Como se combate o populismo? "Com eleições", responde Fukuyama

[J_99]

Commodities Comeuppance?
By Nick Godt
Markets Reporter
5/16/2006 7:20 AM EDT
URL: http://www.thestreet.com/markets/metals/10285701.html

What the wise man does at the beginning, the fool does in the end.
-- Warren Buffett, at Berkshire Hathaway's annual meeting in Omaha, Neb., May 6, 2006.


Gold, silver and copper have made enormous moves this year, rising almost daily as booming global growth has outstripped production and left speculators sitting on huge gains. Now, after two days of heavy selling, could the smart money be leaving the building?

Gold has gained close to $200, or 40%, since the start of the year, and last week traded above $700 an ounce for the first time since 1980. Over the past five months alone, silver has rallied 65% to trade near a 25-year high of $15 an ounce, while copper more than doubled to an all-time high above $4 a pound.

For the first time, those gains seem threatened. Since peaking last week, gold is down 6.4%, silver down 10.8% and copper down 7.4%, sparking fears that a bubble is deflating. Is it? To answer that question, you must first determine the degree to which fundamentals have driven the current rally.

"There is a genuine secular fundamental story," says Anirvan Banerji, research director at the Economic Cycle Research Institute and a contributor to RealMoney, TheStreet.com's sister site. "But commodities, and industrial commodities in particular, are cyclical by nature, which literally means that a downturn is inevitable. There's no insight on whether that's tomorrow, a year from now or later."

Fundamental factors do paint a compelling picture. Chinese growth of more than 10% in the first quarter means that its giant economy will continue gobbling up a growing share of the world's natural resources. The U.S. and other industrialized countries, in the meantime, are not slowing down their own massive consumption of commodities.

On the speculative front, it's not news that hedge funds and other sophisticated investors are heavily invested in commodities. They are increasingly being joined by mutual funds and individual investors, some of whom might correspond to "the fools" that arrive at the end of a party.

The launch of metals exchange-traded funds, such as the streetTRACKS Gold (GLD:NYSE) and recently launched iShares Silver Trust (SLV:NYSE) ETFs, have made investing in commodities easier for retail investors. Those ETFs, which must be backed by real stockpiles of metals, have poured huge amounts of money in what has remained a small market.

For Leonard Kaplan, president of commodities brokerage Prospector Asset Management, the levels reached in gold and other metals can only be explained by money chasing money.

"The fundamentals don't justify this," he says. "All of a sudden, the Street believes that commodities are a financial asset, and all these investors are pouring money into a very small market."

Yet, Kaplan says that, just like Internet stocks in the 1990s, the rally in commodities can go on for much longer. "It's entirely speculative but it doesn't mean it can't go a lot higher," he says.

Even Buffett, when he made his bearish comments about commodities last weekend, admitted he's "not good at the game of figuring out how far the speculative gains will go."

Adding to the confusion, gold, which has had a halo effect on other metals, acts as both a hedge against inflation, such as soaring energy prices, and as a safe-haven asset amid rising geopolitical tensions. With oil still above $70 a barrel and the current standoff over Iran's nuclear ambitions showing no sign of abating, there could be strong support for the metal.

Dollar weakness, and the expectation of more to come, is another big factor often cited by metals bulls. A weak dollar raises the value of dollar-denominated commodities, such as gold, as it takes more of the currency to buy the same amount of the metal.

Gold bugs believe that once the Federal Reserve stops raising interest rates, the dollar will resume a multiyear decline (some say it's already under way), as currency markets start paying attention to the soaring U.S. current-account deficit. This should fuel demand for gold, the currency substitute of choice, they say.

Still, for the metals, it really is the emergence of China and India as economic powerhouses and the globalization of economic trends that "have impacted us quite a bit," says Banerji. Companies involved in extracting the metals can't keep up.

"Even amid persistently robust physical demand [for metals] , capacity will not rise sufficiently to materially boost inventories or alter the supply/demand balance, reflecting a decade of underinvestment in the sector," write Doug Porter and Bart Melek, two senior economists at BMO Nesbitt Burns.

The world's largest metals miners, BHP Billiton (BHP:NYSE) and Rio Tinto (RTP:NYSE) , have repeatedly cited supply constraints as the cause for the jump in the price of metals, such as copper.

Just last week, Germany's Norddeutsche Affinerie, the largest copper refiner in Europe, noted strong demand and a "continued shortage" of the metal.

At the same time, the London Metals Exchange reported that copper inventories dropped 2% to 113,650 tons, which is equivalent to only three days of global consumption.

Production of metals is also impacted by labor and social unrest in different parts of the world, as rallying prices stir up claims of ownership by the countries whose natural resources are being exploited. Last week, Bolivia's new president, Evo Morales, nationalized his country's natural gas assets and said mining would be next.

"Regions that have readily available reserves of metals, such as Russia, much of Latin America and Africa, are increasingly turning to resource nationalism, a flashback to the 1970s commodities boom," writes the BMO economic team.

The outcome, they say, is likely to be less investment and lower output. "In a high-demand, low-inventory environment, this means more upward pressure on prices as costs rise owing to high utilization rates and rising risk without a quick turnaround in sight."