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By Lawrence Roulston
October 18, 2006
www.resourceopportunities.com
There is a growing divergence between the physical metal markets and the paper markets for the metals.
The following is extracted from the September 2006-2 Issue
While tens of billions of dollars flits in and out of the commodity markets at the drop of a rumor, the physical markets continue to operate at a steady pace. The volatility occurs in the paper markets, where traders can drive prices up and down while knowing little about the underlying fundamentals of the markets they trade in.
(The paper market refers to the futures contracts and other derivatives that are based on metals. For example, a metal fabricator may enter into a contract to buy copper in the future at a fixed price. This contract gives him the certainty that he needs to set his product selling prices. A copper producer may wish to have price protection on a portion of its future production, for example to satisfy debt obligations, and therefore become a counterparty to a futures contract. The contracts are traded on exchanges, with the prices rising and falling according to expectations with regard to the markets. The price set in the derivatives markets impacts on the spot, or current, price of the metals.)
Rumors of peace suddenly about to break out in the Middle East and the expectation that the U. S. Government will manipulate the dollar ahead of an election are among the latest ideas driving the moods of speculators. The gold price pendulum was already on a downswing after being pushed too high earlier this year by speculators.
The latest news-of-the-moment has resulted in the gold price being pushed too far to the downside: It seems the pendulum swings created by the speculators never come to rest at an equilibrium point that the physical market is comfortable with. There may be a little further downward momentum, and there will undoubtedly be a period of base building before the pendulum begins its return journey.
A few investors in the small metal companies reacted to the latest move in the gold price with panic. Fortunately, most investors are taking a somewhat longer-term perspective. The depressed prices are not so much a function of selling pressure as they are to an absence of buyers. Most investors have simply stepped aside, waiting for a clearer direction. In that situation, the markets can change quickly. If you can find some bargains now, you'll be glad you did when the market starts to perk up.
Regarding the base metal markets: There are still some commentators who believe that metal prices are high for no other reason than the speculators. That is an extraordinarily naive notion. In an upcoming issue, I will discuss this in more detail. For now, consider this basic point: Speculators do not normally take physical delivery of base metals. The role of the official warehouses is to store the metal behind the futures contracts. The warehouses are nearly empty, implying that the speculative market must be pretty much in balance and is therefore not a driving force in setting metal prices.
Plain and simply: Metal is being mined, refined and sold to fabricators. Those physical users are bidding fiercely against one another in order to get their hands on enough metal to keep their factories operating.
Demand for metal is overwhelming the ability of the mining industry to deliver, yet the new metal production coming on stream, or set to come on stream in the future, is barely adequate to offset older mines that are being shut down as they are depleted.
The message cannot be any more clear: Use this down time in the markets to load up on exploration and development companies that have advanced-stage metal projects.