By Kevin Grewal
As earnings season is in full swing, Alcoa (NYSE:AA) disappointed Wall Street, but increased demand from the global manufacturing sector will likely support base metal prices in the near future.
Elastic demand in base metals is primarily driven by the manufacturing sector and the manufacturing sector generally grows as economies emerge out of a recession. So, the demand for base metals will likely increase as economies around the world grow.
In fact, the most recent manufacturing numbers suggest that two of the largest economies in the world, China and the United States, are showing strong signs of growth. China’s manufacturing index posted a 55.9 in December suggesting expansion and the number of manufacturing mills that are increasing utilization rates is on the increase in the United States.
Demand from other regions of the world including parts of Latin America, Russia and other Asian nations like India, is expected to further bolster demand for base metals due to their uses in infrastructure and their direct correlation with growth in middle classes. As middle classes grow, which is expected to be seen in developing nations, demand for automobiles, real estate and other assets which utilize base metals generally follows.
In a nutshell, the expected increases in demand of base metals will likely support prices which will affect the following ETFs:
· the Materials Select Sector SPDR (NYSEARCA:XLB), which closed at $34.05 on Thursday
· the iShares Dow Jones Basic Materials (NYSEARCA:IYM), which closed at $62.70 on Thursday
· the PowerShares DB Base Metals (NYSEARCA:DBB), which closed at $22.82 yesterday.
When investing in these equities, it is important to consider factors that could potentially hinder the price of base metals like a hiccup in China’s economic growth. A good to way to protect against these factors as well as the inherent risks involved with investing in equities, is through the use and implementation if an exit strategy which triggers price points at which an upward trend in gold could potentially be coming to an end.
According to the latest data at www.SmartStops.net, the price points for the aforementioned ETFs are: XLB at $32.92; IYM at $61.29; DBB at $22.27. These price points fluctuate on a daily basis and reflect changes in market conditions. Updated data can be found at www.SmartStops.net.
Disclosure: No Positions