7 June 2006 Copper rebounds on hedge fund driven trade: LME

Source: Dow Jones


London Metal Exchange three-month copper rebounded in illiquid, hedge fund-driven trade to end the afternoon session higher on the day, after coming precariously close to a critical move below key technical support, traders said.

LME copper had earlier teetered around $7,245 a metric ton, the recent May 22 low, but support held. After an illiquid afternoon session, LME copper resumed its rise and hit an intraday high of $7,825/ton before closing the kerb session at $7,780/ton.

This is up 8% on the day's lows but still down 12% on the all-time high of $8,825/ton, hit May 11.

Traders attributed the rebound to covering from one or two large U.S. hedge funds whose bearish stance had led them to go short in anticipation of much lower prices.

"The lows haven't materialized so these players are having to come back in as buyers to cover positions in the short term," a trader added.

Another U.S.-based hedge fund that is active in copper and holds a generally bullish view of the market in the long-term was also said to be buying the metal during the kerb.



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DJ Comex Copper Review:Trimmed Losses, Reversed To End Higher

NEW YORK (Dow Jones)--Comex copper futures trimmed their losses on the day to
settle higher Wednesday at the New York Mercantile Exchange as buyers emerged
at the lows, trader sources reported.

The benchmark July copper contract settled 9.45 cents higher at $3.5840 per
pound. At the open the contract ignored bullish fundamental news and dropped to
a session low of $3.3550 per pound.

Traders at Triland Metals noted that copper traded lower despite news that
producer Grupo Mexico SA (GMEXICO.MX) declared force majeure on June and July
copper deliveries as a strike at its Cananea copper mine entered its sixth day.

"The strong dollar and weakness in the precious metal and falling stock
markets were the main influence," the traders said referring to copper's drop
in price.

Amid that news, speculative liquidation and short selling ran copper to its
lows of the day before trade buying appeared.

Scott Meyers of Pioneer Futures said he remains bullish on metals despite its
recent corrective patterns.

"Copper is trending back up and these pauses seem to refresh the market,"
said Meyers.

Other traders noted that New York copper rebounded as the London market also
moved off its lows in illiquid, hedge fund-driven trade.

Strong demand to keep copper prices high Thursday Jun 8 19:49 AEST


Strong demand from China and supply bottlenecks could keep copper prices high for a number of years, a top Rio Tinto executive said.

"We see a robust outlook from the demand side," Tom Albanese, Rio Tinto's chief executive for copper and exploration, told reporters at a conference.

"And it will take, probably, a number of years before we see some of these constraints from the supply side beginning to be taken out of the system."

There is a shortage in everything from equipment to engineers to ballbearings, which combined with stricter environmental regulations worldwide is slowing the development of new mines and keeping prices high, Albanese said.

Grupo Mexico Warns of Closing Copper Mine



MEXICO CITY, Jun 08, 2006 (AP Online via COMTEX) -- Mexican mining giant Grupo Mexico announced Thursday that it will be forced to close one of the country's largest copper mines if workers continue striking.

Grupo Mexico issued a news release stating the company would "be forced to close the mine and concentrator" at La Caridad copper complex in northern Sonora state if strikes continue at La Caridad mine and the nearby Cananea mine.

Workers at Cananea, Mexico's biggest copper mine, walked off the job June 2, saying the company had refused to give half of the workers the day off to celebrate the 100th anniversary of a historic 1906 strike at the mine when it was owned by a U.S. company.

The strike at the Cananea mine added to the supply problems already caused when workers at La Caridad, the country's second largest copper mine, went on strike March 24, demanding government support in their ongoing dispute with the mining union's leadership.

Mining workers across Mexico have demanded government recognition of Napoleon Gomez Urrutia as the leader of the miners union, but the government has instead maintained that dissident Elias Morales is the new leader of the union, despite a number of union meetings in which Urrutia was ratified.

Gomez Urrutia is accused of misappropriating $55 million in funds paid into a trust by Grupo Mexico in relation to the 1990 privatization of La Caridad and Cananea, and a judge in Sonora last week issued a warrant for his arrest on fraud charges. He was in Canada last week.

The growing dispute has already escalated into strikes at a number of key mining and steel operations.

Grupo Mexico has said that Mexican copper production in 2006 could drop as a result of the prolonged strike at La Caridad, after the company earlier in the year forecast production to rise.

La Caridad produces about 150,000 metric tons of copper concentrate a year and 250,000 tons of different refined copper products. Cananea produces about 140,000 tons of copper concentrate and 50,000 tons of refined copper.

Branding the ongoing strikes as "illegal activities," Grupo Mexico said that not only the Caridad mining complex, but also the Cananea mine would be closed if a lasting solution wasn't reached promptly.

Daily Telegraph June 9

Workers at Anglo American's Kumba Resources unit, the world's fourth-largest iron ore producer, declared a dispute with the company after pay talks failed, clearing the way for a strike, a union said.

Copper Futures in Shanghai Tumble as Rate Rises Spur Fears of Lower Demand

June 9 (Bloomberg) -- Copper futures in Shanghai declined after central banks in Asia and Europe raised interest rates to curb inflation, threatening to slow economic growth and demand for commodities. Aluminum also dropped.

The European Central Bank, the Reserve Bank of India, the Bank of Korea and the Reserve Bank of South Africa increased benchmark rates yesterday, sending copper down in London and New York. The slump may signal the end of a five-year commodity rally fuelled by demand from China and increased investment by hedge and pension funds.

``The rate increases will slow down economic growth,'' said Li Rong, copper analyst at Great Wall Futures Co., by phone from Shanghai today. ``Copper has been declining from records since mid-May on expectations of such rate increases.''

Copper for delivery in August fell 2,730 yuan, or 3.9 percent, to 66,620 yuan ($8,316) a ton on the Shanghai Futures Exchange at the 3:00 p.m. close. The metal, which earlier dropped by the daily limit of 4 percent, has slumped 22 percent since it reached a record on May 15. It fell 4 percent this week.

``Investors are selling commodities to avert risks,'' said Shen Haihua, vice president of Maike Futures Co.

Slower growth prospects may prompt investment funds to reduce stakes in commodities. Pension and hedge funds had helped to fuel the rally in copper and other metals as they sought better returns than stocks and bonds.

Higher Risks

``The risks are higher for funds to continue to invest in commodities,'' said Maike's Shen, who believes the U.S. dollar is a better investment than commodities.

Copper for delivery in three months on the London Metal Exchange rose $65, or 0.9 percent, to $7,375 a ton at 3:29 p.m. Shanghai time. It closed 6.2 percent lower at $7,310 yesterday.

Commodities: Gold keeps sliding

Fri 09 Jun 2006
LONDON (SHARECAST) -

There were further losses on the gold market, with a stronger dollar continuing to erode the yellow metals bumper gains built up earlier this year.

Thursdays losses take golds slide to $120 from the 26-year high seen at $730 on 12 May as it loses its attraction as a hedge against a weak US currency.

Traders are now bracing themselves for a possible move below $600, which they say could spark off a round of technical selling sending prices south towards $540.

Meanwhile silver tumbled to a 10 week low at $11.18 an ounce, while July platinum was more than $41 adrift at $1,190.10 an ounce. Copper for July delivery was 22.7 cents worse at $3.3570 a pound.

Copper Heads for 2nd Weekly Drop on Concern Rate Increases Will Curb Usage

June 9 (Bloomberg) -- Copper headed for a second consecutive weekly decline in London after central banks in Europe and Asia raised borrowing costs, fueling speculation that demand for the metal used in wiring may be curbed.

The European Central Bank yesterday lifted its benchmark interest rate for the third time since December. South Korea's central bank and the Reserve Bank of India were among banks that also increased rates. Copper yesterday tumbled the most in a week on the London Metal Exchange, and shares of mining companies also slumped.

``Speculators have had a bad week,'' said Kevin Tuohy, a trader in London at Man Financial Ltd., one of the 11 companies trading on the floor of the LME. ``Everyone wants a little bit of rest.''

Copper for delivery in three months on the LME fell $85, or 1.2 percent, to $7,225 a metric on as of 10:13 a.m. local time. A close at that level would represent a weekly drop of 8.2 percent. The metal dropped 4.4 percent last week.

Investors are betting that higher efforts by central banks to control inflation may bring to and end a three-year rally in commodity prices. In that period copper has risen more than threefold, and traded on May 11 at a record $8,800.

``Interest rates are weighing on all the metals,'' said Paul McLeod, vice president of precious metals at Commerzbank Securities in New York. ``The increased real rate of returns is going to be detrimental to all hard assets.''

If copper closes below $7,245 a ton, traders who use so- called technical charts may sell more metal next week, Tuohy said.

Aluminum lost $1 to $2,501 a ton and nickel declined $550 or 2.7 percent, to $19,275 a ton. Lead dropped $2 to $1,007. Tin gained $100, or 1.3 percent, to $8,000 and zinc rose $50 to $3,350 a ton.

Iran could change everything, $100 + oil, Gold price will rocket and with gold & silver being a bye product of copper mining so will copper followed by Zinc.

Pop Go Commodities By Richard Suttmeier RealMoney.com 6/8/2006


Commodities snapped after the FOMC raised the fed funds rate to 5% on May 10, with speculators around the world fearing further rate hikes. The bubbles have popped for gold, copper and steel, and the share prices for metals miners have been hit even harder than the commodities themselves.

This illustrates the risk I have discussed in my columns covering miners and steel makers, as this sector has been the most overvalued among the 11 I follow. You may have left some money on the table if you followed my suggestions to sell, but now we see how hard it is to follow the crowd out the door on that painful right side of a parabolic peak, as stocks become falling knives.

Comex gold reached a high of $732 on May 12, just two days after the FOMC hiked the funds rate. Wednesday it hit a low of $621.30; a close Friday below the five-week modified moving average of $644.20 will shift the weekly chart profile to negative, indicating risk to my semiannual support at $551. If it somehow rallies to end the week above $644, the rebound should be limited to my monthly resistance level of $676.60.

Nymex crude has been moving sideways to down since reaching $75.35 on April 21; a close Friday below the five-week MMA of $70.28 would shift the weekly chart profile to negative, indicating risk to my semiannual support of $64.58.

The Federal Reserve is concerned about energy-induced inflationary pressures. If crude oil is trading toward this support, the FOMC should make a last-minute decision to pause at its June 28-29 meeting. This would stabilize commodities and steel and mining stocks.

Valuations among miners and steel makers have fallen sharply since I last wrote about them May 5, but the sector is still the most overvalued at 8.8%, with precious-metals miners 21.2% overvalued, base-metals miners 7.2% overvalued and steel makers 30.2% overvalued.

Monday will be interesting. Shares were well up yesterday in response to early Wall Street developments but after London closed Wall Street nose-dived. So did metals. Copper crashed more than 5% and this is sure to hammer metals share prices in London on Monday. Be prepared!!!!



"Business The Times June 10, 2006

Rising US import bill adds to jitters on Wall Street


WALL STREET suffered another day of jittery trading yesterday as market nerves over oil-fuelled inflationary pressures and higher interest rates left American blue-chip shares mired in negative territory.

After a turbulent Thursday for US stock markets, in which the Dow Jones industrial average sank more than 1 per cent before rebounding into positive territory, leading American shares surrendered early gains yesterday to sink by as much as 67 points in early afternoon dealing. The Dow went on to close down 46.90 points at 10,891.90. "

The S&P500 index had a loss of 2.8% for the week. The Nasdaq Composite saw a weekly decline of 4% and the Dow Jones Industrial Average fell by 3.3% over the week.

The Nikkei 225 index fell by more than 7%, its steepest one-week fall in four years.

Over the week, however, whilst the FTSE250 fell by 4.5% the FTSE100 only fell by 1.9%. It does appear to be the case therefore that the FTSE100 will be playing catch-up tomorrow and will suffer quite a fall.

Bullion's breather discounted in shares      By: Barry Sergeant      11-JUN-06

JOHANNESBURG (Mineweb.com) -- Fresh analysis of gold markets and stocks is seldom a one-way story. At this juncture, the good news is that gold stocks are now pricing in a $550 to $570 an ounce long-term gold price, according to Stephen D. Walker, director of global mining research at RBC Capital Markets.

The bad news, though not so bad after Walkers comments, is that according to the Bank Credit Analyst, there is more downside for gold prices in the near term. Developing an optimised theme going forward presents investors with a quandary; Walker, for one, argues that gold stocks offer attractive risk reward upside.

Gold bullion prices have fallen by more than 10% in the past month, even, as BCA Research puts it as investor concerns about inflation have escalated. Gold bullion is normally seen as a hedge against inflation; this time around, far from this theme not working out, the inverse has occurred. Analysts at BCA Research argue that investors recent counter-intuitive reaction underscores the fact that the earlier rally in gold bullion reflected to a large extent a liquidity boom that investors now fear is being unwound.
On May 10, in the hours ahead of an interest rate hike by the Federal Reserve, the US central bank, gold futures rushed to fresh 26-year highs, nudging $700 an ounce. A broad number of other metals and commodities also touched fresh multi-decade highs. At this point, investor interest in metals and commodities, already heavily fanned by the hunt for safe, alternative assets, remained underpinned by robust global economic growth. On the supply side, there were increasing constraints on expansion, not least due to rising skills shortages.
Metals and commodities continued to draw new investor participants. In a report in early May out of Sydney, Citigroup Smith Barney analyst Alan Heap said investors of all kinds held at least $120 billion in US commodity markets in April. Investors held some $30 billion in natural gas contracts, about the same in crude oil, with the two comprising about half the total of 36 metals and commodities surveyed. Natural gas and crude oil were followed by gold contracts with $13 billion invested.
Citigroup said that investments in global commodity funds were around $200 billion in February. For some time, Heap had made out a case that speculators, not least hedge funds, had been key drivers in pushing metal and commodity prices to multi decade highs. Crude oil had increased some 15% from the onset of the calendar year, but gold had rocketed by 31% and copper by a massive 72%.
In a cautionary note in early May, BCA Research warned that rampant bullishness in the commodity pits has bolstered the materials sector but the case for a near-term relative performance correction continues to build. Warning signals were flashing all around, but there was hardly anything new in that.

At the end of January this year, Citigroup warned loudly that a flood of investment funds is driving base metal prices much higher than can be supported by fundamental analysis of supply and demand. Its a bubble which could grow a lot bigger before bursting. Noting that fund investments began to surge in early 2004, Citigroup illustrated how commodity markets have always been strongly influenced by speculation.

It was, for example, surging investor demand that had contributed to the 1994-95 boom. In the current cycle, Citigroup noted, however, that funds deployed were perhaps double the previous high, and that since early 2004, when the current cycle started, funds invested had tripled. The interest in the current cycle extended far beyond base metals; all commodities are involved, said Citigroup, reiterating that all classes of commodities base and precious metals, energy and softs (agricultural goods), have enjoyed substantial price gains.

While every man, his cousin and his dog was taking tips on metals and commodities and the relevant stocks, fundamental supply and demand indeed remained supportive. But it was increasingly clear that commodities, metals and the broader materials sector had become seriously overheated.

BCA Researchs outlook for global economic growth remained constructive, but analysts there maintained a cautious near-term view toward the overheated materials sector. The scales dipped decisively in favour of the sceptics and cynics when the Federal Reserve made its hawkish comments on May 10 this year. The worlds most powerful central bank judged that some further policy firming may yet be needed to address inflation risks. The core US interest rate has risen incrementally from 1% in mid-2004 to 5% after the latest hike.

BCA Research reckons that in the near term, hawkish talk from the Federal Reserve and other central banks will weigh on gold prices, which still look overvalued. Moreover, the argument continues, gold bullion will lose some lustre if inflation fears fade as global growth decelerates. That would be ironic indeed, and would emphasise the risks, known and unknown, of investing in gold bullion, perceived as one of the safest of all investments.

For BCA Research, the bottom line is that while a soggy dollar will provide support, there is more downside for gold prices in the near term. This view would accord with Walkers analysis finding that gold stocks are already looking for gold bullion to fall by up to another $65 an ounce from trading levels around $615 an ounce seen on Friday.

Gold Price Declines in Asian Trade as Rising Dollar Erodes Metal's Appeal

June 12 (Bloomberg) -- Gold prices in Asia fell as a strengthening U.S. dollar eroded the precious metal's appeal as an alternative investment.

Gold has had four straight weekly declines as the dollar climbed 2.2 percent against six major currencies in the same period. Federal Reserve officials have suggested they will continue to boost interest rates to counter inflation. The central bank has raised its benchmark interest rate 16 times since June 2004 to 5 percent.

``Investors are liquidating gold and other commodities'' as the dollar strengthens, said H.M Lee, head of overseas futures team at Woori Futures Co. in Seoul. `` I think prices will fall in the second half of this year after peaking in the second quarter.''

Gold for immediately delivery fell as much as $3.20, or 0.5 percent, to $604.25 an ounce. The metal was down 0.2 percent at $606.15 an ounce at 11:11 a.m. Seoul time.

The price has fallen 15 percent in the past four weeks, and tumbled 17 percent since it reached a 26-year high of $730.40 an ounce on May 12. Gold's four-week decline is its longest falling streak since May 2004.

Gold for August delivery fell $2.20, or 0.4 percent, to $610.60 an ounce in after-hours trading on the Comex division of the New York Mercantile Exchange at 11:16 a.m. Seoul time.

TOKYO, June 12 (Reuters) - Japan's Mitsui Mining & Smelting Co. Ltd. (5706.T: Quote, Profile, Research) said on Monday it had cut its zinc price by 13,000 yen a tonne to 433,000 yen ($3,796), after a regular review of currency and metals market fluctuations.

Mitsui Mining's previous revision was made on June 7 when it cut the price by 19,000 yen to 446,000 yen.

Copper slides as investors flee on inflation fears


Copper, one of the key drivers of a boom in the commodities sector in the past few years, tumbled on Monday as investors fled the metals complex on fears that rising interest rates could slow global economic growth.

Monday's decline in copper prices on the London Metal Exchange dragged sharply down prices for other industrial metals and futures markets in Shanghai and New York.

By 04:06 GMT the benchmark LME copper contract was at $6 950/$6 990 a ton, down $270 or 3,7 percent from Friday's London close. It had earlier bid as low as $6 940/$6 990, the lowest since April 25.

On Friday, the red metal lost $90, or 1,2 percent, to close at $7 220.

"It might be technical selling after the copper market failed to hold the $7 250 and then $7 000," said a metals dealer with a major Japanese trading house.

Consumers in Asia were largely staying on the sidelines on hopes for further declines in copper prices after the market fell below $7 000 a ton, he said, putting major support for copper at the 100-day moving average of around $6 000.

Market sentiment remained depressed due to a strong dollar and fears of slowing global economic growth and inflation, which in turn could dampen demand for industrial metals, while supportive fundamentals in base metals had been largely ignored.

China's imports of copper and copper products in the first five months of 2006 fell 23 percent from a year earlier, while primary aluminium and aluminium alloy exports fell 22,2 percent, customs figures showed on Monday.

"It's very much driven by liquidity," said Rick Holmes, director of Mitsui Bussan Commodities in Sydney.

"At the present moment, you've got the US dollar strengthening, you've got fears of inflation and you've got strong belief that the United States will raise rates ... which gradually means that liquidity is going to tighten up."

Prices for copper, used in wiring, tubes and coins, reached an all-time high of $8 800 on May 11, having jumped more than six-fold since late 2001 on strong demand in China and India, supply disruptions and relentless fund buying.

Since then, copper has retreated as much as 21 percent, but is still up around 58 percent since the end of last year.

In electronic trade, copper for July delivery fell 7,25 cents to $3,1950 a lb after trading as high as $3,2600 on the New York Mercantile Exchange's COMEX division.

Meanwhile, the latest Commitments of Traders data issued late Friday by the Commodity Futures Trading Commission showed that net non-commercial short positions for copper rose to 7 302 lots in the week ended June 6, from 6 372 lots the previous week.

Non-reportable net long positions fell to 83 lots, compared with 453 lots in the week ended May 30.

Shanghai copper futures fell by their daily trading limits on Monday, with the most active August contract down 5 percent, or 3 340 yuan, from the previous settlement to end the morning session at 63 280 yuan a ton.

It was also down 3 290 yuan from the previous close.

Shanghai aluminium futures were also lower, with the most active August contract losing 150 yuan to end the morning session at 20 410 yuan a ton.

LME aluminium was at $2 485/$2 495 a ton versus $2 510 on Friday, while zinc was at $3 270/$3 295 a ton against $3 320.

In other commodities, oil prices held steady below $72 a barrel, while gold edged down below $625 an ounce on a firmer dollar, weakness in global equity markets and losses in industrial metals.

Copper Futures Fall, Posting Biggest 3-Day Decline in 20 Months

June 12 (Bloomberg) -- Copper futures in London fell, staging their biggest three-day decline since October 2004, on concern a rally that drove the metal to a record last month was overdone. Prices in China also tumbled.

Copper has dropped about 20 percent from its all-time peak, and other commodities including gold, silver and zinc have declined, on concern that rising interest rates will slow global economic growth. Central banks from Asia to Europe boosted interest rates last week in a bid to curb inflation.

``Consumption has suffered because buyers are wary of price volatility,'' said Shen Haihua, Vice President of Maike Futures Co. by phone from Shanghai today. ``Consumers aren't buying because they hope prices will fall further.''

Copper for delivery in three months on the LME dropped as much as $340, or 4.7 percent, to $6,880 a ton today. Metal for delivery in August in Shanghai fell as much as 3,340 yuan, or 5 percent, to 63,280 yuan ($7,900) a ton. The contract has fallen about a quarter since reaching a record on May 15.

``Investment funds have probably withdrawn money from commodities,'' said Yuan Fang, a trader at Shanghai Dongya Futures Co., by phone. ``The rally was overdone. Shanghai prices fell more aggressively than London after stockpiles rose.''

Copper inventories in Shanghai rose about 11 percent last week to their highest since Feb. 23. Stockpiles in exchange warehouses in London, New York and Shanghai jumped 3 percent to 172,503 tons as of June 9 from June 1, Bloomberg figures show.


Investment Funds

Speculators have been attracted to copper by forecasts that global demand will outstrip supply this year. Investment funds have increased their holdings of commodities to gain greater returns than those available from stocks and bonds.

HSBC Holdings Plc estimated last month that about $100 billion will be invested in commodity indexes by the end of 2006, compared with $10 billion at the end of 2003.

Five out of eight traders, analysts and investors surveyed by Bloomberg News on June 8 and 9 said copper will drop on the London Metal Exchange this week. Three forecast a rise.

``A 50 percent decline in price would still leave copper at the previous all-time high,'' David Threlkeld, president of Resolved Inc., a copper trading company in Scottsdale, Arizona, said in the Bloomberg News survey.

Hedge Funds

Hedge-fund managers and other large speculators increased their net-short position in New York copper futures in the week ended June 6, according to U.S. Commodity Futures Trading Commission data released on June 9.

Speculative short positions, or bets prices will fall, outnumbered long positions by 7,302 contracts on Comex, the Washington-based commission said in its Commitments of Traders report. Net-short positions rose by 930 contracts, or 15 percent, from a week earlier.

Metals extend declines to test resistance levels. By Kevin Morrison. June 12 2006

Metal prices extended their declines on Monday to test key resistance levels, which, if broken, could trigger further price falls. The copper price, which was the focal point of the metal price boom, fell below $7,000 a tonne for the first time since April 28. It hit $6,980 a tonne in late trade on the London Metal Exchange, down $240 on the day.

The copper price has now fallen 20 per cent from a record $8,790 a month ago.

In spite of the fall in the three-month price, the copper cash price is $7,231, suggesting that the availability of the metal is still very tight.

London-based metal traders said that if the copper price failed to hold at about $7,000, the red metals price next support level was about $6,500, and then $6,000. However, the fall has been accompanied by low volumes.

Other base metals were also weaker. Three-month aluminium was heading to finish below $2,500 a tonne for the first time since April 4. It was quoted at $2,495 a tonne in late London trade, down $20 on the day, and 25 per cent below its record peak of $3,300 a month ago.

Zinc prices, which doubled in price from the start of the year to a peak of $4,000 a tonne almost a month ago, dropped to $3,200, its lowest level in three weeks.

Nickel prices fell to $19,100 a tonne, their lowest level in more than a month.

Precious metals also tested key support levels. Gold hovered just above the $600 a troy ounce, a level it has remained above since mid-April.

The bullion price fell to a low of $603, before recovering to $609.70, up $2 on the day.

Gold has fallen more than 16 per cent from its 25-year peak of $707 a month ago. The latest data from the Commodity Futures Trading Commission showed that the non-commercial position on Comex gold futures fell for the fourth successive week, suggesting that investors are unwinding their positions.

Silvers decline has been more dramatic. The silver price fell below $11 for the first time since the end of March, before recovering to $11.10 a troy ounce, down 5 cents on the day. The silver price has fallen almost 28 per cent from its peak of $15.17 on May 11.

What has held commodities back for the past 200 years?             By Dr Marc Faber.
09.06.2006


I have great sympathy for the view that over the last 200 or so years investments in commodities performed poorly when compared to cash flow-producing assets such as stocks and bonds. I also agree that, as the team at GaveKal suggests, "every so often, we experience a massive break higher in commodity prices in which commodity indices triple in less than three years," which is then followed by a period of poor performance.
Still, we need to ask ourselves why in the last 200 years, commodities, adjusted for inflation, were in a continuous downtrend and whether it is possible that something might have changed in the last few years, which would suggest that this downtrend is about to give way to a sustained out-performance of commodities compared to the US GDP deflator.
The other question is of a more near-term nature. Should commodities, having approximately trebled in price since 2001, be sold, or should we expect far more substantial price increases? I have to confess that I have little confidence that I can answer these questions satisfactorily. Still, the following should be considered.
In the 19th century, and for most of the 20th, industrialisation was concentrated in a few countries, which for simplicity we shall call the Western industrialised world. The world's economy was at the time characterised by an abundance of land, resources, and cheap labour (certainly in the colonies and later in the developing countries) and a relatively limited supply of manufactured goods.
At the same time, growth and progress was concentrated among a very small part of the global economy - either in the Western industrialised countries or among a tiny part of the population (the elite) in developing countries. In addition, there were hardly any other sectors in the economy where productivity improvements were as high as in agriculture and mining.
These factors - abundance of land, labour, and resources combined with huge productivity improvements and limited demand from the then still small industrialised world - may, at least partially, explain why commodity prices failed to match consumer price increases for much of the last 200 years.
Remember that in the first half of the 19th century, manufacturing was concentrated in England with a tiny population, while the British Empire could draw on the supply of commodities from an enormous territory. Then, in the second half of the 20th century, we experienced the socialist and communist ideology, and in India policies of self-reliance and isolation.
As a result, about half the world's population remained largely absent as consumers of goods. (How many motorcycles and cars were there in the Soviet Union, China, India, and Vietnam 25 years ago?) But, while largely absent as consumers, people in these countries continued to produce raw materials and agricultural products.
Therefore, I suspect that the removal of approximately half the world's population as consumers through socialism and communism may have been an important factor in the poor long-term performance of commodities compared to the US GDP deflator, and other assets such as equities.
Since the breakdown of communism and socialism, the world's economic fundamentals seem to have changed very importantly. Initially, the impact of the end of socialism was muted. Production shifted to China, but as had been the case with production shifting from the West to Japan, South Korea, and Taiwan between 1960 and 1990, rising industrial production in former communist countries largely substituted for production in the West.
But over time, in countries such as China, rising investments and industrial production boosted real per capita incomes considerably and made way for a tidal wave of new consumers. In turn, these additional new consumers lifted industrial production further in order to satisfy not only the demand from their export markets but their own needs as well.
Thus, industrial production and capital spending increased further. This led to additional income and employment gains, further domestic demand increases and so on (multiplier effects).
In short, the opening of China and of other countries has permanently shifted the demand curve for consumer goods and services (for example, transportation) to the right and along with it the demand for industrial commodities and, notably, energy.
Now, if all goes well in India (a big if, I concede), then the demand for goods, services, and hence commodities will continue to increase very substantially for another 10 to 20 years.
Indian oil consumption has just recently started to turn up. Should its demand now accelerate, as we believe it will do, it is very likely that China's and India's oil demand could double in the next eight years.
There are a few more points to consider. For much of the last 200 years, developing countries, where many of the world's natural resources are located, had trade and current account deficits with the industrialised world.
These deficits were a constant drag on these countries'
ability to accumulate wealth. But now, through its current account deficit, the United States is shifting around $800 billion annually to the economically emerging world.
This represents a huge shift in wealth from the rich United States to the current account surplus countries.
That this shift in wealth stimulates their economies and consumption, and along with it their own demand for commodities, should be clear. (Rising domestic energy demand in Indonesia amidst falling production has turned the country into an oil net importer!)
Now, for most countries a current account deficit the size of that of the United States would lead to some sort of crisis (for example, the Asian crisis of 1997) and then to a curbing of consumption. However, in the case of the United States, which is endowed with a reserve currency, trade and current account deficits are simply financed by "money printing."
So, at least for a while (but not forever), the shift in wealth to the emerging world won't have a negative impact on America's economy and consumption. And, at least for now, rising demand and wealth in the rest of the world won't be offset by declining demand and shrinking wealth in the United States.
On the contrary, the global imbalances arising from "over-consumption" in the United States have brought about a global economic expansion, which, while unsustainable in the long run, is nevertheless firing on all four cylinders at present.
Simply put, the excess liquidity which the Fed has created - and which it is still creating, I might add - has led to a global and synchronized economic boom. (If money were tight, the asset markets wouldn't rise.)
The following point regarding the demand for commodities is frequently overlooked. In the developed countries, commodities account for a very small part of the economy. As a result, price increases for oil and other commodities have a very minor impact on growth rates and on consumption. However, in the commodity-producing countries (Middle East, Africa, Russia, Latin America), commodity production is an important part of the economy.
So, when commodity prices rise, their economies are, as in the case of the Middle East, turbo-charged. GDP per capita then soars and leads to a consumption and investment boom, which then increases these countries' own demand for commodities.
This is particularly true for resource-rich countries that have a large population and also explains why, in the 19th century, when agriculture was still the dominant sector in the US economy, rising grain prices led to economic booms, while declining commodity prices were associated with crises. (In recent years, financial markets have begun to have a similar impact on economic activity as agriculture had in the 19th century: rising stock markets = boom; falling stock markets = bust.)
In sum, we could argue that the emergence of a large number of new consumers in the world following the breakdown of communism, expansionary monetary policies in the United States, which have led to a rapidly growing current account deficit, the US dollar's position as a reserve currency, which enables the Fed to create an almost endless supply of dollars, and new demand from the commodity producers themselves, have all led to a significant increase in the demand for raw materials.
I am not predicting here that, from now on, the demand for commodities will always outstrip the supply. In time, new technologies (in particular, in the field of nanotechnology), which will permit resources to be used more efficiently, and conservation will curtail demand for raw materials. But until the effects of these factors kick in, a tight balance between rising demand and existing supplies could remain in place for quite some time.

The commodities boom may last another 14 years.                By Jonathan R Laing.                11 June 2006

So claims Jim Rogers, legendary 1970s hedge fund guru and unapologetic commodities bull.

WITH the prices of oil and industrial metals such as copper, zinc and nickel screaming higher in recent months, such observers as Warren Buffett and Morgan Stanleys Steve Roach have proclaimed that commodity markets are in a bubble destined to burst soon.
But Jim Rogers, fabled hedge-fund manager of the 1970s and now ardent commodity bull, finds such talk ridiculous. Indeed, he has been pounding the drum for investing in commodities in recent years in numerous speeches and media interviews, even writing Hot Commodities, a book propitiously published in late 2004 that predicted a coming price boom in everything from aluminium to zinc.
Barrons caught up with Rogers on a recent rainy morning as he worked out on a stationary bike in the fourth-floor exercise room of his five-floor mansion on New Yorks Upper West Side. Bloomberg Radio droned in the background as he talked while occasionally glancing at a laptop computer, perched precariously on the machines handlebars. How can anybody say that a bubble has developed in commodities yet brief pant with sugar 80% below, silver 75% below and corn and cotton less than half their all-time price highs? he huffed. You cant have a bubble when the media has only begun to pay attention to commodities in recent months after years of disinterest. Were now only in the early part of a long-term commodity price boom that has years to run and will likely see literally dozens of raw material prices make new highs. Even crude oil and copper have a long way to go, even though they recently set price records.
How long will the surge run? Based on the past longevity of commodity bull markets (Rogers mentions ones that, by his reckoning, lasted from 1906 to 1922, 1933 to 1953 and 1968 to 1982), the current boom could last eight to 14 more years. The commodities-bubble crowd scoffs at that, just as sceptics did when Rogers predicted the current boom a few years ago
Commodity price booms, says Rogers, are typically the product of years of underinvestment in new productive capacity whether in exploration for new oil or metal deposits, construction of new smelters and refineries or planting of new orange or rubber trees in response to low prices. Meanwhile, demand creeps up all but unnoticed until imbalances suddenly erupt and prices surge. Producers with the possible exceptions of grain farmers and cattle ranchers cant respond quickly because of the long lead times required to finance and build new capacity.
Over the years, commodity prices have tended to surge during periods when the stock and bond markets have laboured, exhibiting what modern portfolio theorists call non-correlation with the financial markets. For instance, commodities did poorly during the stock market booms of the Roaring Twenties and the post-1982 bull market, while outpacing stocks during the Great Depression and the 1970s, Rogers notes.
Recent studies seem to bolster this observation. One, superintended by capital-goods analyst Barry Bannister, now of Stifel Nicolaus, found that over the past 130 years, commodities and stocks have alternated performance leadership in regular cycles, averaging about 18 years. A 2004 study by Gary Gorton of the University of Pennsylvania and K Geert Rouwenhorst of the Yale School of Management that examined market returns from July 1959 through December 2004 concluded that passive, systematic long investments in commodity futures generated total returns comparable to the S&P 500s, while both asset classes smoked the corporate bond market. Even better, the two academics concluded, commodities were less volatile and hence less risky than stocks over those 54 years. And their lack of correlation with stocks made them worthy diversification tools.
Its no surprise, perhaps, that commodities march to a different beat than stocks and bonds. Unlike their financial counterparts, commodities are hard assets that both contribute to and benefit from inflation particularly, unanticipated inflation. Rising inflation hurts stocks by crimping companies profit margins and consumers purchasing power. Inflations fraternal twin, rising interest rates, likewise can savage bond returns by sapping the real value of interest and principal payments.
To Rogers, the past few years have witnessed another changing of the guard; commodities will rule over stocks and bonds for the next decade or more. Inflation will continue to flare and not just because of rising raw-material prices. According to Rogers, new Fed Chairman Ben Bernanke is an amateur with no knowledge of markets whose academic work revolved around how nations could avoid depressions by printing more money. And, finally, he throws into this witches brew the likelihood of a collapse in the dollar as a result of Americas accelerating debtor status. Rogers views commodities as the ultimate refuge from these scourges.
Fundamentals will tell the tale for commodities. Rogers invariably points out in speeches that no major oil fields have been discovered in more than 35 years, nor major new metal-mine shafts sunk in 20 years. And many existing elephant oil reservoirs, such as those in the North Slope and the North Sea, are fast depleting. And who can trust the Saudis to tell the truth about their real oil reserves? That leaves the global market depending on production gains in Russia (a bunch of mafiosi who have probably already reached their peak production level) and such basket cases as Nigeria and Venezuela.
Sure, oil from the Caspian Sea and the Alberta tar sands eventually will hit the market. Wind, solar and geothermal hold promise, as do biomass-generated power and other alternative energy sources. But tapping them will take lots of time and money, warns Rogers.
On the demand side, theres the US consumer, who in the 1990s considered McMansions, gas-guzzling SUVs, fancy appliances and ubiquitous electronics a national birthright, gobbling up petrol, natural gas, electricity, timber, steel, aluminium and lead (for batteries) at a fearful rate. Add to that 1.3bn Chinese and 1.1bn Indians all largely walled off from the global economy during the last commodities boom joining the global scrum for natural resources.
China is now the No 1 consumer of copper, steel and iron ore, and No 2 in the use of oil and energy products to feed its industrial maw, which is growing at a prodigious rate of nearly 20% a year. And the torrent of textiles, refrigerators, colour TVs and computers arent just flowing to overseas outlets like Wal-Mart. Burgeoning economic growth is also creating a Chinese middle class aspiring to better meals and more creature comforts. In Rogers; view, it;s delusional to deny that competition for commodities will continue to heat up as a result of Chinas pell-mell rush from a peasant economy to economic giant. Today, there are only 30m private vehicles on the roads in China, versus 235m passenger vehicles in the US, even though China has almost 4.5 times as many people.

The large commercial interests that trade commodities arent about to let speculators wrest control of prices. ExxonMobil can drown all the index funds, hedge funds and other speculators in the energy markets if anyone tries to manipulate prices, Rogers asserts. Its largely the surging global demand for raw materials that is pushing prices up.
Rogers is the first to concede that the bull market in commodities will have plenty of nasty corrections and volatility along the way. Thats the nature of bull markets. Gold, on its way to its record of $850 an ounce in 1980, suffered a 50% correction in the mid-1970s, falling from nearly $200 to $100. The Rogers Index itself dipped some 25% in the months following 9/11. Then, it resumed its upward trajectory.
Obviously, a major terrorist incident, a bird-flu epidemic, a global financial crisis or a hard landing in the Chinese economy could trip up the commodities bull. But, according to Rogers, any slide would likely be temporary and offer a good buying opportunity.
None of these events change the underlying dynamics of the global economy. Supply will remain constrained for some time. And demand wont disappear. Not with Chinas 1.3bn people, fired by rising aspirations and epic entrepreneurial zeal, driving the market. Consumption is likely to outstrip supply if only because of the developing worlds hunger for a better life.

i wish it would start again now!!!