Lead: A Patriotic Investment Option

| About: BHP Billiton (BHP)

Right now, I’m bullish on many things, but lead might be the most contrarian commodity I’m bullish on.

That’s why it pays to be a commodity investor, because we’re still ahead of the crowds; we’re contrarian.

Most, if not all investors, are heavily into broad index mutual funds. They’ve been buying the market, and hoping that it will turn around.

I’ll keep my 'hope' for my favorite sports teams (go Philadelphia!), and instead use my brain to find investments that are forward looking. What has worked in the past might again work in the future - but not simply because it worked in the past.

And since we’re coming up on 4th of July weekend, I’m looking for patriotic investments, like lead.

You might be wondering why I say lead is a patriotic investment.

A patriot is someone who loves his country - and what it stands for. I still think this country stands for the freedom to do what you wish, as long as your actions do not infringe on someone else’s freedom. I’d like to think that this country still stands for inalienable rights endowed to all people by the very virtue of their personhood.

One of those rights is recognized in the Second Amendment of the Bill of Rights:

“A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed.”

I feel obligated to point out that this right to bear arms, and the other rights in the Constitution are not “granted” by the Federal Government. The government (any government) does not have the power to grant such rights any more than it has the power to take them away.

It’s an important distinction - and one that’s lost on most people, even the esteemed journalists at The Wall Street Journal get it wrong. Here’s a headline from a recent story about the Supreme Court overturning Chicago’s handgun ban: “Justices Expand Gun Rights”.

Of course, the right to bear arms is completely useless without ammunition for those arms. And today, lead is still the metal of choice for most ammunition manufactured.

But lead isn’t just for bullets; only 3% of all lead smelted today finds its way into ammunition.

It’s primarily used in an almost innumerable amount of manufacturing applications. Most cars still have lead-acid batteries under the hood.

Lead is still used in some industrial outdoor paints, like those used on roads. It’s used in many electronic devices found in basically every sector of the economy. It’s used to protect from radioactivity generated from x-ray machines and other medical devices.

The biggest growth market for lead today is in lead-acid batteries for the burgeoning automobile market in China, India and the rest of Asia.

I wrote about lithium recently, and it’s certainly a great battery material. But it’s about 5-7 times more expensive and not as accessible as lead.

And as you probably realize, lead is about as hated as any commodity in existence. Between lead bullets and lead poisoning from paint and industrial applications, lead is a four letter word in the investment world.

What you might not realize is that lead prices are extremely highly correlated with oil prices.

Take a look at this five year chart of lead spot prices:

You’ll notice that prices only spiked following the record oil prices of the summer of 2007. They quickly dwindled along with oil prices through the latter half of 2008 and 2009.

That’s a strong correlation, and I expect it to continue - especially since lead production has been falling for the past 5 years. Look at this data from the US Geological Service:

You can see that most lead production came from scrap recycling. At the same time, mine lead production has been falling: about 10% over the past five years. That’s not sustainable.

Lead prices will get pulled higher by higher oil costs, as well as dwindling production. Today, lead is cheap and hated, but that situation won’t last forever.

The easiest way to invest in lead is to buy the Australian mining giant BHP Billiton (NYSE:BHP). Of course, they mine a lot of different substances, so it’s not a pure play on the price of lead, but they’ll benefit from increased demand and higher prices.

BHP is one of the blue chip companies that’s going to be around no matter what - so I’d say it’s safe to buy shares anywhere south of $65. Collect the 2.4% dividend, and ride the commodity bull as prices in lead and everything else keep rising.

Have a great 4th of July.

Disclosure: None

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Tagged: , , , Industrial Metals & Minerals, Australia
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