The Commodity Bull Roars Again

Sean Brodrick By Sean Brodrick, Resource Strategist, The Oxford Club

Metals

The action in gold and silver has been awful recently. Oil was on the ropes, too – until a last-minute OPEC deal. And that deal may or may not stick.

But one group of commodities is quietly rallying. And it’s telling us volumes about the global economy. That group is base metals.

Heck, forget quiet. The price action in base metals and related companies is ready to roar.

Industrial metals have rallied about 30% in 2016. Aluminum is up about 19% for the year, and it’s the underperformer of the group.

Zinc recently rallied to its highest level since 2007. It’s up more than 50% this year and up nearly 90% from a low it hit in January. Nickel is up more than 25% this year. Iron is up a stunning 82% for the year, hitting a two-year high.

Copper was recently up 23.3% for the year. Most of the price action has come in just the last six weeks…

copper-blasts-off

That’s close to its 18-month high… after the longest winning streak in 28 years.

The action in copper is most important because it is often seen as a gauge of global economic health. That’s for two simple reasons: It’s used in just about every conceivable industrial application, and it’s hard to substitute.

That’s why traders and investors call the metal “Doctor Copper.” It takes the temperature of the global economy.

And according to the good doc, things are heating up!

There are multiple drivers for it.

Prices were so bad at the end of last year, a bunch of mines closed. This crimps supply.

China is ramping up infrastructure spending. That country spends $2 trillion a year on infrastructure. And the amount it spends is growing by $300 million a year.

Trump is pushing his own infrastructure plan, aiming for $10 trillion over 10 years. In his victory speech, Trump returned to his plan for widespread construction. “We are going to fix our inner cities and rebuild our highways, bridges, tunnels, airports, schools, hospitals,” he said.

That’s one of the Trump Trends I told you about in a recent column.

A trillion dollars a year may not be big by Chinese standards, but it’s huge for America – a country that badly needs infrastructure investment.

What Lies Ahead?

So that’s what we know. But new developments could push base metal prices higher going forward.

For one thing, it’s not just infrastructure spending. China’s consumers are buying a lot of stuff. For example, automobile sales in China rose 27% in September year over year. That’s the third consecutive month in which auto sales growth was more than 20%.

That’s a lot of steel, zinc, copper and more.

And it’s not just cars. A recent shopping holiday in China broke all kinds of records.

China’s currency is slumping. It’s down nearly 5% against the U.S. dollar this year. That makes Chinese goods cheaper in America. No wonder China’s manufacturing gauge is near a two-year high.

As China sells more goods to America, it needs to buy more copper, iron, nickel and zinc.

In the U.S., we have low unemployment, rising wages and consumer confidence at its highest level in nine years. That’s a good environment for buying stuff.

Can Supply Keep Up With Demand?

How about the supply side? Nickel could see a 150,000-ton deficit in 2017, that’s according to analysts at TD Securities. That’s up from a 50,000-ton shortage this year.

Meanwhile, zinc is facing a projected 248,000-ton deficit in 2017. That’s down from a 349,000-ton deficit this year. But it will be the third year in a row of not enough zinc supply to meet demand. And stockpiles can only take you so far.

But some metals are expected to be in surplus next year. Iron is one. Copper is the other. So why are prices for these metals still increasing?

One reason is the fact that a rising tide lifts all boats. Money from big funds is starting to slosh into base metals again. That’s speculation. And the tide can go both ways.

But the other reason is expectations and final demand ebb and flow. The copper markets are in balance this year. But earlier this year, traders expected a big surplus.

So while Goldman Sachs expects a 400,000-ton copper surplus next year, that’s more of a weather forecast than a hard number. And the thing about the weather is it changes a lot.

If Trump is able to push ahead with his infrastructure stimulus, it won’t affect demand immediately. But over time, any iron and copper surplus could be soaked up like water into a sponge.

And the big funds – that are already buying now – will want to grab even bigger buckets of profits.

I already gave you names of miners that are riding this Trump Trend. But there’s another way to play this that is more directly exposed to the metal.

That is the PowerShares DB Base Metals Fund (NYSE: DBB). It’s up 32% so far this year. And its powerful rally is accelerating.

powershares-metals-fund

The fund tracks an equally weighted basket of copper, zinc and aluminum. It has average daily volume of 253,000 shares, so it is plenty liquid enough to trade. And it has an expense ratio of 0.60%.

You don’t have to be reckless in this bull market. There are always pullbacks. Wait for consolidations and buy the dips. There is plenty of fuel to keep this rally running for a long time.

Good investing,

Sean