Market Observations with Rob Kirby

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Base Metal Bogie Man

by Rob Kirby, Kirby Analytics. January 8, 2007

I've taken particular note of how the prices of most of the base metals have been "HAMMERED" lately. In fact, I've been shaking my head by the number of "experts" being trotted out on CNBC and ROB TV making the claim that copper inventories have now got a supply overhang and how they've even got people believing there might be a commodity price implosion due to these "ballooning inventories" – e.g. see Clive Maund.

To his credit, Mr. Maund's short term prognostication – that being for metals prices to decline – is very accurate.

But let's examine his analysis:

While copper inventories have empirically and factually gone up in the past year – they are still CRITICALLY low. Here's reality as to copper inventories

1 year, But take a look at 5 yr.,

Interestingly, according to Goldman Sachs and reported by Forbes,

"China's imports of copper are expected to increase in the current quarter, offsetting lower demand for the metal in the US."

So What's Really Going On?

The recent build in global copper inventories has been a U.S. event, which coincidentally happens to be VERY consistent with a slowing U.S. housing market.

"Goldman Sachs said despite the market pushing prices lower over supply concerns, the picture is not quite as straightforward as headline stock numbers suggest, since nearly all of the build up in stocks has been in the US."

The Forbes article goes on to explain that,

"Chinese wire and pipe manufacturers have recently been holding off purchases of imported copper until prices move lower."


"They said the market is noticeably stronger in Asia, and particularly China, and this is reflected in the premiums being paid there."

The reality is that in addition to the U.S. housing market "slowing" – the Chinese have also [strategically timed their purchases, perhaps?] remained "out of the market" – temporarily. So, despite all the dire predictions of ballooning inventories and commodity price implosions – if one stops and considers that base metals are essential requirements for the build out of INFRASTRUCTURE in Asia – the odds of continued price weakness appear somewhat mitigated unless the fundamental picture in Asia changes.

The Story Behind The Story

In 1970-71, the price of copper zoomed from about 50 cents to $1.25 per lb. This sounds cheap, but the US dollar back then was at least five times bigger.

So if you put back the inroads of inflation by dividing the present price of $2.64 by five, we see that the present price of copper in 1970 dollars is about 53 cents. This is not expensive, except in the opinion of the Federal Reserve which is trying to hide the fact that the buying power of the Federal Reserve Note is collapsing. In 1999, the price of copper was 80 cents. If we go back to that level, [as my friend Rhody points out - using derivatives, anything is possible], there won't be a copper mine left standing in the world.

The fact that every commodity has recently been hit, whether it is scarce or not, oversold or not, or already cheap (like oil) suggests we are entering a period of extreme dollar instability when the Monetary Interests will be relentless in their programmed selling of real assets to maintain the illusion that paper assets are the superior hold. The excuse for dollar strength this time was employment data which beat expectations, but was a mere 17,000 over the level that signals an outright recession [150,000 per month] in the United States, and is insufficient to provide jobs as fast as immigration rates import workers [200,000 per month is needed for that].

Price movements in everything from the Dollar to base and precious metals experienced severe gyrations as a result – setting up [or painting, perhaps?] charts that technically oriented fund managers religiously follow for sharp sell-offs or in the case of the Dollar - rallies.

The reality is this; the powers that be can create any graph pattern they want with the short term application of derivatives. Now stop and consider why J.P. Morgan Chase really has a derivatives book now [at Q3 / 06] totaling more than 63 TRILLION in notional value – with growth in the latest quarter of 5.5 Trillion alone.

Folks, that's a Derivatives Book in one bank – with a market cap of 165 billion – of over 63 TRILLION, or 5 x the size of the entire GDP of the U.S.A.! Amazingly, or perhaps not, this unregulated obscenity has the blessing of the Federal Reserve, hmmmm?

When one stops and considers that all US government economic statistics are questionable, is it any wonder that we've witnessed three false breakdowns in silver and gold over the past 7 months?

If nothing else, this should serve as food for thought before you pitch all of your base metals stocks.

Today's Market

Japanese markets were closed for holidays, but North American markets began the week on a positive note with the DOW gaining 25.48 to 12,423.49, the NASDAQ adding 3.90 to 2,438.20 and the S & P picking up 3.15 to close at 1,412.85. NYMEX crude oil futures ended a volatile day down .23 at 56.08 per barrel.

The interest rate complex was little changed from Friday's close with the benchmark 2-year bond ending the day at 4.78%, the 5-year at 4.66% and the 10-year at 4.66%.

On foreign exchange markets the U.S. Dollar Index gave up .03 to close at 84.37.

Precious metals ended the day mixed with COMEX gold futures adding 2.30 to 608.80 per ounce while COMEX silver futures added .15 per ounce to close at 12.37. The XAU gave up .18 to 132.01 while the HUI gained .67 to close at 314.79.

There is no major U.S. economic news scheduled for release tomorrow.

Wishing you all a pleasant evening and a happy tomorrow!

Rob Kirby

© 2007 Rob Kirby

Contact Information

Rob Kirby | Proprietor, Kirby Analytics Newsletter - Proprietary Macroeconomic Research
Toronto, Ontario, Canada | Observations | FSU Editorials | E-mail

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