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Dollar Falls - Copper Shines The U.S. Dollar has been taking a beating lately. The forecasted decline has long been discussed in these letters and elsewhere for many months, and the learned expectations are for more of the same. Here is an example. http://news.ft.com/cms/s/257979a6-30f4-11d9-a595-00000e2511c8.html And, the recent history looks like this. http://quotes.ino.com/chart/?s=NYBOT_DXY0&v=dmax The importance of the story, of course, is that the exchange value of the dollar influences many commodity prices. As the dollar declines, the prices of raw materials goes up - completely unrelated to issues of supply and demand. Presently, however, we are experiencing both a falling dollar (causing higher prices), and increasing demand for raw materials. More importantly for your investment dollars, this boom is just getting started. Speaking of commodities, the price of copper is again pushing back toward multi-year highs as demand continues very strongly higher against short supplies. In fact, inventories in London are below 70,000 tonnes (long tons), a record low for recent years. Above ground stocks in New York, too, have fallen sharply and now stand at less than 45,000 short tons. From January through August of this year, global mine production increased at an annualized rate 3.2 percent, while world off take from all sources increased 5.9 percent over the same term. In the meantime, mines are operating at 92+ percent of capacity, or very nearly maximum sustainable output. Given that proven world demand is running far ahead of stocks by a factor of 1.8 to 1, it will not be long before above ground stocks are thoroughly exhausted. What we are about to witness, then, is significantly higher copper prices, and it will take years for the output of existing and new mines to catch up. Aside from these fundamentals, history has a lesson for us. In the previous copper cycle, the highest average annual price was posted in 1989, and that was US$1.37 per pound. That would equate to about $2.08 per pound in current dollars (when accounting for the depreciated purchasing power of the dollar over these last 15 years). Given that supply and demand fundamentals are sharply more in favor of higher prices now than then, AND with the added pressure of changing foreign exchange rates, I expect the current $1.42 per pound will look rather cheap very soon. So, how do the big mining professionals feel about this? Well, some evidence must be in the fact that the world's two largest mining companies (Rio Tinto - RTZ - of England & Broken Hill Proprietary - BHP - of Australia) are partners in a newly defined copper deposit that represents one of the most significant new resources in the world. [RTZ's interest is by way of their subsidiary, the Resolution Copper Company (http://www.resolutioncopper.com/).] The deposit, however, has two major problems that will create exceptionally high costs for recovery. Yet, the partners seem committed to spending the two billion dollars that may be required to bring their plans to fruition. The first major problem here is that the ore is at a depth of 7,000 feet. That's roughly 3,500 below the bottom of the main shaft of an older, previously exploited deposit. For those who know their geography, the project area is near Superior, Arizona. Access to the mineralization, conceptually, will be by way of a ramp into and below the mountain from Pinto Valley many miles away to the east. Complicating operations (and costs) will be temperatures as high as 175 degrees. Further, up to 20,000 acre feet of water will annually be required for the operations, and this from an environment on the edge of the Sonoran Desert. The other negative consideration is the location in the United States. That by itself means higher labor, legal and environmental costs than would be experienced elsewhere. So, at this point, it's hard to imaging the partners making a profit at current market prices for copper. They must be looking forward to much higher prices by the time production can begin, since that date lies up to 10 years in the future. While production is a very long way off, the greater part of the investment will begin in as little as four years. However, substantial investments have already been made, including acquisition of the mining rights, and the recent purchase of 28 miles of long neglected railroad right-of-way. Further, the state of Arizona is involved in massive investments for highway realignment and other work to provide better access to Superior, and from Superior to Pinto Valley. The point here is commodity prices are moving higher, and it's not just a copper story. Raw materials do not make large, sustainable price movements in isolation. One either influences the others, or they all respond together from the same broader economic forces. As we may well be on the verge of an explosion in metals prices, you should be making your investments accordingly. Don't wait for this boom to become a common topic in casual conversation with the neighbors, at parties, or at the workplace water cooler. THE CHINA SYNDROME: (News related to Asian influences on commodity and other international markets) 10/11/2004
- For many Westerner's, mutual funds are the best means of investing in
Asian growth to earn exceptional returns. 12/11/2004
- China's inflation index is markedly lower from the prior month, as
exports zoom higher. Selected News Highlights from Markets and the Economy: 10/11/2004
- September Trade Deficit shrinks, while exports soar - gap still
running at +600 billion annualized. 10/11/2004
- Currency markets did not like the above report, sending US dollar to a
new low. 10/11/2004
- CRUDE OIL prices are down 14-15 percent in a matter of a couple of
weeks. 10/11/2004
- Fed raises rates. 12/11/2004
- Retail sales post marginal gain for October. Some
thoughts: End
legal tender laws. End government debt as an "asset" for
reserve banking. End the Federal Reserve System. "The
study of money, above all other fields in economics, is one in which
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Larry S. Levy is editor of Arts 'n Mines, a private email newsletter for special friends, guests and selected industry insiders. It is not available to the public. EXTRACTS is compiled from portions of the newsletter not dealing with specific mining issues. Mr. Levy also contributes economic and historical commentary on these subjects to international publications. He is retired from his former practice as a property valuations expert, during which time he held leadership roles in the premiere trade associations, lectured, and published articles on valuation topics. |