Metals Bull Unabated
EXTRACTS
by Larry S. Levy
Editor, Arts 'n Mines Newsletter
December 15, 2004

Late last year, and a couple of times early this year, we looked at comparisons of changes in indices between precious metals, mining stocks, and the broader stock market. As the base month first used was December, it is now a good time to take another look at these comparisons. We will use the first trading day of December 2001 to compare with the first trading day of December 2004. If you recall, we assume a base investment of $10,000 in each of the following metals and indices comparing that amount to the current value from each alternative.

Adding to our previous studies this time will be a couple of components of the base metals market, copper and molybdenum.

Precious and base metals - what $10,000 invested three years ago in each of the following is worth as of 1 December 2004:

The major mining indices - what $10,000 invested three years ago in each of the following is worth as of 1 December 2004:

Results for conservative, main line stock indices - what $10,000 invested three years ago in each of the following is worth as of 1 December 2004:

Within the extremes shown above, the mining stock indices have very dramatically out performed the S&P, the Nasdaq, and Dow Jones averages. Of course, metals and mining stocks are cyclical in nature, but so far the broader markets seem almost unaware of the evolving bull market in mining shares. Given that such cycles typically run for about 7 years, we can assume this one is just getting started, especially when considering the falling inventories for many industrial commodities.

For example, above ground stocks of copper deposited with the London Metals Exchange equated to about 790,000 tonnes on, or around the first trading day of December 2001. By December 1, 2004, the amount held had dropped to 42,400 tonnes. Similar declines have been posted in New York and Shanghai, and not just in copper. Demand for most all metals, and energy products (hydrocarbons and uranium), is running far ahead of production at this time. The marginally higher production the mining industry has been able to sustain has not been able to reverse these annual deficits. And, it will take many more years to re open moth balled facilities, and to bring new mines into being.

Further, as most of these elements are priced on world markets in terms of U.S. dollars, it's declining trade weighted value will continue to push prices higher (at least in dollar terms). A falling dollar, plus nearly empty warehouses, assures continued pressure on prices.

Now, before leaving this subject, let me add one more thing for those who routinely believe that rising interest rates are bad for precious metals prices, and mining stocks - a common misunderstanding. Firstly, interest rates in the U.S. are not the only influence on metals prices. While that may have once been so to some degree, the U.S. is no longer the economic force driving these markets as it once was. Secondly, studies show that where there appears to be an interest rate influence, it is most related to the divergence between real and nominal rates, rather than the direction of those changes. That is, the more the difference between the rate of inflation, and bank lending rates, the more upward pressure there can be on precious metals (PM) prices. That's because PMs are often safe harbors against the wasting value of the dollar during inflationary periods. Nominal (bank) rates can rise merely to lessen a widening divergence from the rate of inflation, or to maintain it for a while. This, I believe, is the current state of the market.

In other words, lending rates can increase in the early days of a cycle, such as we are currently experiencing, as they can be more an excuse for banks to improve returns against rising inflation. The process, though, is usually presented by the Fed as an excuse for suppressing inflation. But, that really comes later in the cycle, when the spread between real and nominal rates narrows. Note that Tuesday was the fifth time in just a few months that rates went up. Yet, during this period gold set, and remains near a high not seen in a generation. As stated earlier, interest rates in the United States are not the only factors effecting commodities. Those other general influences have moved to another part of the globe for the first time since the early days of the Industrial Revolution.

In my considered opinion, then, this bull market in metals and mining stocks (as well as the energy sector) is only getting started. One day soon, perhaps in the coming year, the boarder markets will awaken to these factors, and a great rush will blow across the world in an boom witnessed by few living souls.

Late note: "Moly" this week is trading at US$32.00 per pound, up from $28.00 earlier in the month, and up 1,262 percent over three years.

QUOTES FROM SELECTED READINGS:

From last March, but still relevant - "It's not just America that should be grateful for China's dramatic emergence. Multinational corporations have moved rapidly to integrate China into the global supply chain. More than $50 billion in foreign direct investment went to China in each of the past two years, making it the world's largest recipient of such flows. Chinese subsidiaries of multinationals and joint venture partners from Japan, the U.S., and Europe have accounted for 65% of the cumulative increase in total Chinese export growth over the past decade. Outsourcing has become an increasingly important element of corporate efficiency strategies around the world, allowing high-cost operations in developed countries to be replaced by low-cost production in developing countries such as China. Ultimately, these benefits are also passed on to consumers around the world." Stephen Roach, Why We Ought to be Thanking the Chinese, http://www.morganstanley.com/GEFdata/digests/20040312-fri.html

As I've often repeated in these pages, the key to sustained growth, be it globally or locally, is new products and/or new markets. China is not only the worlds largest ever emerging industrial power, it is also the worlds most populous market ever to be confronted with (what to them) are huge arrays of new products. While some are calling the current environment in China a bubble, it may well become the largest and longest lived the world has ever seen, and in the end, it may prove no bubble at all. In fact, it may become salvation, or a least a reprieve for an otherwise systemically troubled world economy.

THE CHINA SYNDROME:
(News related to Asian influences on commodity and other international markets)

10/12/2004 - The U.S. throws fuel on the escalating trade wars.
http://my.netscape.com/corewidgets/news/story.psp?cat=50580&id=2004121011150002193902

15/12/2004 - China's auto production is expected to make it the 3rd largest producer by 2010.
http://english.people.com.cn/200412/15/eng20041215_167434.html

15/12/2004 - India's economy continues expanding.
http://economictimes.indiatimes.com/articleshow/958355.cms

15/12/2004 - China's direct foreign investments (DFIs) surge (see above Quotes from Selected Readings).
http://economictimes.indiatimes.com/articleshow/958348.cms

Side note:
Manhattan Minerals had a much promoted mining story in Peru back in the 90's. Today, the story provides a strong lesson for those who may be willing to bet against anti-mining movements, or that existing mining bans may be overturned. Manhattan had multiple claims involving what could have made an exploration mining company into a mining powerhouse, but the indigenous resistance won in the end. Manhattan finally and formally quite the area in the last several weeks and is trying to find a buyer for these properties. Good luck to them. The stock, which ran as high as C$12.00 back in '98, hit C$0.04 the other day. There is a lesson here, and that is, do not bet that economic reason (as pro-mining types understand it) will prevail where locals peoples fear any change in their traditional way of life, even if that way of life is what we call subsistence living. http://finance.yahoo.com/q/bc?s=MAN.TO&t=my&l=on&z=l&q=l&c=

Some thoughts:
In the long run, escalating trade deficits always result in severe economic adjustments.
In the long run, unrestrained fractional reserve banking always results in a full fiat money system and later disaster.
In the long run, legal tender laws always end in economic crisis.
"In the long run, we are all dead." John Mansard Keynes, the 20th Century's most influential economist/monetarist (and leading socialist).

End legal tender laws. End government debt as an "asset" for reserve banking. End the Federal Reserve System.
The cost of such adjustments will be quite painful, but no where nearly as disabling as the eventual cost of not doing so.

"The study of money, above all other fields in economics, is one in which
complexity is used to disguise the truth or to evade truth, not to reveal it."
John Kenneth Galbraith

© 2004 Larry S. Levy
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