The Interesting Metals Story Is in Emerging Markets

Includes: DBB, ECH, EPU, EWZ, GDX, GLD
by: Jim Farrish

Is it just me, or does it seem like every other headline is focused on gold? The rise to $1308 has received top billing and plenty of speculation from analysts on how high it will rise. Silver has joined the party, climbing more than 20% over the last five weeks. The base metals are equally impressive relative to gains as the commodities renew their push higher.

GLD, the SPDRs Gold Trust, has gained more than 30% since breaking above the $1000 resistance in September 2009. GDX, Market Vectors Gold Minders ETF, has gained more than 37% over the same period. Many investors are looking for comparable returns in the coming year. The base metals such as copper, steel, aluminum, platinum and others have seen similar returns, but the volatility has been pointedly greater.

Equally the global metals’ markets have experienced solid growth the last five weeks. In our weekend Sector Watch we have discussed the move along with the correlation in the mining sector. It is important to note the move in DBB, PowerShares Base Metals ETF, which illustrates the price advance of all the metals. Copper, for example, gained better than 25% from September 2009 to January 2010, only to fall nearly 20% by February 2010 and regain 25% by April, and fall nearly 30% by June only to rise 25% through September. The base metals have done well, but they have done so by riding a roller coaster. Maybe that is why gold has been the metal of choice for most investors: less volatility.

Equally impressive is the relationship of the move higher in metals relative to the gains in the emerging market economies. When reviewing who the greatest producers of raw metals are, one might assume Australia, Canada or the United States. The truth is the greatest economic impact is in the smaller countries. The top producer of silver happens to be Peru, followed by Mexico. The top producer of copper is Chile, head and shoulders above number two, Peru. The United States is 3rd in copper production and 8th in silver. Interestingly enough, China is number three in both categories, yet they import a significant amount of metal.

Putting this in perspective, eight out of the top ten silver producers are emerging markets; seven of the top ten copper producers are as well. Mining is a top industry for the emerging market countries. To look at the correlation between the mining industry’s growth and the economic growth, simply look at the stock market performance in each of these emerging countries.

ECH (iShares MSCI Chile Index ETF) and EPU (iShares MSCI All Peru Capped Index ETF) have each gained more than 25% this year with a solid rise coming in conjunction with the recent rise in their respective metal prices. This gives reason to find correlations between commodities and the respective countries. Australia, for example, is a commodity rich country with large mining interest in metals. EWA (iShares MSCI Australia Index ETF) has moved up nearly 20% off the August lows in metals. The correlation is a result of the companies mining the metals making money, which in turn is reflected in their stock price. We could dig further and see the impact on the economies as a whole. For example, Australia currently reported 5.5% unemployment and GDP growing at 3.3%. While Australia is not an emerging market, the impact is evident.

Has the opportunity passed for investors to benefit from this opportunity? While the last year has been stellar for the metals and the respective countries, there will be opportunities going forward to take advantage of these and other correlations. Brazil, as an example, has been benefiting from the move in the agriculture prices over the last six weeks. EWZ (iShares MSCI Brazil Index ETF) broke above resistance at $72 recently and looks attractive relative to future growth.

The global markets have plenty of opportunities for those willing to invest the time to research where the best opportunities exist. Exploring the globe is well worth the time and the trip.

Disclosure: No positions