Don't read too much into Chinese GDP figures

Australian markets are down today. Not surprising - the commodity markets are down. The question is - should they be down? Well, the purported reason for them falling is the 'concrete' reason that China has just reported that it is forecasting annual GDP growth of 7.5% in 2012 rather than 8%. One has to be suspicious of this number however for a simple reason - the Chinese government is:

1. Highly centralised

2. Even autocratic leaders need to depend on market info

The question is - what is deciding the reported forecast of Chinese economic activity. There are several possibilities:

1. The government bureaucratic analysts are looking at market trends - clearly this is not likely because they have a habit of always understating growth

2. The government bureaucrats are performing a market survey to assess market demand for commodities, demand for their products, and these forecasts are relatively negative, i.e. This could be because Chinese manufacturers and traders have a tragic, cautious nature....but alas the economy is growing fairly strongly. The other reason is that Chinese traders are advising the government that demand is weak because they want to drive market perceptions down, so they can buy commodities at lower prices.

3. Chinese commodity buyers, traders or manufacturers, are paying kickbacks to analysts to talk down prices and economic activity in China, so that international commodity prices fall, so that they can buy commodities lower. They can later in the year adjust their prices.

I favour this last approach because a lot of commodity prices are set on the basis of annual price negotiations; and they tend to occur in March or April, i.e. so these Chinese GDP figures are rather timely for the traders. I have over the years seen a great deal of corruption in Asian markets. Rest assured the economists studying PhDs in Canberra take Chinese bureaucratic numbers as gospel - but that is because there is no implication for their papers. i.e. Their salary is extorted from you the taxpayer, where you have no discretion. The trader has discretion, however they are responding to the 'news'; so I suggest they will be buying in coming weeks. I see copper prices are testing previous highs; and lead can go higher.

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Dubious outlook for metals

The current gold market suggests we might be looking at a change in fortunes for the gold market. This next week will be telling; but we might be looking at an overall weak metals market. This would spell a more compelling argument in favour of agricultural commodities in the short term. The problem of course for gold - despite the debasement of global currencies - is the very strong underlying fundamentals of global market liberalisation that have continued unabated since the 1990s, if not before. Earnings in Western countries have remained flat, which means the productivity gains have accrued to businesses to be sure, but also to 'cheap labour' in the third world, whilst more Westerners live off benefits.

We can probably expect a weaker commodity outlook for the next year, but we might see some selective recovery before long, i.e. copper. This of course will not be the end of the commodities story. We are still looking at a commodities 'super-cycle', but things will be off in the short-run, at least in metals. I tend to think agricultural commodities will hold up better, but this is not my market of interest generally.

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Metal prices rally on rate speculation

The price of copper in New York and London rallied overnight as speculation of further aggressive US rate cuts favoured commodities as a good hedge against inflation and USD weakness. At least that is the rhetoric. The reality is that at some point economic activity will be undermined by rising inflation. Only gold, silver and food commodities can be expected to buck the downtrend in commodities because they are least exposed to weakness in industrial demand. LME copper futures for 3mths delivery settled at $US8,730 per tonne, up US$190 from Tuesday's close. On the COMEX exchange copper for May delivery ended up 10.95 cents (2.8%) at $US4.00/lb.
Despite a 2.8% rise in copper, the metal still failed to close above $4.00/lb. I think that is a telling sign that industrial metals will fall, though they might consolidate at these high levels as the USD falls. But gold and silver can be expected to perform well.

Other base metals followed copper with three-months aluminium rising by $US112 to $US3,100 and nickel up $US475 to $US29,350.Lead rose $US63 to $US2,958 and tin was at $US20,650/20,700 versus $US20,400/20,450. Zinc rose $US22 to $2,372. NYMEX May crude closed at a record $US110.87, a gain of $US2.37 (2.18%), after trading betweeen $US107.95 to $US112.21. This is the highest level since NYMEX launched crude oil trading in 1983. The previous record was $US110.33 set on March 13 while the prior intraday high was $US111.80 hit on March 17.

Gold prices rallied 2% higher, reaching a high of $932.60 an ounce. Trading volumes are low in anticipation of a central bank and G7 meetings later in the week, which could offer guidance as to future policy on currencies and bullion sales. The IMF has announced plans to sell some of its gold reserves, but this would have little impact on prices since its likely to proceed in a gradual manner. The IMF is the world's third-largest gold holder after the USA and Germany, with 3,217.3 tonnes in reserves. It plans to sell 403.3 tonnes and use the proceeds to invest in government and corporate bonds, and possibly equities. Its possible that these events will bring gold back to the $850/oz support for gold that I have discussed already.
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Andrew Sheldon www.sheldonthinks.com

Commodity Prices dont respond to the news

Commodity prices did not rally in the face of the 416 point rally in the Dow Jones, which was caused by a $200 billion Fed injection into the US economy. The reason is purely technical. Commodities in previous weeks had already rallied to a new high, so with little upside to that major resistance, we can expect commodities to come off. The Fed injection is good for gold, though even it should weaken for technical reasons. I see gold coming back to $950/oz support. Copper, which peaked last week near $4.00/lb rose $0.10/lb, but was sold off, so now sitting around $4.75/lb. Commodities might not have shown their meddle, but expect commodity-based equities sold off during the last week to perform well, particularly those small spec miners - gold, copper, nickel, coal, etc. You should have been buying them yesterday.

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Andrew Sheldon www.sheldonthinks.com

Why metal prices stronger on weaker outlook

You might be wondering why copper prices are rallying to new highs at a time when the US economy has never looked sicker. The reason is simply two things:

1. The lag between the US economic outlook and producers ability to forecast it. Producers in China and elsewhere are not the most market-savy people. They are waiting for queues from the market before they reduce output. Even when that point in time comes, they are probably more inclined to reduce prices to stay competitive than to accept a slower rate of output. They want to remain relevant, so they willingly accept falling profit margins.

2. The rising USD-denominated price of commodities. Traders need to hold $US to buyt their commodities because all commodities are transacted in USD. At times like now, when the USD is falling, commodity consumers prefer to hold metal rather than USD on account, because they will actually make money from the transaction, and they will happily trade that position. I suggest that commodity inventories are not falling for some metals like copper because of resilient consumption. Really its just consumers building their inventories to profit from the falling USD. If that is the case, we can expect that consumers will dump copper and other metals at some point.

The question is which point? Well here are some clues:

1. Technical support in the USD - but relative to which currency? Well I guess that could be in the currency of a number of large consumer countries, eg. China, Japan, South Korea. Some of these countries have managed exchange rates, so I'm inclined to think it will be a technical resistance in the metal prices.

2. Technical resistance in the metal price: Copper prices have rallied to new highs. The copper price is currently $US3.93/lb, having reached $US3.97/lb in earlier trading. I would suggest that the $4.00/lb level is going to be a difficult resistance level to break, and thus I am expecting copper prices to be dumped from this level.

3. Stockpile levels of the metals: We might wait for the stockpile levels of the metals to start rising as a queue as to when metal prices have peaked, but I would suggest this is a lagging indicator. Understanding the fundamentals, followed by the price action is the best guide. Of course easier said than done.

I think we can expect copper prices to peak around $US4.00/lb - since its an important psychological level. Interestingly the copper price is almost there (currently $3.93), and the bigger news is that the USD has just reached an important support - 102.36 Yen - last reached on 18th January 2005. You can follow the USD-JPY forex and copper price action yourself at Kitco.
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Andrew Sheldon www.sheldonthinks.com

Source of Base Metal Charts

Until about 12 months ago you could download daily price and stocks data for base metals. Sadly the LME has gone commercial and you now have to pay for it through one of their intermediaries. Fortunately Kitco and others offer daily prices and historical charts which effectively does the job for you. I would however argue that the charts are not as accurate as the trading platform charts.

The historical charts can be accessed at:
1. Copper: See www.kitcometals.com/charts/copper_historical.html
2. Zinc: See www.kitcometals.com/charts/zinc_historical.html
3. Nickel: www.kitcometals.com/charts/nickel_historical.html
4. Lead: www.kitcometals.com/charts/lead_historical.html
5. Aluminium: See www.kitcometals.com/charts/aluminum_historical.html
6. Tin: See ???
In the precious metals we have
7. Gold: See www.kitco.com/charts/techcharts_gold.html
8. Silver: See www.kitco.com/charts/techcharts_silver.html
9. Palladium: See www.kitco.com/charts/techcharts_palladium.html
10. Platinum: See www.kitco.com/charts/techcharts_platinum.html
11. Rhodium: See www.kitco.com/charts/historicalrhodium.html

These are the traded metals where there is a high level of price discovery or disclosure. There are of course alot of other where price information is not so transparent because these metals prices are concealed by confidential commercial agreements between producers and end users. The reason for this is that these markets are illiquid. Another problem is that the metals are often sold as ores or metal concentrates with widely variable concentrations, as well as price bonuses (for precious by-products) and penalties (for deleterious contaminants). For this reason its difficult to reach a standard price for these commodities because every refinery has a different pricing policy to achieve competitive advantage. These metals include:
12. Zircon:
13: Niobium:
14. Tantalum: See www.metalprices.com/FreeSite/Charts/tantalite_charts.html?weight=lb (before 2006) and http://metalsplace.com/prices/?a=14&grt=6 since.
15. Molybdenum: See www.adanacmoly.com/adanac_stock.php
16. Manganese: See www.metalprices.com/FreeSite/Charts/mn_ferro_charts.html?weight=lb (before 2006)
17. Cobalt: See ??
18. Magnesium: See http://metalsplace.com/prices/
19. Chrome: See ??
20. Antimony: See ??
21: Bismuth: See ??
22. Tungsten: See http://metalsplace.com/prices/?a=4&grt=5
23. Mercury: See ??
24. Vanadium: See ??
25. Cadmium: see www.asianmetal.com/Metal_News/index_product63_en.asp or http://metalsplace.com/prices/?a=15&grt=6
26. Iron ore: See http://metalsplace.com/prices/

No other metal not listed here is sold as a discrete commodity because they dont occur in isolation. Even some of the commodities above are seldom mined as a discrete commodity. eg. Cobalt is usually a by-product of nickel mining, bismuth is often a by-product of tin mining, antimony is often associated with gold. These metal combinations might simply be liberated by physical crushing, but often they require more expensive chemical separation processes that directly impact on the value of ores, thus making price determination less transparent.

Finally we have the energy-based commodities:
25. Petroleum:
26. Natural Gas:
27. Uranium (yellowcake): See www.uxc.com/review/uxc_g_price.html or in constant dollar terms www.uxc.com/review/uxc_g_hist-price.html
28. Thorium: See http://minerals.usgs.gov/minerals/pubs/metal_prices/

Otherwise you can perform price queries at this site: www.metalprices.com/freesite/historical/price-query.asp. See the US Geological Survey for more more info on commodities: http://minerals.usgs.gov/minerals/pubs/metal_prices and www.crbtrader.com/fund/articles/default.asp. Here are a few other places for metal price charts - http://www.mineralstox.com/.

Commodities - what and how to invest?

Based on my analysis presented in my Market Commentary blog we are looking at 5 or more years of subdued growth and stable asset prices, or a precipitous shakeout of asset market and credit liquidation culminating in a rapid transition to economic growth, though a calamitous shift in wealth from those with asset or liability exposure to those with cash. The question is:
1. Does the Fed have the skills to maintain a flat market for 5 years?
2. Will global markets be exposed to exogenous factors that might impose instability, eg. bird flu?

Does it not strike people that the safe option is to avoid assets. But under this scenario, where do you put your cash?
1. Cash - the problem with cash is that it makes you no money
2. Gold bullion and other precious metals
3. Gold 'derivatives' that offer exposure to the gold market. The problem with financial instruments like these is that you might not be safe from a failure by the counterparty or market maker. Best to avoid these products.
4. Gold stocks offer the best exposure since you dont just have a fixed exposure to the physical metal, but exposure to a growing inventory of metal, as long as the stock is producing or close to production. The benefit of this is that you have the opportunity for the market to price in long term high gold prices and such an extrapolation can blow out your capital gain. There are several things you should look for - unhedged production and the ability to scale up production.
5. Gold exchange traded funds (Gold ETFs) offer 2 types of exposure. Some buy physical metal, others buy stocks. Equity funds can target emerging producers or blue-chip exposure.