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Base Metals May Lose Luster

|Includes: PowerShares DB Base Metals ETF (DBB), XME

By Kevin Grewal, Editorial Director at www.SmartStops.net
 
Now that the U.S. government's "cash-for-clunkers" program has come to an end and the demand for automobiles has slowed down, some believe that the recent uptrend in base metals will be in trouble and for good reason.
 
Domestically, the automobile industry accounts for nearly 40% of metal demand and even though the "cash-for-clunkers" program sparked increased sales in the auto industry, there is a huge stockpile of unsold vehicles and other finished goods that need to find buyers before manufactures can justify increasing production and replenishing metal inventories.  Internationally speaking, China was a huge consumer of metals as the emerging nation stockpiled commodities and witnessed a surge in demand.
 
As for the future, in the automobile industry, demand in the United States should remain relatively weak as labor numbers are still not improving.  Most recently, the Labor Department reported a decline in Americans filing first time unemployment claims, but the number is still much higher than that in a non-recessionary period.  One can not purchase a new vehicle without a job.
 
As for China, going forward, the nation is supposed to be a leader in both production and consumption of automobiles, but this wasn't really what drove their need for base metals.  The emerging nation's stimulus package, which was heavily focused on infrastructure was the driving force behind its increase in demand.  Now that the stimulus package is dying down and advances in infrastructure are slowing down, the demand for base metals most likely will follow.
 
In a nutshell, base metals will always have a favorable characteristic, in that they are resources which are essential to any economy, however, in the near future their demand will most likely not sustain the levels seen earlier in the year.
 
Some equities that have benefited from the uptrend in base metals are the following:
 
The PowerShares DB Base Metals (NYSEARCA:DBB), which is up 65% from a FFebruary low of $10.95 to close at $18.06 on Wednesday.
The SPDR S&P Metals & Mining (NYSEARCA:XME) closed at $47.77 on Wednesday, up 130% from a March low of $20.81.
 
 When investing in these equities, one must keep in mind the inherent risks involved.  To help mitigate these risks and preserve equity, an exit strategy is important.  According to the latest data from www.SmartStops.net, an upward trend in the previously mentioned ETFs could come to an end at the following price levels: DBB at $17.36 and XME at $44.13.  These price levels change on a daily basis as market forces change and updated data can be found at www.SmartStops.net.