Royal Bank of Scotland Comments on Metals and Energy 18 comments
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"Stay with precious metals, urges RBS, but ensure also that you have industrial metal exposure. April heading to be the best month for prices in 40 years. Zinc is expected to slip into deficit next year and copper in 2011, but aluminium is carrying heavy inventories that may yet increase further."
That's how Rhona O'Connell from Mineweb.com summed up the latest report from RBS and gave some details that bodes well for precious metals.
After taking quite a hit on Tuesday we are seeing a pleasing rally in gold and silver on Wednesday. To me it will be significant if gold can break above $900 and head towards $920 with silver breaking through the $13 an ounce level.
The latest quarterly Commodity Companion from Royal Bank of Scotland records that the RBS Base Metal Price Index has since the end of 2008 risen by 20% and is on course for further gains. Despite the fact that there is as yet little sign of any real demand growth, a number of elements have allowed commodities to prosper, and base and precious metals have taken the limelight with oil, natural gas and steel having to take a back seat.
The primary factors behind the increase in metals prices so far have been; a) monetary and fiscal stimulus, 2) hefty supply cutbacks) Chinese metals stockpiling and d) the "cash-for-clunkers' boost to auto sales.
The publication is a comprehensive volume covering not just the precious and base metals, but also bulk commodities, energy and the steel sector, each of which have their own individual profiles. For now, precious and base are where it's at, but there is light on the horizon elsewhere in the sector as we look further out.
RBS takes a reflationary view on the economy and is looking for anaemic world GDP growth this year, but is expecting a rebound to 4.0% in 2010. The analysts note that in a volatile world themes, not forecasts, are perhaps most important and that "if you are seeking indicators of the upturn in the world economy, then look no further than metals themselves!"
While platinum and palladium are expected to continue to outperform gold and silver, the favoured base metals are copper, zinc and lead, followed by nickel while aluminium brings up the rear among the base metals. Bulk commodities, however are expected to record hefty declines in annual benchmark settlements.
Oil's resurgence is further down the road according to RBS but the outlook for natural gas remains forlorn, while steel is expected to stabilise in the second quarter of this year after a tough first quarter.
The oil theme has convinced me to hold on to two of the ETFs I prefer which are USO and DBO (DBO is a more actively managed ETF the way I understand it).
The heart of the RBS report is covered nicely in Rhona's Mineweb article so I'll defer to her at this point:
"The economic outlook remains fraught with periods, with commodity consumption collapsing, business segments suffering severe growth dislocations and capital expenditure badly mauled. As a result the jury is still very much out as to whether the raft of simulative measures will be able to stop the rot and give the necessary boost to consumer confidence that is necessary to kick-start the world's recession-hit economies. One swallow may not make a summer, but the April Conference Board consumer confidence figure for the US, released after RBS went to press with this publication, recorded its fourth-largest ever increase and the biggest since the fall of Baghdad in spring 2003, with an increase to 39.2 after 26.9 in March.
"Copper remains the RBS analysts' preferred base metal, and although a large surplus is likely this year, Chinese strategic stockpiling may absorb much of it. An underlying surplus is also expected for 2010, but the market is expected to movie not growing deficit for 2011. The recession has hit copper's project pipeline particularly hard. The study comments that market-driven production cutbacks remain modest, and ever more so compared with other metals. Some 25 price-related cutbacks are however noted in the mining sector and 21 similar restrictions in the smelting and refining sector and copper mine capacity utilisation is still way below historical levels. There have also been a substantial number of project deferrals however and RBS believes that this has contributed to copper's price rebound as far forward prices had been looking too low.
"Zinc is also one the most favoured base metals, with much more price recovery forecast for later in 2009 and through 2010. Chinese stockpiling also plays a part here, but there have already been deep producer cutbacks that are expected to limit this year's surplus and RBS expects "continued producer discipline" to tip zinc back into deficit as soon as next year, ahead of a more genuine tightening of market conditions by 2012...
The report bodes well for producers like Freeport-McMoRan (FCX) and if you like international metals companies take a look at Sterlite Industries India (SLT) which just happens to be up over 10% today.
For those who favor silver investing, New York precious metals consulting firm CPM Group forecasts that the net surplus in silver is expected to rise to 182.1 million ounces this year, which will approach the record 222.2 million ounces of silver purchased in 1980.
CPM's analysis also found that the key driver for silver prices
"is investor attitudes toward silver and how those attitudes are being reflected in investor buying and selling of this metal. Over the past couple of years investors have significantly increased their silver holdings and this has been reflected in relatively high silver prices. It is expected that investors will continue to be interested in buying silver through 2009."
In their annual yearbook report, CPM notes that
"shifts in the nature of investment management, changes in the nature of investment management, changes in the methods for investing in precious metals, and other trends all suggest that investors may continue to buy large volumes of precious metals for several years to come, seeking to maintain their safe haven investments even when economic recovery emerges."
The markets are all getting a nice lift today from statements today from the US Federal Reserve. The prepared comments show that the Federal Open Market Committee remains willing to risk high inflation in the years ahead if that means avoiding deflation now. Given the prevailing conditions, this is the right move if they are consistent with their stated position.
That is why all of us should maintain some corel, long-term positions in my favorite closed-end and exchange traded funds, including SLV, GLD, CEF, ASA and GDX. Although I'm anticipating some seasonal selling and maybe even a surprise pullback between now and November, the scenario for the end of 2009 and the beginning of 2010 looks encouraging for precious metals, base metals and for energy.
The RBS report is just one more solid piece of evidence that if the Federal Reserve sticks to their guns that eventually the Stimulus money and the Bailout money will trickle through the system in the US and other industrialized nations and create a spurt of new growth "down the road" that should make commodity buyers smile.
By the way, another interesting ETF to consider for commodities in general is the PowerShares DB Commodity Index Tracking Fund (DBC). It's a unique way to own a proxy for the "basket of commodities" that make up the Deutsche BAnk Commodity Index.
Disclosure: I'm long SLV, GLD, CEF, ASA, USO, DBO and SLT.
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This article has 18 comments:
It may also make your taxes a bit more complicated since I believe Schedule K needs to be filled out. Not a big deal most of the time, but just something for people to be aware of.
Larry House, your preference for companies like CVX, COP, XOM, RIG, and SLB means you are more focused on fundamentals than diversity. That's a good thing as far as I'm concerned.
Williemo: You wrote, " You comment that you are expecting some seasonal selling and a surprise pullback may occur, seems to indicate you are expecting midterm weakness in these metals before any longer term up trend. If so, it might be nice to see a future article or comment from you on the best entry point, as now doesn't appear to be one" and you are "Spot on!"
All I can tell you is that gold below $860 and silver below $12 per ounce should look pretty cheap a couple of years from now. I like to do a systematic buy-in program where I find the support levels (like $860 and $820 for gold) and then I accumulate on the way down. Historically it is very possible we will see declines between June and October, but I can't help but sensing that "this year could be different", but as a longer-term investor I wouldn't count on it.
On Apr 30 09:36 AM History Buff 24/7 wrote:
> Marc, a quick note here. You might want to make people aware that
> some of these instruments (I am thinking specifically of USO) are
> structured as partnerships, which means they can generate taxable
> gains and losses even if you do not sell your holdings. This worked
> out to my benefit last year (USO shifted an unrealized loss at year
> end into 2008 which I then used to offset some of my gains) but it
> could be an unpleasant surprise if it generated a taxable gain when
> you weren't expecting one.
>
> It may also make your taxes a bit more complicated since I believe
> Schedule K needs to be filled out. Not a big deal most of the time,
> but just something for people to be aware of.
I beg to differ, plenty of mines coming online, especially in Africa (Lumwana) & Indonesia.
seekingalpha.com/artic...
On May 01 01:48 AM Freya wrote:
> In January of 2008, LME Copper Inventory was just a little over 100K
> tonnes, over the next 13 months it was approaching 550K.
>
> As of today it is down to 411K. Mines are not producing and China
> is buying. What happens when the other infrastructure stimulus plans
> start? Other than ours, I mean.
>
>
>
On May 01 03:38 AM SOMALIA! wrote:
> RBS better comment on their stock price and how they see themselves
> as a going concern without taxpayers $$$.
> Fuck you, fuck their research.
But even more recently, Denison Mines, Corp., a uranium play is up from 94 cents on April 7th, to $2.02 today.
During April, most gold and silver mining stocks have remained flat.
I expect the next minerals to zoom up will be palladium and platinum; those new ETF's are coming.
So my trifecta idea is, or has been, to take the gold gains from November through middle March and rotate them into copper and uranium, and then, when I see palladium and platinum start to take off, I will rotate out of copper and uranium into stocks like Stillwater Mines (SWC) and North American Paladium.
I'm already accumulating small batches of the last two stocks mentioned.
We'll see.... Good luck!
Re: History Buff 24/7's comment about surprise K1's issued by Limited Partnership ETF's.
I explored the option of putting them in an IRA. I was concerned with the consequences of having 'Unrelated Business Income' screw-up my IRA tax deferred status. Apparently not a problem. As long as the income is passive (as a holder of the ETF), the K1 you may receive does not have to be reported. I got the info from Fidelity and a search of Ed Slott's IRA forum (irahelp.com).
I got a good hit using 'IRA ETF K1' as search words.
On Apr 30 10:24 PM Marc Courtenay wrote:
> Good and very helpful comments here. Thanks History Buff. I'm going
> to check out whether some of the ETFs are structured as partnerships.
> Your points are well taken and deserve serious consideration.
> Larry House, your preference for companies like CVX, COP, XOM, RIG,
> and SLB means you are more focused on fundamentals than diversity.
> That's a good thing as far as I'm concerned.
> Williemo: You wrote, " You comment that you are expecting some seasonal
> selling and a surprise pullback may occur, seems to indicate you
> are expecting midterm weakness in these metals before any longer
> term up trend. If so, it might be nice to see a future article or
> comment from you on the best entry point, as now doesn't appear to
> be one" and you are "Spot on!"
> All I can tell you is that gold below $860 and silver below $12 per
> ounce should look pretty cheap a couple of years from now. I like
> to do a systematic buy-in program where I find the support levels
> (like $860 and $820 for gold) and then I accumulate on the way down.
> Historically it is very possible we will see declines between June
> and October, but I can't help but sensing that "this year could be
> different", but as a longer-term investor I wouldn't count on it.
>
For me, I am sitting on a powderkeg of info and data proving to me that the PM's (Precious metals) should be much higher with all the scoundrals and political non-functioning programs, this thing should have been gone to the sky long ago. So why not.
Again, simple pilgrim. It is called SUPPLY AND DEMAND. If prices are moving up, the supply is less than demand, if prices are moving down, then the sellers are dropping the price to unload unwanted products. How hard is this.
In this case, the holders or PM's need cash, and I mean people, businesses, banks, and governments. I will give them my cash and receive their PM's till my coffers cannot hold anymore. I will gladly trade my soon to be worthless dollars for a rea money. We are tossing so many dollars from the helicopter, soon there will be so many dollars around, having a lot of them willn't help. What will help will be holding a nice silver round from Sunshine, or Johnson Mathey, or some mine. Silver eagles will be nice too, to save for a few years after the recovery because extrinsic value will disappear until some time in the future when coin collecting is in vogue again, for now get some real money, and what are you risking half?
Stock hahahahhaha "Honey, I shrunk the market'.
On Apr 30 10:04 AM Larry House wrote:
> Good info. Personally, I would rather have a strong integrated oil
> (XOM, CVX, COP) than an ETF. Add to that RIG or SLB, and you've got
> oil/natural gas covered. Natural gas is not going to stay down forever.
China has probably done as much stockpiling as it really needs or wants to by now, the price has risen & there are no other buyers, therefore they can afford to wait for prices to drop.
My link to my article on Indonesia was not there as a plug, more to show that bigger resources are becoming available & closer to the Asian market. If I had wanted to plug, I would have linked to a previous article on my own blog from December last year, (Google Lumwana, Zambia if you will), where Equinox Minerals has just brought a new facility into commercial production.
Equinox has an extraction cost of $0.80 per lb & has hedged its 2009/2010 production at $2.00, so they are now in a pretty nice position whether the copper market goes up or down, they can continue to provide a stream of ore whilst others (in North America for example) have to close down operations & wait for the market.
Codelco (Chile) has just announced record production for the first quarter & is having problems shifting it, although their announced partnership with Chin Minmetals (govt controlled natch) will probably help things along.
so my contention is that there is going to be another glut on the LME & on Shanghai & copper prices will slump again.
On May 01 02:44 PM Freya wrote:
> Mr. Harper: I'm glad you so kindly brought up FCX as your counter.
> Have you read their last operations report as found in their earnings
> report.
Aluminum?
You are talking "China" as if they are the only Asian Economy acting on a Stimulus Package. There are Hundreds of Billions designated for Infrastructure from the other Asian Economies like Japan and India. Expanding outward, Australia, Brazil, And do not forget the Developed countries outside of the USA.
You expect the Drawdowns to cease once China is sated. I expect them to increase as others join the fray. Zinc has joined the party.
I like the Chart.
They have curtailed production by 50% in all of their North American mines. That percentage also applies to Molybdenum production...Because of low demand.
To my knowledge, they have NOT resumed full operation.
I beg to differ your differ and raise you another differ.
As of today it is down to 411K. Mines are not producing and China is buying. What happens when the other infrastructure stimulus plans start? Other than ours, I mean.