What are the Metals Telling Us?

Floyd Norris puts forth an interesting theory about metals: While they have been historically early indicators of booms and busts, something might be changing. Are metals no loner a leading indicator of the US economy? Norris posits that may be the case:

"An index of spot metals prices [CRB/Reuters] has been around for a quarter-century. It concentrates on metals that move the fastest when economic conditions change, and that has made it volatile. But even with that volatility, not until 2003 did it manage to go up 50 percent in a 12-month period, and that was an increase from the very depressed prices that came with the worldwide slowdown early in this decade. The rise left the actual price level well within historic norms.

But starting in late 2005, the level of prices began to rise in a way that would have seemed normal to a technology stock investor in late 1999. At the end of last month, the 12-month increase was 99.6 percent. An index that first went above 400 a year ago topped 750 early this month…

For most of its history, the index was a relatively good indicator of activity in the United States, the economy that used the most raw materials. But the American economy did not surge in 2006. Instead, it seemed to be slowing a bit, and the forecasts for 2007 are far from euphoric."

Why is that? As Norris observes, the US "is no longer sure to be the
marginal buyer of economically sensitive materials. That honor now goes
to Asia, particularly China."

I still believe the Metals index can forecast economic activity — the
shift however, is that its forecasting global, rather than just the US
economic growth.

And given the growing manufacturing might of Asia (and China in particular), the reduced manufacturing base in the U.S., and the slowing economy  here, metals may still be useful as a global rather than local, forecasting tool.


CRB index: prices of zinc and tin, steel scrap, copper scrap and lead scrap
graphic courtesy of the NYTimes




A Historically Accurate Indicator for the U.S. May Not Apply Anymore
NYT, December 23, 2006

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What's been said:

Discussions found on the web:
  1. Sailorman commented on Dec 23

    Has the percentage of use of metals shifted so much that the US no longer dominates this?

    Is there a chart available that shows the use of copper by country?

  2. blam commented on Dec 23

    The parabolic rise in metals is definatey revealing something about commodity pricing. Higher Asian demand is certainly a component as are the effects of more stringent environmental restrictions on supply.

    The single biggest factor is speculative manipulation of the futures market. At least 50 % of the price of copper, at it’s peak, has been attributed to “investment” flows from hedge funds, insurance companies, pension funds, ETF’s, and speculative banks. The amount of paper money thrown at the base metals has swamped the actual “physical market” by 400 % or more.

    The futures market is not an efficient market for price discovery but an unregulated mechanism by which organized, financial cartels can corner commodities markets, imposing a tax on consumers in the process. In the current go around, financial interests have provided a double whammy by pumping the stock price of producers.

    The base metals market is small potatoes compared to the oil and natural gas markets. The pump and dump on oil prices and the undoing of Amaranth both reveal the extent of the futures market manipulation.

    It is time to rethink the futures markets and regulation. They are rotten to the core.

  3. dad29 commented on Dec 23

    Another interesting possibility for the runup in copper (I noticed the same outlier-high price…) is that valuation in USD may be less reliable than it was, say, 5 years ago.

    Wonder what copper/gold or gold/copper analysis would show…

  4. Gary commented on Dec 23

    Every country in the world is in the process of devaluing their currency. Most are increasing money supply in the high single digits annually and some even by double digits. Looks to me like we are getting good old fashion inflation. It’s only human nature to want something for nothing, unfortunately there’s always a price to pay.

  5. blam commented on Dec 23

    sorry for the double post; Just can’t resist

    If you recall in Sept 2005 the hedge funds via their mouthpiece, bloomberg, were driving the price of copper up because China was short the market 200,000 tons. China replied they had 1.3 Million tons in inventory and were not worried about copper. The common thinking was that China only had 200 – 300,000 tons in inventory and couldn’t possibly have 1.3 million tons in inventory. Where could China have gotten that much copper at less than $ 1 per pound ?


  6. alexd commented on Dec 23

    This is very interesting. So if other countries are also drawing on copper supplies then the question becomes where are the products that utilize the copper go? It seems as the quest for a better of standard of living increases at an ever increasing rate across a broader band of the world’s population, that the utilization of a finite material in terms of geography is a tell pertaining to economic activity and thus in turn which markets to pay attention to as possible places to invest in. In the same manner we have to look at which of the materials where demand is increasing where there is an inherent limitation on supply (see Jim Rodgers on this concept) as to where we can find leveraged investments such as mining, and the refinement of that which is extracted.

    Then we need to keep an eye open for which technologies are coming up that might serve as substitutes for this material.

    At this juncture there is a lot of work being done on energy. Since the economic stakes are so high there are many interested players. There are also many different and in some cases divergent interest in new ways to supply energy to those who want it.

    There is no question that there is a huge demand for petrochemical/highly volatile materials to utilize as portable/storable highly potent sources of energy due to the inherent extant infrastructure. Yet we have to try to stay aware of what processes might be created that will eventually negate this approach in favor of new ones.

    A lot of it comes down to storage. Most clean processes have a problem with the source not being constant, no means of storage, pollution as a side effect, and inefficiencies of transmission. As these problems are addressed (and one problem will affect the others) there will likely be a shift in where financial resources are applied.

    So demand for energy and raw materials is likely to increase and substitutes for current approaches will be searched out as the economics of the processes warrant.

    Meanwhile shifts in the overall supply and demand can tell us how strong the winds of the world economy blow.

  7. My1ambition commented on Dec 23

    Gary, where’d you learn? You’re constantly taking the words out of my mouth.

  8. DavidB commented on Dec 23

    It is going to take a LOT of copper wire to pump electricity throughout all of China and India

  9. alexd commented on Dec 23

    DavidB: That is a good observation. I will accept it as having the ring of an obvious truth that everyone ignores.

    So we also have to ask ourselves what does all that copper wire mean? It means consumption continues which to some degree will mitigate or if you will soften the effects of any downturn.

    So now that we know which way the wind is blowing we should invest accordingly.

    I do not have a stake in the following but it might be of interest. LMC It is currently rather volatile. I would look at this as a long term investment.

    Then on the side where I do have a stake there is mea. This is a value play, and this is a metals play. A Cranford NJ recycler. Selling under book, very nice earnings. Physically from that point they can supply the US or oversea buyers. PE is 11.8 with great growth.

    These two suggestions are a small holiday gift to those who provide valuable insights to this forum.

    Also on a technical basis the qqqq’s look awful and I will likely take some positions in reverse etf’s. The other us markets seem to be following. Things could get very ugly. Banking and defense look strong. The thing that has me concerned is the more vocal and in my face referrals to the housing market and the negative effects that it is having on parts of the US economy. I am going to propose that every time a hedge fund operator and johnq public sees this kind of thing there is an erosion of confidence. I am concerned that this herd could all run to the doors. People who have made money after a crummy start to the year are likely to have on their track shoes. Of course after such an event then there will be opportunities.

    I especially want to thank Barry R for hosting it. Its quality grows out of his.

    Peace and health.

  10. DavidB commented on Dec 23

    Talking about copper opportunities brings my mind back around to FCX. If you believe in the long term viability of the copper market then that is a cheap value stock to hook your wagon to. I would have said PD but FCX just bought them

  11. donna commented on Dec 23

    Is it time to mine the landfills yet?

  12. Gary commented on Dec 23


    Sorry I’ll wait a few hours before I post from now on :)

  13. My1ambition commented on Dec 24

    DavidB, I don’t usually find myself watching Jim Cramer but I did recently. He was talking about Copper. He mentions that while copper was soaring (along with housing) homebuilders ran in to buy extra copper for inventories just in case of a shortage.

    This threw copper in the air about 40%. Eventually homebuilders realized that they had more copper needed than inventory would suffice (supply exceeded demand).

    This pushed down the interest for $4 copper.
    Point is when pointing to China we can always show a shortage, until there is no longer a shortage.

    (Cramer’s commentary might be a very bullish buy now, dunno).

    and tired-bear, it almost reminds me of looking at Google in 2005 when their technical charts just went up. I think we are going to see a correction very soon in Uranium (too much hype) – but I’ll put down any money that we’ll reach 200 in the next 10 years.

  14. DavidB commented on Dec 24

    Keep a keen eye on the supply/demand fundamentals. Supply versus demand has been increasing with the higher prices and that will always be the determining factor in whether or not a company can make money

  15. D. commented on Dec 24

    Sure cheap commodities are probably gone forever especially since we haven’t invested much in tese sectors in the last decade. We’ve been more interested in investing in stocks that depend on them!

    But these prices won’t last for one simple reason: The world has not adapted to these new high price levels. Right now we’re at the end of the cycle, where commodities are the bottleneck in the system.

    This cycle has been set up for low commodity prices: 18$ oil price (think just in time inventory, McMansionas, gas guzzlers and burb expansion), 3$ nickel (stainless steel everything)…

    If input prices have quintupled and end prices are still going down, either inflation is not being reported properly or someone along the chain is obviously taking a hit. I think it’s a mix of both.

    As any mom knows, it’s all fun and games until someone loses an eye.

    The world economy will slow, and commodity prices will tumble. But the new base level won’t be 18$ oil or 3$ nickel anymore it will probably be closer to 30$ oil…

    I’ve NEVER seen the economy easily adapt to parabolic changes in pricing.

  16. brion commented on Dec 24

    “It is going to take a LOT of copper wire to pump electricity throughout all of China and India”….
    …to enable them to sell more shit to U.S.? What happens if we ever DO stop shoppin? …If “debt takes a holiday”?

  17. dryfly commented on Dec 24

    Copper is a strange one – where precious metals meet base metals – very different market drivers & copper gets torn both ways.

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