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