continue to dwindle, Feng said.

``The fundamental demand and supply factors are still good,'' she said, without forecasting how high prices may rise.

Zinc stockpiles at warehouses monitored by the London Metal Exchange have plunged 55 percent this year to 179,175 tons as of yesterday, the lowest since early 1992.

China's lead consumption may surge 43 percent to 2.3 million tons in 2010 as demand from lead-acid battery makers soars 65 percent to 1.79 million tons, Feng said.

The forecast is ``definitely conservative as over the past 10 years, apparent consumption in China has grown 20 percent every year,'' she said.

The Dell recall and zinc

2006-08-18T05:19:00.000-07:00

This article looks for an opportunity to profit from the Dell battery recall, and concludes that zinc miners should be future winners. Below are some excerpts:

Dell's battery recall prompted us to look for an opportunity to profit. After some digging, we uncovered a possible winner: zinc.

After Dell Inc. <DELL.O> recalled laptop batteries made by Sony Corp. <SNE.N> on Aug. 16, our first reaction was to slam Sony. After all, $400 million is a lot of money even by multi-national standards. But rather than cursing the darkness, we thought that we'd light a candle instead. What companies stand to benefit from faulty laptop batteries? Companies that mine the only thing that all future battery technology must contain: metal.

With that in mind, we turned to the idea of the future. Unfortunately, the development of batteries is not as fast-paced as that of, say, semiconductors. The big future technology seems to be "fuel cell" tech. Fuel cells are similar to batteries, but run off of a fuel that can be replenished in an ongoing manner. Advances in the field seem to be geared around use in battery-powered and hybrid vehicles and using water as a fuel source, which is mostly theoretical right now. Wikipedia, though, notes that there is one type of fuel cell in mass production: zinc-air batteries, which are disposed of rather than refilled.

So let's imagine a world in which zinc-air batteries fuel the next generation of laptops. One would imagine the demand for zinc increasing, naturally. Fundamental Metals Monthly said in an Aug. 17 report that "According to the International Lead and Zinc Study Group, global consumption of zinc is increasing, while production of the metal is decreasing." (The most recent information at the International Lead and Zinc Study Group is subscriber only, but the reader is invited to check it out anyway. ) The research report also states that the price of zinc is up 80.2 percent so far this year.

At this point, one could imagine that futures contracts on zinc might be the way to go. Not so fast. Zinc-air is one of several competing technologies; we've merely concentrated on it because it's the best tested. Betting on a winner in a standards war, particularly when there's another tech that dominates now, is a high-risk strategy. Furthermore, zinc's price is cyclical, reflecting its importance in industrial materials; zinc is the coating that galvanizes galvanized steel. Given recent economic uncertainty, now might not be the time to go into a financial instrument tied to a cyclical material and that carries an expiration date.

That said, all battery technology has one thing in common: metal. Lithium, zinc, nickel, even potassium or barium are used in current or potential battery technology. If this is the case, then we might want to turn to the suppliers of metals in general for investment ideas, since a significant increase in demand for any metal would likely be good for a profit boost. The first idea, then, is the SPDR Metals & Mining ETF, <XME.A> which would simply be exposure to the industry in general.

Our analysis of zinc, however, suggests that perhaps we can do better with an equity investment in some company that mines the metal specifically.

21st Century Commodities Bull

2006-08-09T09:10:00.000-07:00

This article, from February, gives a great overview of the commodities bull market we expect and why we believe select commodity stocks represent the best investments for the long term.

Scott Wright February 3, 2006

The turn of the century has brought upon a change of guard for the financial markets. The general stock markets peaked and a new secular commodities bull was born. Even though many have had to endure the pain of a bursting stock-market bubble, the global economy has been thriving since the turn of the millennium and I suspect those in the future will look back on the 21st century and tag it as the Consumption Age.

Globally this consumption is not necessarily that of excess or overindulgence. Rather it may be considered more or less a movement of economic progressivism. Lending part to this trend is the fact that our global population is growing at a blistering pace and will continue to do so for years to come. Many people overlooked the incredible milestone that was attained in 1999. Our enduring planet lofted above the six billion mark in total population.

To put this growing and changing world into perspective, it was only about 200 years ago that the global population passed the one billion mark. According to the U.S. Census Bureau it only took another 118 years for the global population to double, reaching two billion in 1922. It then took 37 years to reach three billion, 15 years to reach four billion, 13 years to reach five billion and only 12 years to reach six billion.

Today we are already past the half-way mark to the next billion. Now with 6.5 billion potential consumers living in an era in which considerable industrial and technological advances are demanding more resources than ever, it’s no wonder global demand for commodities has soared. In this high-tech world we live in, commodities are zealously sought after in order to maintain, support and develop this growing population. Because of this, commodities of all types are soaring in value as their availability and economics are continually being challenged. Simply put, supply has not been able to keep up with demand.

This massively increasing population has contributed to an increase in consumption in virtually all goods and services, and in turn has contributed to the robust economies we are seeing today that are seemingly necessary in order to maintain status quo. Almost not surprising, GDP in the U.S. has increased ten-fold since 1972, China has seen a ten-fold since 1978 and the U.K. has seen its ten-fold since 1976. The macroeconomics we see here tell an incredible story in which commodities have and will play a large part now and in the future.

It is important for everyone to understand why we are in the midst of a commodities craze from a socioeconomic perspective, if for no other reason than to understand how it may affect their everyday lives. It is especially important to understand this if you are an investor. Investors and speculators who have taken part in the commodities bull thus far have scored incredible gains if they have played the upside of this secular trend.

It’s not too late though to continue to profit from this commodities bull. We are still likely in the first half of a long-term bull market. To this day commodities of all sorts are still in the midst of major economic imbalances. Global demand for both soft and hard commodities is on the rise and supply is struggling to keep up. It is the prudent investor or speculator who is able to recognize this pattern before it corrects itself and is able to leverage his capital to take advantage of the upside.

Our task now is to determine which commodities to focus on from an investment perspective. Now depending on whom you ask and where you look, the definitions for soft and hard commodities tend to range across the board. For our purposes we will consider any commodity that can be grown or raised a soft commodity, and any commodity that you have to mine or drill for a hard commodity.

Soft commodities tend to have a renewing characteristic. Crops can be re-grown, and typically in the same spot as the previous crop. And meat commodities are the result of animal breeding that has remarkably accurate forecasting. Softs are integral in this bull market, but are not the major player.

Commodities such as coffee, cotton, cocoa, orange juice and hogs are examples of soft commodities and are all non-finite in nature. As long as a global ice age doesn’t miraculously strike the earth, crops will always be grown. And I surely doubt that cows, pigs and chickens will ever become extinct.

Now there are external factors that can influence the pricing of these soft commodities and they are certainly not exempt from supply and demand pressures. Weather, disease, geopolitical unrest and labor are examples of some of these factors. But when an economic imbalance presents itself, the fact that these commodities are renewable typically avoids a pushing of the panic button.

Even so, soft commodities continue to play a large role in the overall futures markets and are not exempt from the volatility most people associate with commodities. Farmers need to lock in prices and speculators play the game to try and capture profits.

In come hard commodities. Hards consist mainly of energy and metals and require extensive capital expenditures in order to retrieve these commodities from the earth. These commodities are finite in nature and have limited resources. Hards have been on a tear the last four years, have captured mainstream media attention and are the major player in this secular commodities bull market.

Precious metals, crude oil and natural gas are not the only commodities that have taken part in this bull. These commodities do command the lion’s share of attention but let’s not overlook those others that play an integral part in the global economy. Below are many of the popular hard commodities and their bull-to-date highs since the beginning of 2001.

- Aluminum +94%
- Gold +124%
- Silver +142%
- Platinum +159%
- Zinc +220%
- Lead +252%
- Copper +280%
- Crude Oil +300%
- Nickel +302%
- Butane +330%
- Propane +346%
- Heating Oil +360%
- Gasoline +578% (+333% not including Katrina/Rita 3-day spike)
- Natural Gas +807% (+429% not including Katrina/Rita spike)

As you can see, these hards have had quite a run thus far and we’ll touch on them in more detail later. But in addition to these above, there are many other soft and hard commodities that trade in the futures markets. On top of analyzing each individually, it is equally important to get an overall perspective on the look and feel of this bull market in order to grasp the long-term trend of this commodities bull.

A good way to package all these commodities together and obtain this high-level look is to turn to the flagship CRB Commodities Index. The CRB Index has long been the benchmark that many investors use in order to track the overall progress of commodities.

Our first chart below provides an excellent representation of the development and progression of this commodities bull market. The 2001 low we see in this chart is the second bottom to a massive double-bottom in which the first in 1999 was within a point of what we see here. This bottom represents the lowest point the CRB has been since 1975.

As you can imagine, barring the occasional bear-market rally, commodities have been out of favor for quite some time. Today’s commodities bull is finally reflecting the importance of commodities and the realization that in this growing global economy the resources that support it are not to be taken for granted.

The CRB Index beautifully reflects this bullish trend. As you can see on this chart, the last four years display a textbook bullish footprint. The CRB Index has stayed within a relatively tight trend channel and has continued to produce higher lows and higher highs. In fact, just recently it surpassed its all-time high! In 1980 the CRB Index closed at its previous all-time high, but today’s commodities bull shattered it in recent weeks and has not looked back. Since its bottom in 2001, the CRB Index has risen 91%!

Now that we have our baseline for the look and feel of this commodities bull, let’s revert back to our soft versus hard commodity discussion. Currently the CRB Index is comprised of 19 commodity components. Today’s mix weights 59% as what we are calling hard commodities with soft commodities capturing the remaining 41%.

Interestingly, 9 of 19 components in the CRB Index are hard commodities, of which each is included in the list of 14 above. As mentioned previously, each of these gains are spectacular. While many hard commodities today are still hovering around their bull-to-date highs, most of the soft commodities that have actually produced gains are quite a bit off of theirs.

The 10 components that rank as soft commodities in the CRB Index have not had as impressive of a run thus far as hards. Corn and hogs are trading at the same prices today as they were in 2001. Wheat, soy beans and orange juice are up less than 50% from their 2001 lows. Cattle and cocoa are up a meager 62% and 87% respectively from their 2001 lows. And only coffee, cotton and sugar can boast gains in excess of 100% since the inception of this bull market.

Sugar is the truly interesting story among the softs. It has performed very well in this bull market, but for reasons that would exhibit the characteristics of a hard commodity. It recently hit a 25-year high not because more people are putting sugar in their coffee, but rather due to the huge increase in ethanol demand.

Sugar happens to be a common compound in ethanol production with well over 50% of the global ethanol supply coming from it. Ethanol consumption has significantly increased over the years and its demand is expected to continue to rise sharply in the years to come. As more and more countries are implementing ethanol as an alternate energy source we are now faced with a supply-deficit in sugar.

In fact, ethanol has been in such demand that both the New York Board of Trade (NYBOT) and the Chicago Board of Trade (CBOT) recently introduced futures contracts for sugar-derived ethanol. Because of this it is quite possible we may see gains in sugar that exceed the 282% we’ve seen since 2000.

Even with sugar as the stand-out soft commodity, it is evident that hard commodities are the strongest of the group and have been pulling their weight, hoisting the overall index. As with all indexes, the CRB Index went through a revision last July in order to reflect the weightings we see above. Hard commodities now become more of a focus and the results going forward should reflect more on their performance.

But now we look at the CRB Index, or commodities in general, and ask ourselves, why should we buy at all-time highs? But wait, are we truly experiencing all-time highs? Nominally yes, but in real terms, absolutely not! My partner Adam Hamilton penned an essay last year when the CRB Index broke 300 for the first time since 1981 and went into great detail on this topic. One of the charts he developed took a look at the inflation-adjusted CRB Index, and it revealed dramatic results.

I’d like to update this chart and show you why commodities, reflected through the CRB Index, are still relatively cheap in today’s dollars. When analyzing long-term price trends, it is always prudent to compare apples to apples and consider the true value of a dollar. Due to the relentless rolling of presses by the inflation-crazed Federal Reserve, a dollar today has nowhere near the purchasing power it did in 1981. And we need to highly consider this when we discuss the true value of a commodity.

If you only consider the nominal price of the CRB Index, then today’s highs are phenomenal as indicated by the blue nominal CRB line above. But when you factor inflation into the mix, as indicated by the red real CRB line, today’s prices are not as exciting as originally thought and it shows we still have a long way to go before true highs are met.

All we did was simply factor in the conservative CPI data in order to compare the purchasing power of today’s dollar to that of it in the past. The above chart reveals the fascinating reality of the true progress of this commodities bull market. In real terms, the CRB would have to nearly triple from today’s levels in order to approach its all-time high. This is a massive 200% increase over the nominal highs we’ve seen in the past month.

In real terms, today’s commodities prices are actually trading at the same levels they were in the early 1990s. In order to approach its real high in 1980, the CRB Index would have to rally up to over 777. And because of inflation, the 1980 nominal high is in fact not the true high as seen by the pinnacle achieved in 1974. Imagine the CRB Index trading at 1000! Well, this is what it would have to trade at in today’s dollars in order to equal its true all-time high. Commodities are still cheap!

Now that we’ve established the fact that commodities have enormous potential even at the nominal highs we are seeing today, how does an investor jump on board and leverage his capital in order to profit from this? Believe it or not there actually is a reason why I broke down the commodity types between soft and hard. In my humble opinion softs are nowhere near as exciting as hards, but regardless of this opinion, softs are just plain more difficult to invest in.

As an example, let’s say I saw further potential in sugar and wanted to jump on its bandwagon. Only one problem presents itself, I’m the average Joe investor, I invest in stocks, and not only do I not have a futures trading account, but I am not even interested in futures trading, way over my head!

Well, if you look real hard you will find various hedge funds out there that have recognized sugar’s potential and have thrown capital in its direction. But ultimately for the common investor there is really not an easy way to get a piece of the pie. Soft commodities are almost exclusively traded in the futures markets. You would be hard pressed to find a publicly traded company that produces a soft commodity and is exposed to its price fluctuations.

Hard commodities, on the other hand, offer wonderful opportunities for investors to join the party. Because of the massive capital expenditures and operating costs necessary to produce hard commodities, and because funding is always a challenge, most producers and servicers of these sorts are publicly traded in the stock markets.

With this, we need to again keep in mind the underlying reason why the CRB Index was revised to favor hard commodities. Its custodian’s goal is to reflect the commodities that are most important and influential in today’s economy. Energy and metals are such commodities today and are currently faced with serious economic and fundamental challenges.

Demand for these resources has reached unprecedented territory in order to service today’s global economy. And the supply that is being mined and drilled is not only slow to meet this demand, but for many of these commodities the reserves for future supply are quickly dwindling with new discoveries becoming increasingly difficult to find.

The reason you see these immense gains in hard commodities is because of the now and future economic imbalances that present themselves. For many years capital has poured into the general stock markets with focus on tech stocks, and though commodities need significant funding in order to sustain future supply, the funds had just not made it their way. For many years exploration budgets were slashed and new discoveries were few and far between. This brazen ignorance of commodities for so long has finally commanded the world’s attention.

It’s going to take many years for commodities producers to ramp up output in order to meet this increasing demand and even more to renew and build reserves for future sustainability. Because of this prices will most likely continue to rise as much-needed capital is directed towards these commodities producers. At Zeal we have gone into great detail analyzing the core economic fundamentals and imbalances that many hards are faced with, and I encourage you to research and discover the problem the world is grappling with today.

Now as mentioned earlier, the wonderful thing about these hard commodities producers is that most are publicly traded companies. Investors and speculators indeed have the opportunity to leverage their capital at the epicenter of this global commodities shortage.

Some commodities producers are more leveraged than others to their underlying product, but ultimately the stocks of these producers can be looked at as non-expiring call options in their various sectors that should continue to soar as this secular bull market in commodities climbs.

The stocks for many of these companies have produced gains far better than those of their underlying commodities thus far. And as the prices of their products rise as we expect them to, if they are leveraged correctly so will their profits rise. The continued appreciation of their stock price will reflect such.

The bottom line is commodities are still in the early part of a secular bull market. The global economy is starved for commodities and producers are struggling to keep up with demand. It will take many years for today’s economic imbalances to correct themselves and prices should only continue to rise.

The best way for investors and speculators to leverage their capital in order to take advantage of this commodities bull market is to invest in the stocks of the companies that produce these commodities.

U.S.'s largest pension fund sees a future in commodities

2006-08-08T21:39:00.000-07:00

By Karl Heilman 07 Aug 2006 at 12:07 PM

The financial wizard hired to invest billions of dollars for the state pension system is about to take the nation's largest pension fund where it's never gone before: into commodities.

Undeterred is Russell Read, who is taking over investments for the $208-billion California Public Employees' Retirement System. He thinks the risks are worth the potential payoff.

"We believe commodities are an important asset class that is likely to represent a core investment for our fund," Read said, choosing his words carefully during an interview in CalPERS' new $265-million headquarters building.

Read said he expected to begin putting his strategy in place at a September workshop on commodities trading with CalPERS' 13-member board.

Gold, Silver, Metals and Mining Shares

2006-08-08T21:38:00.000-07:00

By Lawrence Roulston

August 7, 2006

www.resourceopportunities.com

Metal prices have already rebounded strongly from the recent sharp drops. The question now is: When will share prices follow?

The following is extracted from the July 2006-1 Issue of Resource Opportunities

When gold, silver and some of the base metal prices plummeted in May, shares of mining and exploration companies followed the commodities down. Those big drops in share prices have created a lot of pain for some investors.

The metal prices have already rebounded sharply, reflecting the enormous fundamental strength in the metal markets. Mining and exploration company shares are still languishing, as many investors enjoy a summer vacation.

The big consideration now is, when will the share prices get back onto an uptrend?

The short answer is that some of the companies have already recovered their recent losses and others are beginning to follow. As in the past three years, autumn should see a steady upturn in junior resource stocks.

Its worth a review of the metal markets to appreciate the extent of the upside potential in these markets.

Gold reached $730 in May, the highest level since its run-up to the all-time high of $850 in 1980. By mid-June, the gold price was under $570 – a gut wrenching $160 freefall. In almost as dramatic a fashion, gold regained $80, before taking another pause. The events in Lebanon are adding to the growing interest in gold among investors as a secure store of wealth. Yet, investor demand is but one aspect in the story of the gold market.

The silver market, as usual, was even more volatile than gold. Silver climbed from under $9 at the start of this year to $15 by mid-May, before plunging to under $10. Copper dropped from $4 to under $3, and then recovered to as high as $3.70 within weeks.

Perhaps the most surprising story was nickel, which dropped from $10.30 in late May to $8. The nickel price since rebounded to $13 a pound. At the current price of $12, that base metal trades at the equivalent of $.75 an ounce.

Remember the commentators in May who misread the correction in metal prices and argued that it was all over for the metals? Sure enough, the run-up in prices in May was driven by speculators. The present rebound, coming after the speculators were washed out of the market, is part of a long term uptrend that is still at an early stage.

All you have to do is look at the longer-term metal price charts to understand the big picture. Five years ago, copper was $.60 a pound, nickel was $2 a pound, gold was $252 an ounce and silver was $4 an ounce. The stunning gains in metal price reflect fundamental changes in the economic world.

The gold and silver prices will probably continue to ratchet higher over time, in exactly the way they have over the past five years. The gains will be driven by the same factors that have been in place during that period. In the next issue, I will go deeper into the outlook for the gold market.

Nobody expects today's base metal prices to continue rising forever. But, the long-term forecasts that are being used are totally ludicrous. The big brokerage firms, the engineering firms, even the mining companies are showing long term metal prices that start well below the current levels and then drop back to so-called long term averages within about two years.
I keep asking the people who are working with those figures: What are the new mines that will come into production in two years that will bring the prices down?

The answer, from as many knowledgeable mining industry people as I have been able to put the question to its always the same: There are no big new mines that will come into production in that time frame. But, they argue, metal prices have always gone in cycles, and therefore they are imposing the historic cycles on the present situation.

The last cycle ended when economic growth slowed at the same time that several big new mines came into production. At that time, there was not a massive horde of wealth in the hands of oil exporting nations that we have now with $70 oil. China was not a factor. India was not a factor.

While analysts use the so-called long term averages for metal prices, the forecasters insist on using today’s energy price, based on $70 oil, for the life of the projects.

Not too many new mines look attractive with costs at the present level and revenues based on historical figures. We will never see those historical prices again. Those historic figures are measured in dollars that had an entirely different value than today or in the future.

In other words, even if demand for metals suddenly evaporated and an abundance of new mines started producing, the equilibrium in the markets would come at metal prices that reflect the fact that the dollar is worth substantially less now than it was a decade ago or two decades ago.

The handful of smaller mines presently under development won't come near to offsetting the older mines that will be shutting down as they run out of ore. The biggest copper mine in the world, Freeport’s Grasberg mine in Indonesia, has just seen yet another reduction in forecast production.

Instead of building new mines, the mining industry remains totally obsessed with buying, acquiring, merging, consolidating and otherwise shuffling the ownership of existing production. It takes many years to bring new mines into production and there are nowhere near enough new development projects under construction, or anywhere near construction, to come even close to offsetting depleted mines, much less catch up to rising demand.

The demand side of the metals markets is gaining strength. Copper's recent run to $4 was driven by speculators. After many of those speculators were washed out of the market, the current strength is coming from the fundamental demand for metals.
Many investors remain fearful of a sharp decline in the US economy. Certainly, the US economy has serious problems, including consumer debt, government debt, the on-going government budget deficit and the enormous trade deficit.

That situation is clearly unsustainable. There is no question that there must be a readjustment. I dare say that many investors seem to be missing the point that a process of adjustment has been happening for years… and will continue in a way that results in a gradual realignment of the US economy with the rest of the world.

That process of adjustment is based on the fact that the value of the US dollar continues to erode, having already lost 30 or 40% of its value against other major world currencies. The dollar has lost a substantially greater value when measured against hard assets, such as gold.

Many Americans, who are living comfortably within their own borders, are not even aware of how much of their wealth they have already given away. Those people will have a rude awakening if they ever venture abroad. Many places in the world now have a level of wealth and grandeur that makes American cities look old and tired – and comparatively cheap.

Nevertheless, the US remains a great country. Brilliant business minds and innovators and entrepreneurs will continue to overcome the best efforts of the government to wreck what remains the most powerful nation in the world.

In spite of years of forecasts by economists and would be economists about the imminent demise of the US economy, the country continues to enjoy strong growth. The economy will likely slow from this level, yet only a handful are predicting a situation as bad as zero economic growth. Those dire predictions, for the most part, are coming from the same commentators who have been making the same predictions for at least as long as the nine years that I have been following the markets as a newsletter writer. (Those predictions of doom and gloom likely go back even further, but in my previous life as an exploration company president, I wasn't following the market commentators.)

In short, even if a disaster case were to unfold, and the US economy were to plunge to zero economic growth, then America would merely consume the same amount of metals as in the previous year.

The Case for Zinc

2006-07-31T11:49:00.000-07:00

This article is from February, but gives a great overview of the case for zinc and zinc mining stocks.

By Rob Furse
February 10, 2006

Zinc is hot. Everybody is talking about it and buying anything related to it. My interest in the “Great Protector” was piqued about three years ago by the great Jim Rogers who mentioned it in interview as a laggard in the metals cycle. With zinc being the best metal performer in 2005 it looks like Jim is right again. But how sustainable is the current strength in zinc prices?

Let’s start by looking at the inflation adjusted price of zinc. In the early 70’s zinc reached an inflation adjusted price of $10,000 per tonne. At the beginning of 2006, the zinc price is still under $2500 per tonne. This historically low price is less than one quarter of zinc’s inflation adjusted high. If the commodity super-cycle plays out, the ultimate price of zinc could be stunning, perhaps far surpassing the high water mark of $10,000 per tonne.

This technical fact is supported by the long-term fundamentals of the zinc market. Take a look below at this graphic created by Teck-Cominco showing current and future mine supply versus expected demand. This graphic illustrates what is termed the “Zinc Supply Gap”.

It is apparent that years of underinvestment have left few projects in the pipeline. In fact, many producing mines are set to close over the next few years. It is worth noting that in the past, Teck-Cominco purposely choose to not develop any of it’s zinc deposits so it would not undercut the viability of its’ massive Red Dog zinc mine.

Not only are there not enough projects in the pipeline to meet demand. The economics of planned projects continue to degrade. Oil, electricity, even giant tires for mining trucks are all in short supply. More critically, experienced geologists and miners are an aging group and tough to find. To top it off, mining regulations are more rigid than ever before with stringent environmental and aboriginal concerns pushing out development timelines even further.

On the demand side, Asia is the key player, with their hyper-growth expected to drive demand in the zinc market. In fact, growth is now expected to be closer to 4% per year, rather than the 1.5% or 2.5% currently modeled.

Zinc has few substitutes and could easily take out its’ old highs without too much dislocation in the economy. It contributes only a small portion of the end cost for the products it is used in. For example, the average car uses about 17 pounds of zinc. At ten times today prices zinc would only add an extra $170 dollars to the cost of a car.

A slowdown in the U.S. is always a factor when considering base metal prices, but America uses only about 11% of the world’s zinc. Furthermore, World population is growing at an exponential rate, creating more people thirsting for their first taste of Western living standards. North America and it’s housing market could affect base metals prices in the short term, but the future will see Asian economies much less dependent on exports. The ramifications of this inflection point will go far beyond base metal demand, but that is beyond our scope here.

Currently there are a lot questionable valuations for mining companies and zinc miners are no exception. I would look for a quality senior and mid-tier producer along with juniors with proven management and decent land packages. With the price of zinc rising, these companies should do well over time.

Australia's ABARE: Zinc prices may keep rising next year

2006-06-27T02:34:00.000-07:00

26 June 2006
Australia's ABARE: Zinc prices may keep rising next year
Source: Dow Jones

Zinc prices are expected to surge 17% in 2007, adding to a forecast more than doubling this year as growth in global mine output continues to fail to match demand, Australia's government commodities forecaster said Monday.

Zinc is forecast to average US$3,500 a metric ton in 2007, up from US$3,000 in 2006 and US$1,382 a ton last year, the Australian Bureau of Agricultural and Resource Economics, or ABARE, said in its June quarter report. Spot zinc closed at US$2,940 a ton in London Friday.

"The rise in prices so far this year reflects a market characterized by slow growth in zinc mine supply, concerns over supply disruptions, strong global demand for zinc and low and steadily declining zinc stocks," ABARE said.

"Compounding these effects has been an increase in targeting of base metals such as zinc by investment funds and financial speculators," ABARE said.

A strengthening of world economic growth is expected to drive demand for galvanized steel, zinc's main use, in the construction and automotive industries in 2006 and 2007, ABARE said.

World production is expected to grow to 10.7 million metric tons this year, up from 10.3 million tons in 2005. A further rise in output to 11.2 million tons is forecast for 2007.

The gains aren't expected to be enough to cope with demand though, ABARE said.

World consumption is expected to rise to 11.1 million tons in 2006 and again to 11.4 million tons next year.

Think Zinc

2006-06-20T21:20:00.000-07:00

By Luke Burgess

BALTIMORE, MD -- Zinc prices have increased 71% in the past 6 months, 141% in the past 12 months, and 251% in the past five years making it one of the top performing metals. Will the trend continue?

After centuries of use, zinc has become one of the most important metals known to man.

The bluish-white metal is now the fourth most common metal in use -- trailing only iron, aluminum, and copper in annual production.

You see, the world needs her zinc because it plays an indispensable role in a wide range of industrial and consumer products.

The single biggest use of zinc is for galvanizing steel. Galvanized steel is standard cold-rolled steel coated with a thin layer of zinc. The zinc layer protects the steel from rust and corrosion.

You are no doubt surrounded by galvanized steel right now. Galvanized steel has long been one of the most used building materials in the world. In fact, U.S. consumes nearly 40 BILLION pounds of galvanized steel each year for a multitude of uses.

Zinc is also used for die-cast components, from door handles and carburetors on cars, to children's toy cars, and thousands of other products such as casings for electronic components.

Zinc is also alloyed with copper to make brass which is used in a vast array of products. The multitude of other uses of zinc includes sun screens, phosphors on TV screens, fireworks, paints, cosmetics and plastics.

This rapidly growing list of applications is steadily adding to the importance of zinc in the industrial world.

And with all these applications its no wonder why global consumption has been increasing steadily at an average of just over 3% a year.

Today the world demands nearly 16 billion pounds of zinc per year.

And because of the rapidly growing economies of China and India, global demand is expected to continue to rise. In fact, demand from China is now expected to be closer to 4% per year, rather than the 1.5% or 2.5% currently modeled.

As a result, the mining industry will need to bring on about 450 million pounds of new capacity each year just to satisfy the growth in demand. This won't be an easy task.
In addition to the 450 million pounds of new capacity required to meet the growing demand for zinc, the mining industry must also find and develop new mines to replace depleting mines.

Current projections show that about half of today's production will be depleted within the next decade.

Over the next few years, the zinc mining industry will need to bring on two new 200-million-pound-per-year mines each year to meet the growth in demand plus another couple of big new mines each year to replace depleting mines.
But because of years of underinvestment in the sector and the thinning supply of geologist who really know how to find a worthy deposit, that's not likely going to happen.

The zinc industry is highly fractured, with about 266 mines in production. Fewer than 20 of those mines produce more than 200 million pounds per year, a level that would be of any interest to a major.

Many of the smaller mines are in China, and are facing growing challenges to meet more stringent environmental and safety standards. So the future of the industry is heavily dependant on finding new deposits.

Zinc has few substitutes and could easily take out its old highs without too much dislocation in the economy.

A slowdown in the U.S. is always a factor when considering base metal prices, but America uses only about 11% of the world's zinc.

Furthermore, world population is growing at an exponential rate, creating more people thirsting for their first taste of Western living standards.

Commodities Bull Market for Another 10 to 15 Years

2006-05-26T16:59:00.000-07:00

This article is the draft of a speech by Clyde Harrison of Brookshire Raw Materials. It's a bit lengthy, but well worth the read. Below are excerpts relating to the stock market and commodities:

The equity market now has 84 million individual investors. Over 50% of these investors’ liquid assets are in the equities—but the historical average is 25%. Using the rules outlined by Graham and Dodd such as dividend yield, P/E Ratio, price ratio, price to sales ratio and price to assets, stocks are very expensive. They are over owned and over priced – a dangerous combination.

There has never been a ten year period in history when valuations have been as high as they are now and where the broad stock market indexes out performed money market funds – never!

I expect a moose market, not a bull or a bear but a moose, rhyming with the period of ’66 to ’82 where the market went nowhere.

I believe the paper bill market has ended and the stuff bull market has begun.

Between 1966 and 1982, equities gained nothing while the GNP gained 330%. The DOW went from 1000 to 875. From 1982 to 2000, the GNP gained 170% and the DOW rallied from 875 to 11,700. Currently the DOW is trading over 11,000, about a 25 P/E ratio. Between now and 2015 if the GNP gains 100% and earnings gain 100%, then the DOW could be at 10,000, trading at 10 times earnings. During the past 5 years the S&P is up 5%. And at that rate of compounding, you will have to work till you die.

During the last stuff cycle equity mutual funds were in a dead zone while stuff; raw materials, art and real estate had super returns.

In 1966 oil was $2.90/barrel and rallied to $28/barrel. Gold was at $35/oz and rallied to $850/oz. The average price of a home increased 180%.

In 1982 the stuff cycle ended and the great paper cycle began. In 1982, the public had 14% of their liquid assets in equities. The Business Week Magazine cover reported “The Death of Equities”. The P/E ratio was 7. Stocks were dirt-cheap and stuff was very expensive. Brokerage firms were selling real estate and oil and gas partnerships. 1982 was the beginning of a great bull market in paper.

By 2000, the DOW was up over 10 fold. The cost of one dollar’s worth of earnings (the P/E ratio) has risen from 7 to 44, and the public had 57% of their liquid assets in equities. The Time Magazine cover featured “The Committee To Save The World: Greenscam, Summers and Ruben”. Brokerage firms were selling tech and dot coms with no earnings. The paper bull market was ending. Paper was very overpriced and over owned. The Dow could be in a trading range of 7,000-11,000 for years.

Stuff, from 1982 to 2000, was in the dead zone. Oil went from $28/barrel to $26/barrel. Gold went from $850/oz to $280/oz. The average price of a house had increased 1.2% per year by ‘2000. Stuff was a bargain.

In the next 10 years paper could be a trading market while stuff is in a bull or buy and hold market.

30 years of restrained and neglected natural resource supply is being overwhelmed by demand.

Peace put 2 ½ billion people in the world labor market. India and China alone contain over 2 billion consumers. Suppose each of the 2 billion people consumes a mere quart of gasoline per week as their economy booms; that’s an additional 1.7 million barrels a day, new demand that is sure to increase price. Today, China is booming. They have declared the national bird to be the construction crane. Last year China’s factory floor produced 50% of the world’s cameras, 35% of the TV’s and 30% of the refrigerators sold worldwide. In the last five years china went from exporting oil to the second largest importer in the world. The Chinese will go from walking, to bikes, to motorcycles, and to autos. They will need oil and gas, chemicals, forest products and metals. At 80 cents per hour they are deflating manufacturing costs, but as they become more successful, they will throw away their bicycles and buy motorcycles and eat better, increasing the demand for raw materials.

China and India are transforming their economies from poor agrarian nations to the newest industrial powers, replete with heavy industries, mass transportation and higher education. Rising from these giant new economies will come millions of new consumers, the very people who are already straining the natural resources of the earth.

Real incomes are just beginning to rise to levels that create large demands for consumer goods. Between 1950 and 1970, Japan’s urban population increased 70%. Personal consumption increased 600%.

China currently is 40% urban, 60% rural. The US is 97% urban and 3% rural.

China has 20% of the world’s population and 7% of the world’s land. China’s grain imports will grow from 14 million tons today to 57 million tons in 2020.

Today, 1 billion people consume two thirds of the world’s raw materials. 5.6 billion people consume the other third and they are becoming more successful.

Demand for raw materials has increased. In many cases, the capacity to produce raw materials has declined dramatically in the last 20 years. Tops and bottoms are creatures of extreme. Markets rise above all expectation and then go higher and then fall further than common sense suggests. The most desirable investments for the future might not be in cyber space but back to the basics.

By the end of this bull market in commodities, there will be a bounty on caribou, you will be able to see an oil rig from every beach and they will be digging a copper mine in Barbra Streisand’s yard.

As you climb the ladder of financial success, check to make sure it’s leaning on the right wall. I believe raw materials will be one of the best investments for the next 10 to 15 years.

Zinc prices will stay above $3,000 till 2008, says Volcan

2006-05-26T10:45:00.000-07:00

Posted online: Friday, May 26, 2006 at 0000 hours IST

MAY 25: Volcan Cia Minera SA, South America’s biggest zinc producer, said prices for the metal won’t fall below $3,000 a metric ton until 2008 because of a production shortfall.

Zinc will remain almost three times the average price for the past five years because of a scarcity of the metal, Volcan chairman Roberto Letts said in Madrid on Thursday. Letts said he wasn’t ‘‘convinced’’ there is a ‘‘bubble’’ in zinc prices.

‘‘There is good demand, and no new production, prices will stay above $3,000,’’ Mr Letts said. Zinc futures have risen 86%, and traded at a record $4,000 on May 11. Demand is forecast to exceed production, and investment funds are buying the metal as they diversify into commodities.

—Bloomberg

Zinc consumers fret over tight supply

2006-05-26T07:03:00.000-07:00

Fri May 26, 2006 7:46 AM ET
LONDON, May 26, (Reuters) - The steel industry is closely monitoring moves in zinc prices as worries intensify about a possible market deficit, a U.S. steel maker said on Friday.

"At some time in the beginning of 2007, zinc supply is going to be so tight and the price will be astronomical and some people will not get their zinc," Douglas Brooks, a manager at Nucor Corp (NUE.N: Quote, Profile, Research), told Reuters at Metal Bulletin's zinc seminar in London.

Brooks said he was much more worried about how to obtain zinc, rather than its price.

The moment price became a problem, orders would drop off and the market would stabilise automatically.

"Eventually, zinc will be so expensive that people drop out, and then there will suddenly be plenty of zinc around," he said.

But before that happened, the price could go well beyond $5,500 a tonne.

Such levels would not be sustainable, but he still expected the price to stay around $1,500 a tonne.

"We will never see zinc at $800-$900 again," he said.

© Reuters 2006. All Rights Reserved.

Heading towards a buying opportunity of a lifetime

2006-05-22T14:47:00.000-07:00

In this article, Eric Hommelberg discusses the technical analysis of Gold vs. the HUI (Gold Bugs Index). There are several charts in the article.

He concludes that "whether or not gold continues its descent from here on towards the $620 - $640 area doesn't bother me since the downside potential for the Gold shares is limited, but according to some credible market insiders the correction in gold could be over much faster as you might think." He stongly believes that "we're heading towards a buying opportunity of a lifetime here."

"Speculative frenzy" coming for Mining Stocks

2006-05-22T14:39:00.000-07:00

Peter Grandich: The bulk of the correction in the metals market is now behind us

Here's Peter Grandich's May 11 real-time alert about a sharp correction coming, right at/near the peak:

Marketwatch, May 11, 2006:
Gold, silver futures rally to quarter-century highs

UPDATE -
From The Desk of Peter Grandich May 11, 2006 1:00 PM EDT

"... an overbought/oversold indicator of mine that I've used since before the 1987 stock market crash, has given the most overbought reading EVER for both copper and gold."

"I'm going to suggest that the risk in gold, silver and copper is now equal to, or much higher than, the reward in these markets for the near term. The long awaited sharp correction is within hours or days at most."

He was right, as gold has already corrected over 10% from its high very quickly. Hopefully, he's right this time as well:

Indeed, "the bulk of the correction in the metals market is now behind us," with the exception of copper, which "has a ways to go to the downside," said Peter Grandich, editor of the Grandich Letter.

He expects gold and silver to "bounce strongly early next week."

I like what he had to say about junior mining stocks in his latest alert:

Mining and Exploration Shares –
I said in my May 11th issue, “…the second half of 2006, and especially 2007, is setting up to be the speculative frenzy most have been patiently waiting for.”

While shares in general can decline another 10%-15%, the bulk of the froth has been removed,
especially in the junior resource market. In fact, I do believe the next 60-90 days could offer
one of the best entry points into the junior market since the bottom in 2001-2002. I’m highly
prejudiced since part of my livelihood is made within that industry, but it’s my most humble
opinion.

The 1970's vs. Today

2006-05-22T14:37:00.001-07:00

This article by Martin Weiss compares the world situation in the 1970's, when gold went up more than 8-fold in 3 years and 5 months, and compares it to today. After describing 6 parallel patterns, he concludes with the following:

These parallel patterns point to a parallel future.

There will be many differences; history will twist and turn events to surprise us all. But throughout it all, I have little doubt that surging gold, and commodities and interest rates imply some of the greatest opportunities of a generation. That was true in the late 1970s. I believe it’s true again today.

To profit from them, you don’t need a big stake. Nor do you need to catch every up and down move. What you need most is patience.

Although protective measures, like stop-loss orders, are always prudent, don’t run at the drop of the hat. Don’t let your vision be clouded in the shadow of each correction. Stick with your core positions and strategies.

Always remember: It’s not until the Federal Reserve slams the door on easy money that you need to worry about an end to the rise in gold, silver, oil or other natural resources.

At the same time, recognize that these kinds of sweeping upsurges don't come every year or even every decade. It is a once-in-a-generation cycle that you or I are unlikely to ever see again.

So if your aim is large profits, and you have speculative funds available for leveraged investments, it’s now or not at all.

Worldwide Zinc Crisis

2006-05-22T14:37:00.000-07:00

This article by Tom Dyson shows how bad the worldwide zinc crisis is already, ahead of some major mine closings in coming years. Here's the zinc discussion from the article:

The world is out of zinc...

I’m not joking. All industrial metals are scarce right now, but none are as scarce as zinc. There simply isn’t any available.

I learned this yesterday on the golf course. Chris Hancock specializes in Asia. He is the author of a publication called the Asia Strategy Report. We were paired together in a corporate golf outing. While contemplating my approach shot to the sixteenth green, Chris started talking about zinc…

Kohler Inc. is a huge manufacturing conglomerate, best known for making bathroom fittings like sinks, latrines and faucets. They coat their products with zinc to stop corrosion.

“I was just in Hong Kong,” Chris told me, “and while I was there, I met up with a friend of mine who’s the manager of several Kohler plants in China. He told me they’re having trouble with zinc… they can’t find it anywhere.”

Chris continued: “At first I didn’t pay much attention. But then at dinner that night, I sat next to a guy from my MBA class. He’s an investment banker with UBS Warburg. He says all the traders at Warburg are buying zinc like crazy and that the zinc price is about to run. But get this...

On the plane back from Shanghai, we start chatting to the lady in the seat next to us. It turns out she manages a plant in Chicago for one of the large office supply retailers. She said she’d been in China visiting factories. We told her we had been doing the same thing. We asked her how her trip went - if she’d had any problems sourcing materials for her plant – and she told us she did. She couldn’t get hold of any zinc!”

No bubble to burst in commodities: PIMCO

2006-05-22T14:33:00.000-07:00

Thu May 18, 2006 3:42pm ET

By Barani Krishnan

NEW YORK (Reuters) - The drop in oil and metal prices this week has raised fears that a speculative bubble in commodities is bursting, but giant U.S. fund manager PIMCO says fundamentals will hold up the asset class.

"In considering commodities, we need to take a more strategic view instead of trying to predict in very short term what prices might give," said Bob Greer, senior vice-president and manager for real return products at the $600-billion-fund which mainly invests in fixed income.

Many analysts saw the corrections as a normal pause needed in bull markets, particularly for energy futures and copper, which hit record high prices in the last four weeks.

But some say too many speculators were bidding up prices too high to justify demand supposedly coming from hungry economies like China and India. Some economists also fear a sudden exit of speculative investors like those that have caused real estate and dotcom stocks to crash in the past.

Greer, who oversees a $12 billion allocation for commodities at Pimco, said his model showed economics would support prices of natural resources.

"To have a speculative bubble, you need one or both of two things -- one, a restricted supply of whatever it is that's going to bubble up, and two, you need to lose all concept of an objective measure of value."

"The former was true in real estate." he said. "Real estate is in limited supply and you can certainly bid up the price of that limited supply. In the case of dotcoms, there was a classic case of losing all concept of what a measure of value was. Neither of that holds for commodities."

U.S. crude has slid nearly 5 percent since Friday, touching five-week lows on signs high energy costs were stoking inflation and stifling consumption. Copper <0#hg:> tumbled 4 percent early this week amid worries that any further rate hikes by the Federal Reserve could slow economic growth and undermine metals demand. Meanwhile, gold <0#gc:> was struggling under $700 an ounce after sliding almost $52 from a 26-year high of $732 on Friday

Greer said the "real" debate over commodity investments was about the passive investments in commodity futures indexes made by funds, pensions, endowments and wealthy individuals looking to hedge their investments in stocks and bonds.

Analysts say passive investment portals such as the Goldman Sachs Commodity Index, the Dow-Jones AIG Commodity Index and Reuters Jefferies CRB Index have seen total inflows of more than $100 billion in recent years, leading to an all-round surge in raw materials prices.

"I do not believe that long-only index investors are driving prices," Greer said.

"PIMCO is by most accounts the largest manager of commodity index mandates in the world. Yet, PIMCO does not own one barrel of crude oil, one bushel of soybeans, one ounce of gold. We do not consume any of those commodities," he said.

"And as far as the objective measure of value is concerned, that occurs on the wheat fields of America, the natural gas terminals, the gasoline pumps and supermarkets where we decide how much we're going to pay for that commodity."

Greer said although there were instances when futures led cash prices of commodities, "it is more likely that futures will converge to the cash, and not the other way around".

"In the short term, you might have some traders in one pit looking at what's happening in another pit. But over the longer term, it will still be the fundamental economics that are unique to that market that will prevail."

"So, you don't have the necessary requirements for a speculative bubble."

Steven Leeb on Commodity Stocks

2006-05-22T14:30:00.000-07:00

May 22, 2006

The other big event last week was a heavy dose of profit-taking in the commodity pits. The CRB index lost a little over 6%, while $56.20 was whacked off the head of the gold price. Most commodity stocks naturally lost ground as well.

The financial media, which hasn’t been bullish on commodities or gold since the 1980s, naturally started screaming that another bubble was bursting. But before you panic and sell your commodity and gold shares to the many eager traders around the world who are looking for a bargain, let’s take a moment to consider soberly whether this so-called “bubble” even existed in the first place.

Bubbles, properly speaking, are strong price gains that by their nature undermine the fundamentals that caused prices to rise in the first place. For example, in the late 1990s, the bull market in technology stocks led to a massive boom in capital spending. The result of this capital spending was too much capacity in the technology industry, which then led to a sharp fall in earnings, and finally a steep drop in share prices.

The current bull market in commodities bears no resemblance to the tech boom, for the simple reason that few people today believe actually the commodity bull is taking place. Hence, very little in commodities is overvalued.

Consider, for instance, that during the tech boom, leading stocks like Cisco and Microsoft were selling for 70 to 80 times earnings – while many others sported P/Es well into triple digits. Compare this to the P/E ratios of leading commodity stocks in today’s worlds. (examples all under p/e of 10)

I think you’ll agree that commodity stocks today look downright cheap by any historical standards. Indeed we challenge you to find any stock in the energy or metal patch which is not selling close to a historically low P/E today!

The other sign that technology was in a bubble in the late 1990s was that tech companies were using their high stock multiples as currency. By issuing or selling shares like crazy, companies were able to buy other companies or raise funds for capital expenditures. Consequently, the number of outstanding shares expanded rapidly for many tech companies.

In today’s commodities bull, almost the opposite is true. Most resource companies today are using their substantial profits to buy back their own shares and reduce the number outstanding. And who can blame them with their stock prices so cheap.

The trouble is that Wall Street does not believe there is a bull market in commodities. It is valuing these companies as if commodity prices are about to fall back to where they were before the bull began. And herein lies a serious problem.

You see, as long as Wall Street ignores the supply/demand pressures on commodities, and stubbornly insists that the price of nickel, copper and other commodities will soon collapse, it will continue to undervalue the companies that produce them. As long as everyone expects oil to fall back to $38, no one will be willing to finance alternative energy.

As long as this situation continues, resource companies will not issue more shares in order to raise funds to build more production capacity. And the result will be no relief for the supply/demand pressure that’s driving commodity prices higher.

We’ll know the commodities boom is nearing its end when we see huge amounts of investment money flowing into overvalued resource companies, driving up P/Es and causing excess production capacity to be built. Typically, it is that excess capacity, brought about by overly optimistic forecasts, that results in a glut on the market and falling prices.

But today, when resource companies remain at low multiples and are buying their own shares, we can be pretty sure the end is a long ways away.

That’s not to say last week’s sell-off in commodities will be erased this week. It may take a few weeks or even a month or so for prices to bottom and reverse. But we are fairly sure that this bull is far from over.

Comments on Metals from Enrico Orlandini

2006-05-22T14:24:00.000-07:00

Here's some excellent commentary on the different market sectors from an analyst with a great track record (bullish on metals, oil, Swiss Franc, bearish on U.S. stocks, bonds, dollar).

Here's an index of some of his past articles.

The whole document is a great read, but below are the metals-related comments:

I don't know how many times I've received an e-mail from a client saying that some self-proclaimed guru was just on CNBC proclaiming an end to the Bull Market in gold and only the less intelligent would remain invested. The client then asks me just what should be done. My standard reply is to turn the TV off! That usually frustrates the hell out of the client, but sometimes a little frustration is good for the soul. Besides, it was the correct response to the client's query. What the majority fail to realize is that 99% of the things we see and hear on financial news networks, things that often pass for news, do not merit our attention. News really isn't news anymore. Real news came to an end with the death of Edward R. Morrow and the subsequent retirement of Walter Cronkite. What we are given now is food for the masses, programmed by a government that thinks it knows more than the collective will of the people who elected them, and it goes against the best interest of the majority. How many times have I read the headline that "gold rallied due to a decline in the dollar"? Hundreds at least! Completely overlooked is the fact that throughout 2005, gold rallied with a rising dollar. I've never read that in any headline.

Gold/Silver - What can I say? I gave you a price target of 728.60 on February 9th, expecting to see it hit by late summer. So much for late summer! We hit the target of 728.00 intraday on Thursday, May 11th, and then exceeded it intraday, reaching 732.00 the next day. The question is, where does the price of gold (and silver) go from here? Is the rally over? Will the long awaited correction finally make an appearance? And if so, how low is low? All good questions and, in my opinion, all quite premature! I am going to tell you the same thing here that I told you on February 9th, unless gold has undergone some here-to-fore unperceived change in character, we have not yet seen the top. It is also worth remembering that neither have we seen a close above strong resistance at 728.60! We've seen a test and we still have another test or two coming in my opinion. In the meantime, a 5% to 8% correction over a period of three to four days would be nothing out of the ordinary! That translates to a drop of +/- 60.75 and a test of good support at 671.25 in the JUNE GOLD futures contract. Such a test could easily occur without doing any technical damage to the current bullish gold picture.

Please take a look at the following Daily Chart of Gold and tell me what word comes to mind? Relentless maybe? For months now, it has consistently ground up every attempt to turn the price down:

Is gold overbought? Yes! And it can stay overbought for a lot longer than you can stay solvent trying to sell it short. The current target of 728.60 is the resistance of last resort before we go after the all-time high of 887.50. Given what I have seen to date, I suspect that we will keep right on going and not stop to correct at 728.60. You can give me all the reasons you want for a correction, but the price action of gold is saying something different, and has been saying something different for months. It's just that very few people are listening and that is the biggest point in gold's favor at this point in time: everyone doubts the rise! Even my own clients doubt more often than not.

From a technical point of view, a one-day decline of $20.00 or $30.00 seems like a big deal, but at this altitude it really isn't. Right now, if gold were to decline all the way down to 650.60, nothing would change except for the pulse, heart rate, and perception of many investors. Strong support is at 644.70 and should hold under just about any foreseeable circumstance. As far as the upside is concerned, two consecutive closes above 728.60 would indicate an attack of the all-time high of 887.50 would become the order of the day. With respect to gold's orphaned cousin silver, I expect silver to follow gold to the upside for the time being. We are currently trying to deal with resistance at 14.81, and although we managed one close above it, it wasn't quite enough. Over the long run, silver will attack good resistance at 20.73 and maybe even go after 26.11 before the year is out. By the end of this decade I expect to see gold trading at US $3,000 and silver at US 164.00. The volatility to be encountered on this long and bumpy road will be too much for the average investor and very few will actually reap the rewards from such a spectacular Bull Market. Those that do manage to stick it out will be rewarded with a better life.

Outside Commentary

Here is another article [May 15, 2006 - Commodity Bubble] by Morgan Stanley's Stephen Roach and it deals with a subject near and dear to my heart... commodities. Lately, he has come out with a series of articles that tend to take an optimistic view of the world economy. He's done so when it now appears that most of the world's leading stock markets (the Nikkei, FTSE 110, the DJIA, Australia's All Ords) all appear to have topped. Very difficult to understand his timing and, personally, I see some flaws in his analysis but maybe that's because I want to. In this business, one must take great pains not to run with emotional blinders on. Easy to say, but very hard to do! In any event, his view is opposed to mine but in the interest of fairness I would like you to read it carefully.

Footnote

1I did not comment on the Swiss Franc because I just sent out an article devoted to the Franc less than a week ago. Needless to say, I am extremely bullish the CHF. I am also bullish the Euro, CAD$, and the AU$.

14 May, 2006
-Enrico Orlandini

A Raving Precious Metals Bull -- May 19, 2006 9:28 am

2006-05-22T13:52:00.000-07:00

This article by Laurie McGuirk discusses the reasons why the author is a "raving precious metals bull. Here are some excerpts:

On the subject of inflation

I think we're headed for a situation in coming years where there is further massive inflation of what we “need” (food, water, energy, metals, store of wealth – real stuff) and deflation of what we want (boats, cars, racehorses, plasma TV’s, the 3rd house, high end consumables etc). Just my opinion but am keeping a few fillies as a hedge! Actually, two that we bred ourselves are racing for some serious prize money down here tomorrow. We have our fingers crossed.

The gold stocks are behaving dreadfully and indicating that we’re headed back to $600 or worse in the near future. It will take a lot of physical metal to do so for very long, IMO. Be ready and loaded to go. Something is out of whack with the shares. The HUI was 330 when gold was $540 earlier in the year. Today we see HUI at 325 and gold is some $135 an ounce higher. I‘m buying selected stocks at these levels and am looking at the mid-tiers most closely. Of the big boys, Goldcorp (GG), the “bomb-proof” gold exposure in my opinion, is off 25% from its high last week. Fair dinkum, I reckon they are a steal with gold up here. Getting paid $88 to produce their 100% un-hedged gold, is rather attractive to me! That is a real “printing press,” one that Sir Alan would have dreams about I reckon. Others have copped harder hits than -25%, and I reckon this is an opportunity to pick up some very cheap metal equities, especially for those with a longer outlook than next month's performance bonus. The equities do not reflect the metal price and they certainly do not price in the inherent optionality of a precious metal share. Opinion only and never advice!

The silver/gold ratio that I love so much is getting back to levels that appeal. Silver is cheap compared to gold, IMO. At 54 it looks pretty good and I have an expectation that it breaches 20 before the decade is out. We set original positions at 64-66 and am looking to add opportunistically.

The last piece I wrote was titled “Gold at $700 will look cheap in a few years.” I have no edge or inside info. It’s just what I see as the only feasible result of what has occurred in the last 35 years, accelerated over the last 5-8 years. I am confident in saying such because the world is in a significantly worse position than it was when gold was last at this price in nominal dollar terms. In 1971 the USA was the world’s biggest creditor with huge manufacturing production and not much debt. How times change. Gold doesn’t.

Top Ten Signs of a Precious Metals Bubble

2006-05-22T13:51:00.000-07:00

By Peter Schiff

April 25, 2006

www.europac.net

Recent price spikes and increased volatility in gold and silver markets have many observers predicting a dramatic popping to what they claim to be a precious metals bubble. However, after having sold physical precious metals to the public for the past five years, I can attest that none of the characteristic signs that have typified bubbles in the past are visible in today’s market.

Thought metals prices have indeed risen strongly; those gains have come from ridiculously low prices reached at the end of a twenty-year bear market. To consider metals prices too high in this market makes as much sense as saying current technology stock valuations are too low relative to their 2000 peaks. In fact, despite the current run-up, precious metals prices remain well below normal levels when measured against other asset classes.

I have owned mining shares in my personal account for years, yet not a single share has split. Despite significant appreciation, the total capitalization of the mining sector remains tiny when compared to the overall market. There are many individual S&P 500 stocks with market capitalizations greater than the combined capitalization of all the gold stocks in the world. In fact, Newmont mining remains the lone gold stock in the S&P 500.

I am certain that if we were in the final stages of a speculative blow-off, my gold stocks would have split many times over; gold stocks in general would be far better represented in the S& P 500 Index and would constitute a far greater percentage of its capitalization. In addition, a much higher percentage of our nation’s wealth would be concentrated among mining tycoons and precious metals investors (hopefully myself included), much as was the case with dot com billionaires and today’s real estate moguls.

In addition, while it is also true that the financial media has increased its coverage of metals and mining shares recently, what else are we to expect? After all, such performance cannot be completely ignored indefinitely. With the broad markets are flat and uninspiring, would you not expect the media to focus attention on where the action is? Certainly the mere fact that they do is not de facto evidence of a bubble.

As part of our full-service brokerage business, Euro Pacific launched a precious metals division about five years ago. Until this week that division consisted of a single employee, comprising less than 5% of my total workforce. This week I finally added a part-time employee to help with the increased business, which is up about three fold over the past two years (with about half that gain occurring during the past several months). Brisk business no doubt, but a real bubble would have required staff increases of a much greater magnitude. Business would not just be up three fold, but one hundred fold. In addition, a bubble would have brought on new legions of competitors (perhaps bankrupt mortgage lenders reorganized as precious metals dealers.). This has not occurred.

As I am on record as having accurately recognized both the stock market and real estate bubbles while each was still forming, my track record on bubble spotting is strong. In contrast, most pundits who claim the precious metal market has crossed into bubble territory were blindsided by these prior bubbles. Since many of these doubters do not even understand why the believers are buying, their natural conclusion is that a speculative bubble must be underway. After all, if buying gold was a smart investment, they would be doing it themselves.

As has been the case for all real manias, if metals investing were a speculative bubble, it would have migrated from the financial and commodities spheres to make an impact on the broader culture. In other words, taxi drivers would be offering tips on mining shares.

As an experiment why not do the following: Stand on a busy street corner and ask those passing by the following question -- Excuse me, but I want to buy some gold coins, would you mind telling me where you buy yours? My guess is the answers would be something like; “I do not buy gold,” “Why would I want to buy gold?” or “Why do you want to buy gold?” Now, ask the same individuals where they buy stocks, or which real estate broker they use, and I am sure you will receive a much different response. Are you starting to get the picture?

For now, the precious metals bull market climbs a classic “wall of worry.” Once fear gives way to greed, there is no doubt in my mind that this major precious metals bull market will ultimately produce a speculative bubble. However, such a development is years from unfolding. To help identify when a precious metals bubble might actually be about to pop, I have composed my list of the top ten signs to watch out for.

Top ten signs that a precious metals bubble is actually forming

10. Commodities trading jackets are the best selling items at Abercrombie & Fitch

9. George Foreman is the pitchman for an infomercial featuring a "Home Panning Kit"

8. The most popular major at Chico State is Geology

7. Due to high prices, Olympic metals are replaced by ribbons

6. Monster Park in San Francisco is re-named Glamis Field

5. Analysts upgrade shares of McDonald’s based on mineral rights to its real estate holdings, bringing new meaning to its “golden arches.”

4. Snoop Dogg introduces the "Bling Mutual Fund."

3. Hustle and Flow wins another Oscar for their single “It’s Hard out Here for a Miner”

2. The WB has a new hit show about teenage prospectors called “Dawson’s Claim”

1. Tom Cruise and Katie Holmes name their newborn son Newmont.

BHP Billiton Presentation on China and commodities demand

2006-05-22T13:17:00.000-07:00

There are some great slides in this presentation illustrating the enormous demand for commodities coming from China. Here's the conclusion:

Conclusions

• China has been the driver of commodities demand for several
years and its industrialisation path is tracking the world’s developed
economies

• It’s not just about China - other emerging economies are following

• Demographics and economic development could continue for
years

• This will require significant new mine capacity

• BHP Billiton has unparalleled diversification, global reach, visibility
to growth options and track record of delivery

• BHP Billiton is well positioned to capture its share of demand
growth

Gold price to kick into full gear: Faber

2006-05-22T06:12:00.000-07:00

Date : May 7, 2006

Reporter: Alan Kohler

ALAN KOHLER: Well, the death of the Greenback, gold at $US6,000 an ounce with commodity and energy prices rising vertically, spurred on by growing international tensions and war - no, that's not the background to the latest sci-fi pot boiler, but the tentative vision of one of the world's most respected contrarian economic forecasters, Marc Faber. Dr Faber must be taken seriously though because of his record in predicting, among other things, the global stock market crash of 87, Japan's collapse in 1990 and the Asian meltdown of 1997 - forecasts that earned him the moniker Dr Doom. He's also the editor and publisher of the influential The Gloom, Boom and Doom Report. And, as you'll hear, he has some very interesting views on the relative merits of the Australian and US central banks. I spoke to Marc Faber from New York this week.

Marc Faber, just to put this week's interest rate increase in Australia into a global perspective, do you think the developed world in general is in a process of increasing interest rates and reducing liquidity that has a way to run yet?

MARC FABER, 'THE GLOOM, BOOM AND DOOM REPORT': Yes, I think so because we have a global boom and interest rate increases have been very slow. In other words, in the US, we went from 1 per cent on the Fed fund rate in June 2004 to 4.75 per cent, but I think that inflation is higher than 4.75 per cent. And if you look at long growth in the US and credit market growth, then we haven't had tight money yet because if money was tight, then asset markets wouldn't rally as they do at the present time.

ALAN KOHLER: There is a lot of debate in the financial markets about whether the US will have a pause in its interest rate tightening cycle. What do you think?

MARC FABER: Well, I basically think that Mr Bernanke is a money printer and it's interesting to see that since he was appointed Fed chairman, the price of gold has risen by 42 per cent so the market is not very happy with his bias towards money printing.

ALAN KOHLER: Do you think that Mr Bernanke is losing control of the situation, in fact? I mean, I notice the markets are testing him now.

MARC FABER: I think that on his recent comments that the Fed might pause, immediately the US dollar became very weak, the bond market sold off and gold prices shot up another $20, $30, so that is a lesson for him that the market begins to see through his inflationary monetary policies.

ALAN KOHLER: What do you think of the Australian central bank and its decision this week to increase interest rates?

MARC FABER: I think actually that the Australian central bank is probably relatively better than others in the sense that they have further tightened monetary policies and so we have in Australia an interesting situation. The economy is kind of weakening, but there are some inflationary pressures and the Australian Reserve Bank has increased interest rates so I find it is actually quite courageous.

ALAN KOHLER: What do you think it means for the Australian dollar?

MARC FABER: Actually what has happened, the Australian dollar along with the New Zealand dollar was weakening recently but in the last, say, two weeks the Australian dollar has again strengthened from 70 cents to 76 cents, so I would say the Australian dollar is supported by relatively high interest rates.

ALAN KOHLER: What do you think about the length of the current commodities boom? You've written recently about firstly how the long wave of commodities could last for another 15 to 20 years and you've also talked about the impact of India on commodities, so where do you see prices of commodities going from here?

MARC FABER: Basically we had a bear market in commodities between 1980 and 2001, or 1998 and 2001, so we had more than 20 years bear market in commodities. By the late 1990s in real terms, in other words inflation-adjusted, commodity prices were at the lowest level in the history of capitalism in the last 200 years and now they have risen substantially - the price of copper from around 60 cents to over $3 a pound, the price of gold has more than doubled. But in real terms, commodities are still relatively low compared to equities and therefore, also given the length of the cycle - the cycle for commodities lasts usually 45 to 60 years peak to peak or trough to trough - in other words the upward wave in commodities lasts around 22 to 30 years and we are now in year 2006. The bull market started in 2001 so we are five years into the bull market. I do concede that the markets are overbought and there is a lot of speculation and I expect a correction but I think longer term from here onwards commodities will outperform the Dow Jones and financial assets.

ALAN KOHLER: You've been reported as predicting that the price of gold will rise to $US6,000 per ounce. Is that correct - is that what you said?

MARC FABER: What I said is that if Mr Bernanke prints money, it is entirely conceivable that the Dow Jones goes to 33,000 or 40,000 or 100,000 or 1 million. All I am saying is if the Dow Jones here goes up three times because of money printing by Mr Bernanke and we have examples in financial history where a central bank printed money and everything went up, but in this instance I think that gold would significantly outperform the Dow Jones. So if someone says to me the Dow will go to 33,000, I say yes, it's possible but it will decline against the price of gold which will go up to $US5,000, $US6,000 an ounce.

ALAN KOHLER: Did you notice that Steven Roach, the chief economist of Morgan Stanley, who has been a bear for a very long time, seems to have changed his tune now, saying he's feeling better about the world than for a long time. Do you think that the fact that Steve Roach has kind of thrown in the towel is a sell signal or do you think he's onto something?

MARC FABER: Well, Steve is a good friend of mine and he gave already a sell signal two years ago. He suddenly turned bullish about bonds and since then the bond market has been weak. And I agree with him that we are in a global boom but it doesn't change the fact that it is an imbalanced boom and it's driven largely by credit creation in the US, leading to overconsumption, leading to a growing trade deficit, current account deficit, the accumulation of reserves in Asia and a global boom. But it is nevertheless an imbalanced boom and one day there will be a problem, certainly with the US dollar. The US dollar is a doomed currency. Doomed? Doomed. Will be worthless. Actually each one of your listeners should buy one US Treasury bond and frame it - put it on the wall so they can show their grandchildren how the US dollar and how US dollar bonds became worthless as a result of monetary inflation.

ALAN KOHLER: You made at least three great calls - you warned of the 87 crash just before it happened, you warned investors to get out of Japan in 1990 and out of Asia in general in 1997. So what specifically is your call right now?

MARC FABER: I think we are in a bear market for financial assets. There's a bear market where the Dow Jones, say, would go from here - 11,000 to 33,000. It would go up in dollar terms but the dollar would collapse against, say gold or foreign currencies. That's what I think will happen with Mr Bernanke at the Fed because he has written papers and he has pronounced speeches in which he clearly says that the danger for the economy would be to have not deflation in the price of a fax machine or PC, but deflation in asset prices. And so I believe that he is a money printer. If I had been a university professor, I would not have let him pass his exams to become an economist. I would have said, "Learn an apprenticeship as a money printer."

ALAN KOHLER: (Laughs) So, a big mistake putting him in charge of the Fed then?

MARC FABER: I think it's very dangerous, very dangerous.

ALAN KOHLER: You've talked in the past about the links between the commodity price cycles and political tensions in the world and you've pointed out that when the Soviet Union collapsed, commodity prices were weak and you've said that rising commodity prices leads to the conditions for war. Now that we're in a commodities boom - which you now say is going to go for a long time - do you think that we're in for a period of rising political tension as well?

MARC FABER: Basically the way we economists have business cycles theories, the historians have war cycles theories and I don't want to go into all of them, but when commodity prices decline, countries are not concerned about getting supplies of vital commodities, whereas when commodity prices go up, it's a symptom of shortages. America needs oil for consumption and China and increasingly India need oil for their economic growth. If you are growing your industries at a production of 15 per cent per annum, as China, you need increasing quantities of oil and China was self-sufficient until 1994 and today they are the largest consumer of oil and import most of it from the Middle East. So the tensions of course arise and I can see that some people have become very powerful whereas the balance of power in the 80s and 90s shifted to the industrialised countries of the West that consume a lot of oil, now the balance of power has shifted to people like Evo Morales, Hugo Chavez in Venezuela, Mr Putin - Mr Putin is the most powerful man in the world, it's not Mr Bush because Mr Putin controls a production of oil of 10 million barrels, plus he controls all the pipelines going to Europe. And it has also shifted to Mr Ahmadinejad. Mr Ahmadinejad of Iran would be very quiet, as well as Mr Chavez, if oil prices were at $12. But at $70 they have a lot of leverage and so the tensions have also increased. It doesn't mean that it comes to war but the conditions for war have improved and I think that eventually this commodity cycle will last so long until there is a major war and during war times, the best hedge is to be low in commodities, then commodities really go up vertically.

ALAN KOHLER: Bit of a grim way to make money, I suppose?

MARC FABER: Hedge funds make money anyway. It doesn't - morals are not the most important issue.

ALAN KOHLER: Well, on that note we'll have to leave it there. Thanks very much, Marc Faber.

MARC FABER: It is my pleasure.

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Please note: Transcripts on this website are created by an independent transcription service. The ABC does not warrant the accuracy of the transcripts.

Will not sell any commodity, despite fall: Jim Rogers

2006-05-22T06:06:00.000-07:00

Commodities have been extremely volatile over the past one-week. Copper, aluminium, and zinc have all cracked under heavy speculative trading. On Wednesday, prices rebounded sharply, but only for a while, before slipping once again. Investment Guru, Jim Rogers says that all markets have big reactions and consolidations and it may be so with commodities as well.

But he futher adds that he will not sell any commodities even if they correct 30-40%. Rogers says that copper and zinc were overdue for correction.

In his opinion, commodities may have peaked for the moment but will not stay that way for a decade. China is the only emerging market that Rogers is invested in.

He is bearish on the US dollar and hence advises people to sell the dollar.

Excerpts from CNBC-TV18's exclusive interview with Jim Rogers:

Q: Was the crack we saw in commodities only a technical crack or is it the beginning of a downturn?

A: All markets have reactions and consolidations even within the context of the bull market. In the 1970s, gold went up 600% and then it went down 50% over a two-year period only to turn around and go up another 800%. So there may be big reactions and we may be overdue for one. Although I don’t have a clue, I am not selling any commodities, even if they go down 30-40% because they will be going back up later.

Q: Will all commodities go back up because some people are saying that industrial base metals may not reach the tops again?

A: I can see that copper and zinc and few things have gone straight up for a few months and they are certainly overdue for a correction. But one has to know that nobody has opened any mines in years and all the existing mines are depleted.

In Asia, India and China are growing.Some of these people may have to come up with lots of new mines very quickly because the world is running short of these stuff over the next decade.

Although copper is touching new highs, it is still far below its all time high adjusted for inflation and so is zinc, lead and others.

Q: You and others have pointed out that historically, commodity bull runs have lasted between 15-20 years and we are only in the 6th or 7th of this bull run. But has it ever happened before that commodities, stock markets, real estate all of them have gone up together; is this a change?

A: Real estate everywhere hasn’t been going up. It is ceratinly not going up in the US. Nor is it going up everywhere in India. It is going up only in some sections.

Although we have seen stocks and commodities going up, one must remember that the commodity bull market started in early 1999, and commodities are up 300% and stocks as measured in the west are only up 20-30% in that period of time.

Stocks and commodities have not been acting together. Although in the last 1-2 years, people think they have, but in the last 2-3 years in the US, the stocks are essentially flat. If one measures the averages, commodities have been going through the roof. Certainly in India, stocks have been going through the roof. But India is a special case.

Q: You are a legendary commodity investor but are you looking at emerging equity markets at all?

A: The only emerging market that I have invested in the past few months is China. That is because the Chinese market went down for several years. Other than China I am not investing in other emerging markets.

Q: You said that the only thing that could bring the Indian economy down is its governmen. Have things changed?

A: I know that the Indian government is saying the right things. But unfortunately they have been saying it right for the last 15 years. They just haven’t acted. Now they seem to be saying the right things and taking better actions. But I am still a little skeptical. They seem to be saying that they are moving in the right direction. If they are moving in the right direction then buying India now will be one of the great buying opportunities of one's lifetime. But it will happen only if the government and bureaucrats mean what they say.

Q: So you are not buying India only because of the government or is it because of valuations?

A: The market has gone through the roof and I missed the move in India. It is like copper going straight up. I am bullish on copper but I am not buying copper. India is going straight up but I am not buying India right now.

Other thing is that there is a huge number of foreigners flocking into the Indian market. The foreigners are always wrong, when they flock into a market. I have been investing for 40 years. When the Australians started buying Spain or the Japanese started buying Argentina or the Americans started buying Germany, it was the end of the move. Right now, foreigners are pouring into India and it is always a very bad sign.

Q: What is the call on the dollar?

A: Sell it. Do not own US dollar, it is a terribly flawed currency. We are going to see the demise of the US dollar currency in the next decade or so.

Q: So is that bad news for emerging markets and Japan?

A: Not necessarily. When the UK pound sterling lost its status of world's reserve currency, there were serious ramifications for a while. But I don’t see it as bad news for Japan because Japan does most of its business in Asia and not in the US anymore. Although 30 years ago, it would have been a disaster for Japan. Of course, it is not going to help Japan if the US dollar is in trouble but it is not going to be a disaster for them either.

Sell in May, Go Away

2006-05-22T05:57:00.000-07:00

Today's chart illustrates that investing in the S&P 500 during the six months of November through April accounted for the vast majority of S&P 500 gains since 1950. While the May through October period has seen mild gains during major bull markets (i.e. 1950-56 & 1982-97), the overall out performance during the months of November through April is nevertheless compelling. Hence the saying, “sell in May and walk away.” Stay tuned...

Textbook Warnings -- May 22, 2006

2006-05-22T05:50:00.000-07:00

This article by John P. Hussman, Ph.D, discusses stock market returns during various market conditions. Here are some excerpts:

"Among the simplest truths is that market risk tends to be unusually rewarding when market valuations are low and interest rates are falling. For example, since 1950, the S&P 500 has enjoyed total returns averaging 33.18% annually during periods when the S&P 500 price/peak earnings ratio was below 15 and both 3-month T-bill yields and 10-year Treasury yields were below their levels of 6 months earlier. Needless to say, there are a variety of ways to refine this result based on the quality of other market internals, but it's a very useful fact in itself.

The “canonical” market bottom typically features below-average valuations, falling interest rates, new lows in some major indices on diminished trading volume, coupled with a failure of other measures to confirm the new lows, and finally, a quick high-volume reversal in breadth (usually with an explosion of advances over declines very early into a new advance).

Similarly, market risk tends to be poorly rewarded when market valuations are rich and interest rates are rising. Since 1950, the S&P 500 has achieved total returns averaging just 3.50% annually during periods when the S&P 500 price/peak earnings ratio was above 15 and both 3-month T-bill yields and 10-year Treasury yields were above their levels of 6 months earlier. Again, there are a variety of ways to refine this result, but note that anytime the total return on the S&P 500 is less than risk-free interest rates, a hedged investment position increases overall returns (since hedging instruments are priced to include implied interest).

The “canonical” market peak typically features rich valuations, rising interest rates, often a reasonably extended and “flattish” period where, despite marginal new highs, momentum has gradually faded while internal divergences have widened, and finally, an abrupt reversal in leadership, from a preponderance of new highs over new lows (both generally large in number) to a preponderance of new lows over new highs, with the reversal often occurring over a period of just a week or two.

Though our investment position doesn't by any means rely on it, my impression is that recent market conditions fall very much into that description of a canonical peak.

As I've noted before, for an investor looking to capture all the market's long-term returns with substantially less downside risk, it would actually have been enough, historically, to simply step out of the market on a price/peak multiple of 19 and then wait for a 30% plunge before repurchasing stocks, even if that meant staying out of the market for years in the interim. (As I've also noted, this is not a practical or optimal strategy by any means, since it has far too much tracking risk and would have required implausible levels of patience, but it's an enlightening fact nonetheless).

It doesn't help the case for stocks to argue that, for example, earnings growth is still positive, because it turns out that the year-to-year correlation between stock returns and earnings growth is almost exactly zero. It doesn't help to argue that consumer confidence is still high, because consumer confidence is actually a contrary indicator, as are capacity utilization, the ISM figures, and other factors being used for bullish fodder. It doesn't help to argue that the Fed will stop tightening soon, because the end of a tightening cycle has historically been followed by below-average returns for about 18 months. It doesn't help that 10-year bond yields are still lower than the prospective operating earnings yield on the S&P 500 (the “Fed Model”), not only because the model is built on an omitted variables bias (see the August 22 2005 comment), but also because the model statistically underperforms a simpler rule that says “get in when stock yields are high and interest rates are falling, and get out when the reverse is true.”

Once stocks are richly valued, then, the burden of proof is on the case for staying in, not getting out (or in our case, hedging). Once interest rates are rising, that burden of proof ticks up. Once internals show “heavy” price/volume behavior, more burden. And once you get a huge leadership reversal, as we've seen over the past week, it's time to watch for falling rocks.

Our fully hedged investment position in stocks doesn't require any forecasts here – the prevailing combination of valuations and market action has historically produced unsatisfactory returns on average – and this is sufficient reason to be defensive. That said, I strongly encourage investors to evaluate their exposure to market risk here. The Strategic Growth Fund is fully hedged, so I don't have concerns about general market direction on the Fund, but for other investments that are more linked to general market movements, if you could not accept or financially tolerate a market decline of 20-30% in the value of those holdings, you're probably not being realistic in terms of the risks you're taking.

It's only been 10 trading days since the S&P 500 registered 5-year highs and the Dow hit 6-year highs. The S&P 500 has since declined by just 4.43%, is oversold, and could very well be due for a short-term bounce. On that basis, the preceding comments may seem overwrought. Nevertheless, current conditions strike me as so unfavorable that they demand some additional emphasis of the risks involved. We don't rely on negative market outcomes here. But we shouldn't be surprised if the next few months are substantially more difficult for the major indices than anything investors have observed in recent years.

Market Climate

As of last week, the Market Climate for stocks was characterized by unfavorable valuations and unfavorable market action, holding the Strategic Growth Fund to a fully-hedged investment position. Short-term conditions are very oversold, which invites the typical fast, furious, prone-to-failure bounce that often clears that condition in unfavorable Climates. Still, oversold conditions don't produce reliable buying opportunities when the Market Climate is not constructive or favorable. If the Market Climate is unfavorable and interest rates are falling, it's sometimes possible to trade oversold conditions effectively. But when rates are rising and we've just observed an abrupt reversal in leadership (new lows suddenly dominating new highs), it's not worth the gamble - the average return tends to be negative, and the volatility also tends to be unusually high. Yes, that high volatility does admit the possibility of a big short-term jump, so we can't rule that out, but it also admits the possiblity of further - possibly profound - weakness.

In bonds, the Market Climate was characterized by relatively neutral valuations and unfavorable market action, holding the Strategic Total Return Fund to a relatively limited duration of about 2.5 years. On weakness in the precious metals sector, I added a small amount to the Fund's precious metals positions, raising its overall exposure to a higher but still limited 10% investment position.

NDX 5-day RSI Buy Signal Strategy

2006-05-22T05:46:00.000-07:00

There used to be a site (vtoreport.com) that only bought into the market when a buy signal was triggered as follows:

"Buy the Nasdaq 100 Trust (QQQQ) when the 5-day Relative Strength Index (RSI) closes below 30.0.
Sell the Nasdaq 100 Trust (QQQQ) when the 5-day Relative Strength Index (RSI) closes above 50.0.
The Nasdaq 100 Trust is purchased during after-hours trading on the day the RSI buy signal is generated.
The Nasdaq 100 Trust is sold during after-hours trading on the day the RSI sell signal is generated.
The 5-day RSI strategy has a tendency to underperform the buy-and-hold strategy when the market is strong and outperform when the market is weak.
1997 to 2005 Results: NDX "Buy & Hold"up 76.2%, "5 day RSI" up 349.7%
1997 to 2006 Results: NDX "Buy & Hold"up 108.3%, "5 day RSI" up 381.8%
http://www.vtoreport.com/rsi.htm"

It looks like that site is gone now, but they used to post every entry and all the trading results, which were quite remarkable over the last 9 years, as you can see in the summary above. Particularly when the market is weak, as may be the case during much of the coming several years, this strategy has a tendency to outperform the buy-and-hold strategy, being completely out of the market a majority of the time.