The Rude Awakening
Vienna, Austria
Tuesday, July 31, 2007 ------------------------- - Will prices lead to a flood of the base metals market?
- 67 percent for nickel, 30 percent for copper and 41 percent for lead,
- Demand and price sustainability, a barrel of oil a day and more…
------------------------- Joel Bowman, reporting from Austria… Occasionally there arise arguments compelling enough that even the most vehemently aggressive bulls or bears find reason to revisit the underlying fundamentals of their position. In the column below, David Galland shows that keeping an open mind when it comes to formulating your investment theories and practices can be a valuable tool. Enjoy… -------- EverBank Silver CD ------- Pursue silver market returns without the market risk. 5-Year MarketSafe Silver Bullion Certificates of Deposit You can benefit from potential silver market gains without risking your deposited principal. We've combined the simplicity and financial security found in traditional CDs with the potential to benefit from the upside performance of the Spot Price of Silver while your deposited principal remains 100% safe from any potential market declines. More about the EverBank® 5-Year MarketSafe® Silver Bullion Certificate of Deposit. ----------------------------------- Base Metals Bears
By David Galland 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 what 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 reducing demand at the same time supplies are increasing. 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 the Bloomberg article: "An investor who acted on the advice of JP Morgan, the third-largest U.S. bank, missed gains of 67 percent for nickel, 30 percent for copper and 41 percent for lead, the best-performing commodities in the 26-member UBS Bloomberg CMCI Index." Even so, just because JP Morgan has been wrong in the past doesn't mean it will continue to be wrong. (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. Not surprisingly, therefore, the Chinese are increasingly showing up in remote corners of the world, checkbooks open, eager to trade U.S. dollars for tangible resources. China's acute interest in natural resources also explains why there are now 50,000 students studying geology in China. According to Clyde, historical data shows that when a country starts to industrialize, per-capita usage of oil typically goes from about one barrel of oil per year at the beginning of the industrialization, to between 17 and 27 barrels 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. The Chinese will consume increasing quantities of crude oil. That's a certainty. And they'll also consume increasing quantities of base metals. That's also a certainty. Even so, the prices of all natural resources are likely to fall sharply from time to time. Such drops can be frightening, but they can also provide an ideal entry point. So whenever resource stocks are falling sharply, don't forget to buy the dips. Joel's Note: 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. To learn more about the International Speculator and a no-risk trial subscription offering you the opportunity to view all current recommendations, click here. -------------------------------------- Rude Endnote: If you'd like to weigh in with an opinion on which way you see metals heading in the near-, medium- and long-term future, we'd love to hear it. Send all emails to
aussiejoel@the-rude-awakening.com and, as always, keep an eye out for your 5-Minute Forecast en route from Baltimore shortly. Cheers, Joel Bowman
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