Industrial Metal Prices Suggest Shallow Recession

By: Greg_Silberman

There is an old market saying that nobody rings a bell at the bottom.
Case in point, the industrial metals complex. Whilst the entire world has been fixated on slowdowns, recessions and deflations, a funny thing has been happening down at the London Mercantile Exchange.

Chart 1 - Copper prices perking up


Chart 2 - Aluminum rising strongly


Chart 3 - Don't give up on Lead just yet

In the face of falling stock markets – most notably the Chinese market – one would expect the demand for Industrial Metals to be falling off a cliff. To be sure, the prices of the above commodities are well off of their highs but those highs occured nearly 2-years ago! What's up?

We think there are a few important conclusions one can draw from this:

1. The supply demand characteristics of industrial metals is more economically sensitive than the stock market. Which is why industrial metals were able to broadcast the current slowdown well in advance. Thus the latest strength in the metals says a lot about future economic growth.

2. Whilst some of these commodities are significantly off their all-time highs they are all still well above their 1990 lows. Therefore, there is no doubt that commodities turned the bullish corner in the year 2000.
This is further corroborated by the fact that the above industrial metals have halted their declines at significant support levels and remain bullish.

3. The fact that industrial metals are not outright collapsing makes the case for a deflationary collapse extremely remote.

4. Monetary stimulus is buoying the metals either as inflation hedges or through actual supply demand imbalances generated by real world growth – or both.

5. If the lead time on industrial metals is as effective as it was in signalling the stock market top, the recent recovery makes it highly unlikely that stock markets will tumble much further.

What we are not saying however is that we are on the cusp of the next major outbreak in industrial metal prices. Whilst we don't dismiss this scenario totally, our work points to at least one more year of range bound trading in the metals. Its just that now we are closer to the bottom of the range than the top.

In our opinion, the best way to participate in the upside is through the ETF DBB which gains exposure to the industrial metals through futures contracts in the ratio of Aluminium 35%; Copper 37%; Zinc 28%. For added leverage one could invest in beaten down junior mining stocks.

More commentary and stock picks follow for subscribers…

By Greg Silberman CFA, CA(SA)
Profession: Portfolio Manager and Research Analyst
Company: Ritterband Investment Management LLC
e-Mail: greg@goldandoilstocks.com
Website: blog.goldandoilstocks.com

I am an investor and newsletter writer specializing in Junior Mining and Energy Stocks and small caps listed in the US, Canada and Australia.

Please visit my website for a free trial to my newsletter http://blog.goldandoilstocks.com

This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.  

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