All That Glitters Isn't Just Gold: Gold, Silver, Copper, Aluminum, Zinc; Regardless of the Alloy, Whether It Is a Precious or Base Metal, the Story Is the Same: Metals Are Red Hot. between a Proposed Silver ETF and Base Metal Fundamental Factors, Metals Appear Set for a Long-Term Bull Run

By Bauch, Carla M. | Futures (Cedar Falls, IA), May 2006 | Go to article overview

All That Glitters Isn't Just Gold: Gold, Silver, Copper, Aluminum, Zinc; Regardless of the Alloy, Whether It Is a Precious or Base Metal, the Story Is the Same: Metals Are Red Hot. between a Proposed Silver ETF and Base Metal Fundamental Factors, Metals Appear Set for a Long-Term Bull Run


Bauch, Carla M., Futures (Cedar Falls, IA)


Take a growing world economy, supply-side problems and underpriced commodities, put them together and you end up with metals, precious and base, hitting their highest prices in years. Silver, which has outpaced gold much of this year, reached a 22-year high in March, passing $11 an ounce--prices it has not seen since the 1980s. On top of this, copper has risen 25% so far this year, zinc is up more than 40%, aluminum has gained 12% and platinum set a contract high at the end of March. Metals, though, actually have been on the rise the last several years. And while some analysts and traders have treaded cautiously with these rising prices, others like Michael Purdy, a vice president with base metals at ABN Amro in New York, have been bullish from the beginning.

Purdy explains many of today's commodities making new highs, particularly the base metals, are simply trading where they should have traded some time ago. For instance, looking at a copper chart and considering the fundamentals, Purdy says the London Metal Exchange's copper price might reach $6,500 per metric ton. "It could happen. We certainly could see it if demand is there and supply disruptions come up as well," he says.

Many, including Purdy, say this combination of soaring demand and supply side problems is exactly how the base metals story will unfold in 2006. Infrastructure demand for base metals is coming from China, India and numerous other areas around the globe, including South America and the Middle East.

Labor troubles and disruptions already have hit the supply side of the market this year; for example, the strike at the world's third largest producer of copper, Grupo Mexico, and a landslide at Freeport-McMoRan Copper & Gold's Gasberg mine in Indonesia both occurred in March. This, coupled with the numerous mining strikes and disruptions in 2005, paints a grim picture for today's supply.

"We have had an inability to find new copper in the last 12 to 18 months," says Paul Mladjenovic, author and investment consultant, who offers silver to clients as part of a diversified portfolio. "But the shortages are artificial because the United States and Europe are mining in politically unfriendly areas in which it can take years to open a mine," he says. Copper has tripled in the past four years mainly due to dwindling supplies in warehouses.

Regarding labor disputes, Purdy, says, "This is going to be a big story this year for all labor fronts ... mines, smelters ... everyone. This is a big issue for supply of all base metals, it doesn't matter if it is copper, aluminum, zinc or another base metal." Why so many strikes this year? Purdy explains, "Unions gave up a lot in the bear market and have not gained anything back with these prices."

George Gero, a vice president with RBC Capital's futures division and director of Comex, Nymex and the International Precious Metals Institute, also points to labor disputes and high demand hurting copper supply in 2006. Gero says the rebuilding of the Gulf of Mexico, demand from China and India, labor problems at mines, and copper being used to build houses during a robust housing market that only recently has cooled off have all fueled copper's short supply.

"The fact that all of these variables for copper demand have come together all at once in the last two years is what has caused copper to make contract highs," Gero says.

INFRASTRUCTURE RULES

The other side of the story is booming economies that are building infrastructure faster than an eye can blink. Purdy explains while everyone knows China is flourishing, an enormous demand is coming from other areas. "There is a lot of demand coming out of South America. There is a tremendous amount of infrastructure for example being built in Chile, including subway systems and airports. There is also a lot of demand coming from the Middle East. Dubai is basically a construction site," he says. …

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All That Glitters Isn't Just Gold: Gold, Silver, Copper, Aluminum, Zinc; Regardless of the Alloy, Whether It Is a Precious or Base Metal, the Story Is the Same: Metals Are Red Hot. between a Proposed Silver ETF and Base Metal Fundamental Factors, Metals Appear Set for a Long-Term Bull Run
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