Dividend stocks for income investors
See Jim's new portfolio to help navigate the treacherous interest-rate environment.
Jubak's Journal
Recent articles:
• Oil patch is drowning in cash, 4/14/2006
• 5 stocks for the coming retirement boom, 4/12/2006
• Bad for GM, bad for America, 4/11/2006
More...
| | Jubak's Journal
Why metals stocks haven't peaked
(Page 2) of 2
 Previous
But this counterargument, ironically, actually validates the key insight of Peak Oil. As the production peak approaches, the price of oil rises -- even as unconventional sources of oil and substitutions come to market -- because these new sources and substitutes are more expensive to produce than oil used to be. If they weren't, they would have been put into production during the days of cheap oil. In effect, the rise of oil prices in Peak Oil theory creates a price floor for these new sources. As the floor moves up -- to $40 oil from $30 oil, for example, and then to $60 oil -- new sources and substitutes become profitable. That slows the price rise predicted by Peak Oil. But it doesn't reverse it
Twin peaks?
Now look at the three similarities between Peak Oil and Peak Metal:- Its becoming harder and harder to find significant new deposits of everything from gold to copper. Gold production in South Africa, traditionally the worlds biggest gold producer, is now just one-third of its peak because the country's deep underground mines are exhausted and mining companies haven't been able to find enough new gold deposits to make up the difference. Global gold production has actually tumbled as gold prices have spiked. After peaking in 2001 at 2,621 metric tons when gold sold for less than $260 an ounce, gold production fell in 2005 to under 2,500 tons.
- When new deposits are discovered, they are in politically riskier countries. In gold and copper, that's meant replacing production from South Africa and the United States with production from Peru and Indonesia, for example.
- Production costs are higher in newly discovered deposits. Part of that's a result of location: It's more expensive to produce copper if you have to build roads, railroads and ports from scratch in remote Indonesia than it is to produce copper from Arizona. And part of that is a result of the poorer quality of newly discovered deposits. Costs are rising at many gold-mining companies because the grade of ore -- the amount of gold per ton of rock -- is lower in newly discovered deposits than in older mines.
To those, I'd add these factors that could produce even sharper and more sustained price increases for Peak Metal than for Peak Oil.- Mining companies are even more conservative about adding new production than oil companies. Oil companies, initially hesitant to invest when oil hit $30 because they were worried that oil prices would fall back to $20 or less, have started to factor $30- or even $40-a-barrel oil into their long-term capital-spending plans. Mining companies, scarred by the boom-and-bust cycle of an industry that is even more cyclical than oil, are so far sticking by their pre-boom projections for the prices of their commodities. Freeport-McMoRan Copper & Gold (FCX, news, msgs), for example, recently reaffirmed its decision to use projected copper prices of 80 cents to 90 cents a pound in making its decisions on capital spending to increase production. "Metal prices, like all commodities ... are cyclical," CEO Richard Adkerson told the Financial Times this month, "and I don't see any reason to change the long-term planning price because prices are higher." Copper now trades at $2.70 a pound.
- Oil producers have been able to exploit new technology to drill deeper, to force oil and gas out of stubborn geologic formations, and then bring vast new types of reserves -- oil sands and oil shale, for example -- into production. Nothing comparable has occurred in the metals sector. The last big technology shift -- from deep, underground shaft mining to vast, open-air pit mining -- is decades old. (The next big things -- genetically engineered bacteria and viruses that excrete metals from even the lowest grade deposits -- are now just smears on laboratory Petri dishes.)
All these Peak Metal factors make me want to rush out and add more metals stocks to my portfolio.
But one difference between the markets for oil and metals gives me pause: The commodity markets for metals are so much smaller than the commodity market for oil that it is much, much easier for speculative demand to drive up the price of gold, silver, copper, etc., than it is to drive up the price of oil
Not that the price of oil hasn't moved up and down as speculative cash has flooded in and out of the oil market. The price of a barrel of West Texas Intermediate hit an intraday high of $70.85 on Aug. 30, 2005, as traders bid up the price of oil on speculation that Hurricane Katrina -- which made landfall on Aug. 29 -- would shut down a significant part of oil production and refining in the Gulf of Mexico to drive up oil prices. On Nov. 1, the price was down to $58.30, despite Hurricane Rita's landfall on Sept. 24 and the damage it caused, as traders sold the storms. Despite crude inventories at high levels, oil prices have bounced back in the last two months, on speculation that something in Nigeria or Iran or Venezuela would disrupt supply. Crude oil in New York closed at $70.40 a barrel on Monday, its first close ever above $70.
But it took the anticipation of two huge hurricanes -- and then the passing of those storms -- plus the prospects of major geopolitical upheaval to produce a 10% to 15% swing in oil this year and last. In the much smaller gold and silver markets, all it takes is the launching of an ETF or two. First gold and now silver have been driven higher on the projected launch of funds that let retail investors buy the commodity. The launch of gold ETFs pushed gold prices up 12% in the 90 days before the ETFs were actually launched. (Prices fell 10% in the 90 days after trading in the ETFs began.) Silver is now going through the same process. Not surprising since Barclays Global Investors, the backer of the silver ETF, estimates that demand for its ETF will require it to buy 12% -- 130 million ounces -- of global silver demand.
Waiting for the metals to cool
So where do I come down?
Yes, in the long term I believe the metals boom will run for the rest of the decade -- or until a downturn in the global economy puts the kibosh on demand for all commodities. So, for the long term (or until the day of economic reckoning), I'd like to own shares of metals producers.
And, yes, in the short term, I believe that flows of speculative cash have pushed the prices of all the metals, but especially silver and copper, to heights where they've become unglued from the positive long-term fundamentals. (Gold, the first choice of investors in any crisis, is as always a special case.) In the jargon of Wall Street, they're ahead of themselves. I wouldn't sell positions in this sector that I own -- the froth will get frothier over the next few months in the aftermath of copper strikes in Mexico and the election in Peru -- but I wouldn't add new positions just yet.
For that I'd wait for a sharp little correction. Nothing too big, mind you. But enough to take gold and silver off the front page of The Wall Street Journal for a while.
New developments on past columns
3 big threats to Chinas economic miracle
Here's the headline from April 17, 2006: "China sees GDP grow by more than 10%." Read deeper into the story and the news turns into a very mixed bag. Good for investors in the shares of international commodity producers. Bad for investors worried that China's economy will first overheat and then blow up. According to preliminary and unofficial numbers, China's economy grew by 10.2% in the first quarter of 2006 on the backs of higher exports and increased inflows of investment capital. To the degree exports fueled that level of growth, slightly above expectations, it just about guarantees that the bull market in the commodities that China buys most to fuel its economy -- iron, copper, oil, nickel, and zinc -- will keep going. However, the portion of that growth that has been fueled by inflows of investment capital marks a big step backward for a Chinese government that has been trying to dampen bank lending and growth in the money supply. Chinese banks made $137 billion in new loans in the first quarter -- that's nearly halfway to the government's target for all of 2006. Money supply grew at a 19% annual rate, well ahead of the 16% government target. Runaway money-supply growth fuels inflation in China, and abundant loan money makes it harder for the government to shut down money-losing inefficient factories. One way for the Chinese government to fight this problem would be to let the yuan climb in value against the dollar. So far, however, the government has kept the yuan on a tight leash, allowing appreciation of just 3% against the dollar since the country officially unpegged the yuan from the dollar last year.
Editor's Note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. Please note that Jubak's Picks recommendations are for a 12-to-18 month time horizon. See Jubak's CNBC Picks for shorter six month recommendations. For suggestions to help navigate the treacherous interest-rate environment see Jim's new portfolio Dividend stocks for income investors. For picks with a truly long-term perspective see Jubak's 50 best stocks in the world or Future Fantastic 50 Portfolio.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares of the following equities mentioned in this column: Goldcorp. He does not own short positions in any stock mentioned in this column.
|
