The pan-European FTSEurofirst 300 <.FTEU3> index of top shares fell 0.5 percent to close at 973.92 points, breaking a four-day winning streak, and having hit its highest close since early October on Tuesday.

The European benchmark index is still up 50.9 percent from its lifetime low of March 9, as investors have become more confident on the prospects of recovery.

“The market has come a long way, and the economics are still supportive,” said Georgina Taylor, equity strategist, Legal & General Investment Management.

“We’re just seeing a little profit taking. Nothing has been derailed. Housing data is improving. The only area of concern is consumer spending.”

Energy companies were the biggest drag on the index, with crude prices down more than 1 percent to just above $71 a barrel, after the U.S. Energy Information Administration said inventories had risen.

BG Group , BP , Repsol and Total were between 0.9 and 2.3 percent lower.

UK-based oil explorer Tullow Oil fell 3.9 percent after it said interim profits dropped 83 percent on lower oil prices and production.

Other economics news was mostly upbeat. Sales of newly built U.S. single-family homes rose in July to their fastest pace in 10 months, while orders for long-lasting manufactured goods surged, hinting a modest economic recovery was taking shape.

However, some investors chose to focus on orders excluding transportation climbing slightly less than forecast.

Back in Europe, the business climate index of Germany’s Ifo, a Munich-based think tank, rose to 90.5 from an upwardly revised 87.4 in July.

“The Ifo figures did not have a momentum effect, despite them being very good. But one also has to acknowledge that the markets are moving on high levels and that people may be following the strategy of ’selling on good news,’” said Joerg Rahn, chief investment officer at wealth management company Marcard, Stein & Co.

Miners also fell. Copper miner Antofagasta lost 4.8 percent after it posted lower-than-expected earnings in the first half and warned prices were likely to remain volatile in the second half.

BHP Billiton , Xstrata , Anglo American and Rio Tinto were down 1.4 to 4.1 percent.

NATIXIS SOARS

Among individual movers, French bank Natixis soared 38.8 percent after majority owner state-backed BPCE said it will guarantee roughly 35 billion euros ($50.12 billion) worth of toxic assets at the investment bank.

Alcatel-Lucent surged 11.9 percent as traders cited market talk of a possible bid from a Chinese manufacturer of telecom gear and a rating upgrade by Natixis.

Heineken , the world’s third-largest brewer, rose 7.2 percent, after reporting a rise in first-half operating profit, driven by cost savings, beat forecasts.

Guinness maker Diageo rose 2.6 percent, ahead of full-year results on Thursday.

Suez Environnement soared 11.5 percent after the French utility group reported forecast-topping first-half profit despite a sharp drop in waste business.

However, GDF Suez , the French electricity and gas group, fell 1.7 percent, ahead of first-half results on Thursday.

Swiss Life fell 7 percent after saying it is cutting jobs and costs after two investments in Germany failed to yield hoped-for benefits, even as first-half profits beat forecasts.

Across Europe, the FTSE 100 <.FTSE> index closed 0.5 percent lower, Germany’s DAX <.GDAXI> fell 0.6 percent and France’s CAC 40 <.FCHI> was down 0.3 percent.

Aug 26 (Reuters)

Part of the reason for the rise is weakness in the dollar. People often say that oil is denominated in dollars. But maybe it is the other way around; dollars are denominated in oil. A dollar is worth how much oil it can buy. Part of oil’s rise is simply marking down the value of the dollar. Weak dollar means higher oil prices.

People will blame the higher oil price on speculators, but something interesting is happening in the markets for minor metals like molybdenum. Prices are rising, too. The silvery metal, used to strengthen steel, is now $15 a pound — nearly double the $8 and change it fetched in April. This is significant, because there is no futures exchange for moly. It trades on a physical spot market. Speculators play a very small role here. The buyers of the metal use the metal.

So there is a demand story shaping up here, too, mostly focusing on a fragile recovery of some sort and mostly centered on China and the emerging markets. The market is looking ahead.

For instance, over the weekend, South Korea reported numbers that show signs of a recovery in that country. Industrial output fell less than expected, and trade volume surged to $60 billion. That was its best showing since last October. Also, South Korean companies have been reporting better-than-expected results.

The biggest buyer of South Korean goods is China. Still, it’s a confusing time because of all the stimulus money that governments around the world have been spending. So it’s hard to say what’s real and what’s just an illusion created by a temporary spending binge.

Another piece of the puzzle from last week: Spot iron prices in China (meaning iron ore for immediate delivery) topped $100 per ton. That’s the highest level since October 2008. The other breakthrough in iron ore last week came when BHP Billiton (NYSE:BHP), the world’s largest miner, announced that a third of its customers were moving to prices linked to the spot market.

This is big news for the industry. The old way was to have annual contracts with a negotiated price. This was bad for iron ore companies because the contracted price lagged the increase in iron ore prices. And when iron ore prices fell, steelmakers just reneged on their contracts. As the iron companies found out, having contracts was a great way for iron ore producers to cap their upside and leave them with all the downside. Not so good.

The industry now looks like it is moving toward more spot pricing, which is a good thing for the producers. Iron ore prices have rallied too, along with crude oil and moly.

Every rally, like every bottle of beer, has a finite life span. There will be lots of bumps along the way, but the prices of many commodities — such as oil, iron ore and moly — will tack higher, in my view. Intelligent small-cap investors would be wise to pick up shares of their favorite companies in these sectors.

Sincerely,
Chris Mayer

Source: Oil and Molybdenum Are Poised for Future Gains

That’s a very simple statement, but it’s backed by three powerful points:

• Commodities tend to do well when more popular investments (with retail investors) are doing poorly, and when economic conditions are less than ideal.

• When the typical economic underpinnings are at play, a “Secular Bull Market” for commodities tends to last for about 17 years. And right now, the underpinnings are far from typical – and may even be exemplary, meaning this bull-market run could last a lot longer than the norm.

• And last, but not least, we’re only about nine years into this commodities bull market, meaning that there’s probably a lot more room to run – maybe eight years, and very like even more.

Amazingly, this powerful notion of the “Secular Market Cycle” – despite its tremendous profit potential – is largely unknown to the investment masses, and is rarely discussed by the mainstream business news media. Indeed, it’s so taken for granted that it’s almost a market secret…

If you’re a long-term investor, however, you’ll ultimately realize it’s one of the most lucrative strategies you have in your investing arsenal. And most amazing of all is that it’s easy to understand, easy to deploy and easy to profit from.

Let me explain.

Investing in Commodities & The Secret of the Secular Market Cycle

Why is this commodity investing strategy so special? Well, with a finite time to invest for your retirement, it’s crucial to recognize and understand what we like to refer to as the “Secular Market Cycle,” or “Secular Cycle,” for short.

As the chart shows, a Secular Cycle, from peak to trough, typically lasts about 17 to 20 years on average (the period depicted by the chart ends in 2004, but still perfectly illustrates our concept).

And there are essentially two types of cycles:

• The “Secular Bull Cycle,” during which regular stocks increase in value, and have their Price/Earnings (P/E) ratios (earnings multiples) expand. That means that stocks get more expensive.

• And the “Secular Bear Cycle,” during which stocks tend to experience a decline in both price and valuation, with P/Es that contract. At best, stock prices move sideways over an extended period, but still see their P/E multiples shrink, since corporate earnings are growing at a time when stock prices are stagnant.

For investors, one key problem is that an overall “Secular Cycle,” from trough to peak and back to trough, can take 35 years. That’s a big chunk of a person’s wage-earning years, meaning there’s little room for missteps.

Now, there’s no point in fighting a secular market trend – not if you want your investments to grow.

So it’s essential to determine where we are in the cycle, because that will dictate expected returns over the following decade or two. And since most people only spend about 40 years of their lives investing for retirement, not knowing about the “Secular Cycle” – much less where we are right now in the cycle – leads to guesswork, mistakes and losses, instead of the clear planning that will generate the best investment decisions and, ultimately, the biggest profits.

The last commodity cycle ended around 1980. Essentially, a prolonged period of high commodity prices encouraged producers to over-develop their resources. Demand never fell off. Instead, there was a massive oversupply, and the commodities party eventually ended. Prices got pushed off a cliff, so the entire sector became lean in a hurry as profit margins imploded.

We now know how long a typical Secular Bull or Bear market will last years. We also know that the last Secular Commodity Bull was launched roughly around 2000. That allows us to conclude that we’ve easily got between eight and 11 years to go before supply catches up with the burgeoning global demand that we’re seeing right now.

Investing in Commodities – Profit Plays to Consider Now

With class over, it’s time to put your newfound insights to work, searching out ways to earn the outsized profits that will be available from the Secular Bull Market for investing in commodities.

If you prefer individual stocks, you have to get to know BHP Billiton Ltd. ADR (NYSE:BHP). This $140 billion resources behemoth is the largest diversified mining company on earth. With an enviable balance sheet and cash flow, this producer of base metals, precious metals, diamonds and energy is way ahead of the pack. With a current P/E of 11.66, the stock isn’t bargain-basement cheap, but it still represents a good value. Besides, this is a stock that you’ll want to hold all the way to the very end of the Secular Cycle.

Exchange-traded funds (ETFs) and exchange-traded notes (ETNs), on the other hand, provide investors with more direct exposure to commodity prices, as opposed to exposure to the stocks of the commodity-producing companies.

Finally, you’d be wise to get some gold exposure, too – gold miners can also be an excellent hedge against inflationary pressures.

In this case, the Market Vectors Gold Miners ETF (NYSE: GDX) – composed chiefly of major gold miners – offers both company and geographical diversification, while including substantial leverage to the price of gold. GDX is based on the AMEX Gold BUGS Index (HUI), which represents a portfolio of 15 major gold mining companies that do not hedge their gold production beyond a year and a half.

In the next couple of years, as U.S. and overseas economies recover, commodities producers will pay the price for recent major cuts in production, development and exploration – discovering it will be very tough to boost output even as global demand soars.

Shrewd investors will reap the benefit of those decisions: Those shortages will persist, providing quite a tailwind for soaring prices.

Just make sure that your sails are fully deployed.

The bottom line: As you go about rebalancing your portfolio – or continue rebuilding it as a result of the financial-crisis carnage – make sure to include room for a solid natural resources allocation.

Source: Investing in Commodities: How to Buy Gold During Secular Market Cycles

“The market is watching out for Chinese imports and stockpiles data and these will drive sentiment in the days ahead,” Jia Zheng, analyst at Southwest Futures Co., said yesterday.

“There is talk that around 100,000 tons of copper is making its way to LME warehouses in Asia in the next three weeks, and that is weighing a bit on sentiment,” said Jia.

China is expected to release preliminary trade data today or Monday, while weekly inventory data will be released by the Shanghai Futures Exchange after the market closes today.

In company specific news, BHP Billiton (NYSE:BHP), the world’s largest mining company, will begin a study for the potential sale of its Ravensthorpe nickel operations in Australia after closing the $2.2 billion project in January.

“BHP Billiton has received numerous expressions of interest from third parties regarding a possible acquisition of Ravensthorpe and will further test the market through this process,” the company said. BHP intends to finish an options study on the future of Ravensthorpe by December 2009.

BHP closed the Ravensthorpe nickel mine in Western Australia after nickel prices plunged. It sold the Yabulu nickel refinery in Queensland earlier this month to Australian billionaire Clive Palmer for an undisclosed sum.

It’s also worth noting that a Chinese firm started work on a copper deposit in Afghanistan yesterday as part of a multi-billion dollar project and the first major foreign investment of its kind in the country’s history.

State-owned China Metallurgical Group Corp (CMGC) and China’s top integrated copper producer Jiangxi Copper Co won a 2008 tender to explore and develop the vast Aynak Copper Mine south of the capital Kabul.

Aynak is thought to contain up to 13 million tonnes of copper and is regarded as one of the major ore bodies in the world.

The deposit was discovered in 1974 and surveyed by Soviet geologists in 1979, but has never been developed until now.

Source: Base Metals Listless

There’s never been a better time to invest in commodities. That’s a very simple statement, but it’s backed by three powerful points:

• Commodities tend to do well when more-popular investments (with retail investors) are doing poorly, and when economic conditions are less than ideal.
• When the typical economic underpinnings are at play, a “Secular Bull Market” for commodities tends to last for about 17 years. And right now, the underpinnings are far from typical – and may even be exemplary, meaning this bull-market run could last a lot longer than the norm.
• And last, but not least, we’re only about nine years into this commodities bull market, meaning there’s probably a lot more room to run – probably eight years, and very like even more.

Amazingly, this powerful notion of the “Secular Market Cycle” – despite its tremendous profit potential – is largely unknown to the investment masses, and is rarely discussed by the mainstream business news media. Indeed, it’s so taken for granted that it almost a market secret.

If you’re a long-term investor, however, you’ll ultimately realize it’s one of the most lucrative strategies you have in your investing arsenal. And most amazing of all is that it’s easy to understand, easy to deploy, and easy to profit from.

Let me explain.

The Secret of the Secular Market Cycle

Why is it so special?  Well, with a finite time to invest for your retirement, it’s crucial to recognize and understand what we like to refer to as the “Secular Market Cycle,” or “Secular Cycle,” for short.

As the chart shows, a Secular Cycle, from peak to trough, typically lasts about 17-20 years on average (the period depicted by the chart ends in 2004, but still perfectly illustrates our concept). And there are essentially two types of cycles:

• The “Secular Bull Cycle,” during which regular stocks increase in value, and have their Price/Earnings (P/E) ratios (earnings multiples) expand. That means that stocks get more expensive.
• And the “Secular Bear Cycle,” during which stocks tend to experience a decline in both price and valuation, with P/Es that contract. At best, stock prices move sideways over an extended period, but still see their P/E multiples shrink, since corporate earnings are growing at a time when stock prices are stagnant.

For investors, one key problem is that an overall “Secular Cycle,” from trough to peak, and back to trough, can take 35 years. That’s a big chunk of a person’s wage-earning years, meaning there’s little room for missteps.

Now, there’s no point in fighting a secular market trend – not if you want your investments to grow.

So it’s essential to determine where we are in the cycle, because that will dictate expected returns over the following decade or two.  And since most people only spend about 40 years of their lives investing for retirement, not knowing about the “Secular Cycle” – much less where we are right now in the cycle – leads to guesswork, mistakes and losses, instead of the clear planning that will generate the best investment decisions and, ultimately, the biggest profits.

But in order to see where we are, we need to figure out where we’ve been.  To do that, let’s take a look at a very-long-term chart of the stock market in order to study the historic market trends. Then we’ll look at some other key factors – such as the value of the U.S dollar – to confirm our analysis. This is a process few investors take the time to work through.

Where are we right now?  Well, since about 2000, we’ve clearly entered a Secular Bear Market for general stocks.

All too often, investors read such a statement and conclude that its “game over” for portfolio profits. And that’s just not the case.

There’s an old market adage that says “there’s always a bull market somewhere.” That’s true even today, in the midst of the worst financial crisis since the Great Depression. Even if there’s a Secular Bear Market for stocks, it’s very likely that you’ll find a Secular Bull Market forcommodities. So all you really need to do is to focus your investing efforts on the hard-asset sectors.

The Makings of a Secular Commodity Cycle

The last commodity cycle ended around 1980.  Essentially, a prolonged period of high commodity prices encouraged producers to over-develop their resources.  Demand never fell off.  Instead, there was a massive oversupply, and the commodities party eventually ended.  Prices got pushed off a cliff, so the entire sector became lean in a hurry as profit margins imploded.

As you’ve probably guessed, exploration soon ground to a halt.  And little or no money was invested to expand production.  Over the next two decades, investors rejected hard assets.

Over time, known resource reserves were continuously plundered, and finally gave out about nine years ago. At about the same time, the Four Asian Tigers of Korea, Taiwan, Hong Kong and Singapore were already building a gargantuan appetite, and China’s big growth spurt was gaining momentum and growing in magnitude.

The situation has only gotten worse, with global commodities demand continuing to advance – even in the face of sapped inventories.

The Three Catalysts for Major Commodity Profits

We now know that a typical Secular Bull or Bear market will last 17-20 years.  We also now know that the last Secular Commodity Bull was launched roughly around 2000.  That allows us to conclude that we’ve easily got between eight and 11 years to go before supply catches up with the burgeoning global demand that we’re seeing right now.

Yet according to such renowned market experts as author and investing icon Jim Rogers, a number of “wild cards” are in place this time around, meaning this bull market in commodities may have a lot more room to run than its more-typical predecessors. Three factors in particular are extremely bullish for commodities investors:

• Global Infrastructure Spending: The Organization for Economic Cooperation and Development (OECD) last year estimated that worldwide investments in power-generation, water and transportation infrastructure projects would exceed $40 trillion by 2030 – and that was before countries around the world enactedhundreds of billions of dollars in stimulus-spending programs.

• Improving Worldwide Living Standards: About half the world’s 6.7 billion inhabitants are simultaneously pushing to improve their living standards, a fact that by itself stands to create a commodities demand shock never before seen – enough by itself, in fact, to extend the secular commodities bull by five additional years.

• Modernization Efforts in Major Markets: The modernization initiatives in China, India, Brazil, Eastern Europe and other portions of Asia are extremely bullish for commodities prices.

So if you’re looking for a place to stash your cash for the next 12-15 years, look no further: Commodities are the key profit play to make.

Two Arguments Against Low Current Prices

Unless you’re Rip Van Winkle, or had taken up residence in Biosphere 2, you know that the global financial markets suffered through a panic sell-off, and that we’re mired in one of the worst economic downturns in decades.

We also know that many investors sought refuge in U.S. Treasury securities. In order to buy Treasuries, investors throughout the world first bought U.S. dollars, driving up their value in relation to virtually every other major currency. That anomalous and unsustainable U.S. dollar spike hurt commodities, as they are all priced in terms of dollars.

The fear of a deep worldwide recession – or perhaps even a depression – served to temporarily frighten investors out of commodity plays, since the prevailing wisdom was that the global malaise would cause demand for natural resources to plunge. That, too, dampened commodity prices.

But investors who right now fear commodity plays are looking at this from the wrong vantage point: Instead of representing a dangerous point, the situation now at hand is nothing less than an extraordinary opportunity to either make their first foray into commodities, or to add to existing positions during periods of exceptional weakness.

What investors need to understand is that – in the last seven months or so – they have been witness to an impressively quick and coordinated adjustment on the part of commodity producers.  No time was wasted to pull the plug on unprofitable production, suspend near-term new production, or slash capital spending or investments in all forms of exploration.

Right now, most commodities producers are operating with little or no spare capacity. The fat’s been trimmed, and prices are down a third from this time last year.

It’s a situation that just can’t last – for two very simple reasons:

• First, world demand can’t be reversed on a dime. At least half the world continues to move forward with modernization initiatives. Massive infrastructure efforts continue unabated. And governments from both developed and developing nations are ensuring that this infrastructure-modernization train doesn’t get derailed.

• Second, central governments have recently put on a show of unprecedented fiscal cooperation, unveiling colossal bailout and spending plans. The United States ($787 billion) and China ($586 billion) alone have unveiled stimulus packages worth a combined $1.37 trillion. The addition of all that newly printed money means there are even more dollars chasing a still-fixed quantity of goods. And that can lead to only one outcome: A big increase in commodities prices.

We’ve become used to seeing prices increase. Price increases are merely a fact of life.  That’s why we see pay raises each year; we’re trying to compensate for the prices that are rising all around us.

But the magnitude of recent money-supply increases dwarfs the benign, garden-variety annual price increases of 3% to 6% that we’ve grown used to seeing. In the last year alone, the U.S. Federal Reserve has actually doubled the U.S. monetary base. That can only lead to serious inflation, perhaps even hyperinflation.  This will cause the value of the U.S. dollar – which has been eroding since 2001 – to decline at an even-more-frenetic pace. Over time, in turn, this erosion in the value of the dollar will lead to a big increase in the prices of many goods, particularly commodities imported from abroad.

That’s yet another reason why investors must consider resources of all kinds.

Profit Plays to Consider Now

With class now over, it’s time to put your newfound insights to work, searching out ways to earn the outsized profits that will be available from the Secular Bull Market in commodities.

If you want an automatically diversified approach, check out the various resource sector mutual funds available to you.  That can be a great starting point.  Make sure to look at each fund’s individual holdings, which will give you a feel for that fund’s focus, and that will also help you get more familiar with the individual companies and what they do.

If you prefer individual stocks, you have to get to know BHP Billiton Ltd. (NYSE ADR: BHP).  This $140 billion resources behemoth is the largest diversified mining company on earth.  With an enviable balance sheet and cash flow, this producer of base metals, precious metals, diamonds and energy is way ahead of the pack.  With a current P/E of 11.66, the stock isn’t bargain basement cheap, but it still represents a good value. Besides, this is a stock that you’ll want to hold all the way to the very end of the
Secular Cycle.

Exchange-traded funds (ETFs) and exchange-traded notes (ETNs), on the other hand, provide investors with a more-direct exposure to commodity prices, as opposed to exposure to the stocks of the commodity-producing companies.

The broadest exposure you can get is probably through the ELEMENTS Rogers International Commodity Index Total Return ETN (NYSE: RJI).  RJI, based on the index built by the investing-guru Rogers, himself, is comprised of 34.9% agriculture, 21.1% metals, and 44% energy.  Another viable option is the PowerShares DB Commodity Index Fund (NYSE: DBC).  While less diversified – with 22.5% agriculture, 22.5% metals, and 55% energy – it boasts large trading volume.

You can also get exposure through some of the ETFs that focus individually on agriculture, coal, nuclear power, and steel-related companies.  Van Eck’s Market Vectors’ suite of ETFs – such as its Market Vectors Agribusiness ETF (NYSE: MOO) – is a great place to start.

Finally, you’d be wise to get some gold exposure too.  Gold miners could be an excellent hedge against the enormous inflationary pressures thatMoney Morning has repeatedly warned investors to expect. In this case, the Market Vectors Gold Miners ETF (NYSE: GDX) – composed chiefly of major gold miners – offers both company and geographical diversification, while including substantial leverage to the price of gold.  GDX is based on the AMEX Gold BUGS Index (HUI), which represents a portfolio of 15 major gold mining companies that do not hedge their gold production beyond a year and a half.

The bottom line: As you go about rebalancing your portfolio – or continue rebuilding it as a result of the financial-crisis carnage – make sure to include room for a solid natural resources allocation.

In the next couple of years, as U.S. and overseas economies recover, commodities producers will pay the price for recent major cuts in production, development and exploration – discovering it will be very tough to boost output even as global demand soars.

Shrewd investors will reap the benefit of those decisions: Those shortages will persist, providing quite a tailwind for soaring prices.

Just make sure that your sails are fully deployed.

Source: The “Secret” Investing Strategy That’s Your Best Bet For Commodity Profits

Editor’s Note: If you’re new to the commodities-investing arena, and are uncertain about the landscape – or even if you’re an “old hand” at natural-resource stocks, but want some insights into the new profit plays and new players – consider hiring a guide: Money Morning Contributing Editor Peter Krauth , a recognized expert in metals, mining and energy stocks, is also the editor of the Global Resource Alert trading service, which ferrets out companies poised to profit from the so-called “Secular Bull Market” in commodities. A former portfolio advisor, Krauth continues to work out of resource-rich Canada, which keeps him close to most of the companies he researches. Against the growing global financial malaise, Krauth says that commodities are among the most-profitable and least-risky investments available, and notes that this may well be the most powerful bull market for commodities we’ll see in our lifetimes. He makes a strong case. To read more about his strategies, and the sector plays he likes the most, please click here. ]]> http://www.contrarianprofits.com/articles/the-%e2%80%9csecret%e2%80%9d-investing-strategy-that%e2%80%99s-your-best-bet-for-commodity-profits/18915/feed 0 http://www.contrarianprofits.com/articles/base-metals-mostly-lower-7/18697 http://www.contrarianprofits.com/articles/base-metals-mostly-lower-7/18697#comments Fri, 03 Jul 2009 20:00:02 +0000 Doug Casey http://www.contrarianprofits.com/?p=18697 The base metals were mostly lower on Thursday. Copper sank from the pre-dawn hours to mid-morning, bottoming at $2.24, but rallied back from there to finish at $2.2754/lb., down more than 3½ cents. 

Nickel had a pair of jagged ups and downs to mid-morning, but blazed higher from there, closing just off its intraday highs at $7.4382/lb., up 13 cents. Zinc was also choppy, ending little changed at $0.6994/lb., down a half-cent. Aluminum was weak, dropping more than a penny, to $0.7267/lb., while lead also sagged, shedding more than a penny and three-quarters, to $0.7626/lb.

Copper led all the industrial metals but nickel downward yesterday, as traders heeded the strengthening dollar and were spooked by bad economic data from both the U.S.…

“China also bought 590,000 tonnes of aluminium, 159,000 tonnes of zinc, 30 tonnes of indium and 5,000 tonnes of titanium, said Yu, who works in the National Development and Reform Commission’s industry department.” Now that metals prices have rebounded, though, will the stockpiling continue, even at high prices? Or was it a case of bargain shopping at everyday low prices?

There are several components of demand. There’s real economic demand (you need the stuff to make other stuff). There is investment demand (you’re buying it in order to make a profit from what you think the price trend is. There is also pure speculation, and it’s possible that some middle-men were flat-out speculating by buying alongside China’s State Reserve Bureau (sort of like the banks and brokers in the U.S. buying Treasuries ahead of the Fed late last year to improve Q4 earnings).

But if you’re trying to figure out the ultimate direction of certain base metals prices (or commodity prices in general) you have to also consider the currency in which they’re priced. Or, as my colleague Dan Amoss writes, “You also want to consider what Ben Bernanke and Tim Geithner will do to debase the dollar in the coming years. If you’re a foreign creditor facing with this constant portfolio decision, which has higher marginal utility? Is it 1.) US$2.32 or, 2.) one pound of copper?”

Dan is referring to a pretty handy economic concept. Marginal utility is the economist’s attempt to quantify how much satisfaction or benefit you get out of each additional good or service you buy. You have probably heard the term “diminishing marginal utility” more often.

An easy way to understand this is that while one cheeseburger may satisfy your appetite (and your craving for animal fat), four cheeseburgers gobbled down in a row are neither useful nor terribly good for you. They might even be bad (although as an American, we are reluctant to concede this point).

In Dan’s scenario, U.S. dollar holders will ask themselves if each additional dollar owned is more useful. Given the fact that the U.S. monetary authorities are making so many dollars, it’s pretty clear that each additional dollar added to supply makes each existing dollar less useful. It is not very satisfying to see a methodical reduction in the purchasing power of your savings.

If Dan is right, then stockpiling real assets (even during a relatively weak economy) makes more sense that stockpiling U.S. liabilities. Or, as Dan says, “The Chinese will probably go with #2, especially because copper (and oil, and iron ore) can be stored and used in infrastructure projects to keep the population somewhat placated with infrastructure jobs,” says Dan.

He adds that you should look for the Chinese to stockpile resources on the dips in commodity prices, while selling/divesting of U.S. Treasuries into the rallies that come with ’safe-haven’ buying. That sounds right to us. But the only catch to the plan is if Treasuries fail to rally on safe haven buying.

On that score, the Treasury market seemed to survive last week’s big auction without a huge spike in yields. If the economic news remains neither bullish nor exceptionally bearish, then we reckon Treasuries could rally (prices up, yields down), providing a discrete exit opportunity for certain large investors.

Incidentally, we still haven’t seen much in the Australian press about the long-term consequences of government deficits. That’s probably because most people are accepting the government’s case that Australia’s borrowing (and its deficits) will be temporary. We’re not as sure. And besides, there are some serious questions about how structural deficits affect a country’s currency, its credit markets, and its interest rates.

Those are just some of the questions we hope to take up at our upcoming debt symposium/summit, which will precede the first Australian screening of I.O.U.S.A. We’ve even picked a date, booked a venue, and secured a cracking panel of experts to train their eye on Australia’s very own addiction to debt. Stay tuned for your official invitation!

Meanwhile, did you see that China has astonishingly and rather conveniently discovered some 3 billion metric tonnes of hematite and magnetite iron ore? It’s apparently true, and probably comes in pretty handy during the current stagnated annual price contract discussions with Aussie iron ore producers BHP Billiton (NYSE:BHP) and Rio Tinto (NYSE:RTP).

As you know, China is the world’s largest steel maker and thus the largest importer of iron ore. Chinese geologists claim they have found Asia’s largest iron ore deposit ever in Benxi city, which is in the northwest province of Liaoning. The good news is that the deposit is said to be about 2.5 miles long and 1.8 miles wide and could, officials say, have a mine life of 50 years-if a mine is built.

The bad news is that the resource (not a reserve because it’s not know if it can be produced economically) is buried around a mile underground. That’s a long way down, or a long way to lift iron up, if you prefer, and if you’re strong (which China is).

Contrast that with the Pilbara, where the stuff seems to lying around waiting to be found in the hundreds of millions of tonnes by any Tom, Dick, or Kerry. That’s right. Iron Ore Holdings, owned by Kerry Stokes, told the ASX yesterday it was increasing by 50% its estimate of its mineral resource at Iron Valley in Western Australia.

This deposit is only 97 metres below ground. It’s surrounded by big projects by BHP, Rio, and Fortescue (ASX:FMG). And the company says it reckons its sitting on a 132 million tonne resource-which is up from the 88 million tonnes it believed it had just three months ago.

Proving up a resource into a reserve-and seeing your share price benefit because of it-is the name of the game for the iron ore juniors. Despite the big Chinese find, we reckon the Iron Valley story is where the Big Picture meets the Little Juniors (or where the rubber meets the road, if you prefer).

At the right prices, stockpiling commodities makes sense to people who will need them later anyway and already have too many U.S. dollars. And if prices aren’t right…if..in fact…commodity prices decline (either because of slow economic growth or a halt in stockpiling) then commodity stocks probably fall a bit too…which makes those very stocks-especially the smaller ones that need capital and JV partners-the next logical candidates for acquisition or accumulation.

Dan Denning
Source: China Has Stopped Stockpiling Metals

And I don’t know the answer more than anyone else.

However, It stands to reason that one of the best indicators that might give us an early tip on recovery is iron ore shipments.

Iron ore is the basic component of steel, which is used in bridges, buildings, ships, pipes, cars and trucks. Even concrete highways and bridges have steel rebar embedded in them for added strength. It’s perhaps the largest ingredient in the infrastructure of the industrialized world.

World production of raw iron ore averages about 1 billion tons per year, with China alone producing nearly half the total. Australia and Brazil produce nearly 20% apiece, and roughly 54 other countries make up the rest of the production.

One of the largest producers of raw ore is mining giant BHP Billiton (NYSE:BHP), based in Australia. Engaged in the mining of metallurgical and energy forms of coal, oil, gas, diamonds and other base metals, Billiton also operates some of the largest iron ore mines in the world.

The company has 41,000 employees working over 100 mining and extraction operations in 25 countries around the world. Last year, the company generated revenues of nearly $60 billion, and roughly 25% of that was profit.

Rising Shipments: A Positive Sign

One of the best places to gauge iron ore shipments is Port Hedland, in western Australia. The Port Hedland Port Authority keeps track of iron ore shipped from its docks, and May’s total was 13.39 million tons, up 18% from April’s 11.33 million tons. BHP’s portion of May’s total was 11.12 million tons.

To put this in perspective, last June – at the height of the China driven boom – BHP shipped 12.26 million tons out of Port Hedland.

BHP recently put together a joint production venture with rival Rio Tinto, PLC (NYSE:RTP) that is expected to save the two companies $10 billion annually.

Both miners are trading roughly midway between their 52-week highs and lows, and are two of the best ways to gauge economic recovery from the ground up (pun intended).

Source: BHP Billiton (NYSE: BHP): Stock of the Day

Nickel followed a similar path but didn’t sell off as much, and held in positive territory at $6.7094/lb., up nearly 8½ cents. Zinc had a succession of very sharp ups and downs, resulting in a close at $0.6904/lb., down 2/3 of a cent. Aluminum also negated its strong early gains, ending at $0.7062/lb., down the better part of a penny, while lead was modestly lower at $0.7418/lb., down less than a half-cent.

Copper failed to hold onto its early gains and led most of the industrial metals in a modest retreat yesterday, as traders flip-flopped and turned suddenly negative in the middle of the session.

“Copper is following the stocks and the general outlook” for the economy, said Frank McGhee, of Integrated Brokerage Services LLC in Chicago, and that was certainly true with regard to the broader markets, which began moving into the red around mid-morning.

However, McGhee added that the day’s housing data should give copper prices a “short-term” boost and that, while it might seem obvious given the need for copper in new houses, failed to come to pass.

The weakening dollar also should have been somewhat supportive, and wasn’t, perhaps because the buck was able to pare its losses over the course of the day.

On the positive side, London stockpiles continued to decline, with copper inventories monitored by the LME slipping a smallish 1,925 metric tons yesterday, to 285,050 tons, the lowest level since last November 24. Inventories are off almost 50% since this year’s high, notched on February 25.

In company news, we noted yesterday that BHP Billiton (NYSE:BHP) and (NYSE:RTP) Rio Tinto’s proposal for a joint Australian iron ore venture could run afoul of Chinese anti-monopoly law. To expand on that, Yao Jian, spokesman for China’s Ministry of Commerce, said that the law requires a company to get government approval before consolidation if its global revenue exceeds Yuan 10 billion ($1.47 billion) and its revenue in China exceeds Yuan 2 billion.

In the year ended June 30, 2008, BHP’s revenue in China was $11.7 billion, Rio’s $10.8 billion, but Yao says the ministry has not received an application from either firm, and no one knows what actions China might take if the companies were determined to be acting contrary to the law.

Source: Base Metals Mostly Lower

Nickel fell back to $6.80, held there until mid-morning, but took a second beating from there to end at $6.6247/lb., down 38¾ cents. Zinc hit the same morning sell point, going from near even to just off its intraday lows at $0.6972/lb., down 4¾ cents. Aluminum rallied late in the day but still shed more than a penny and a half, to $0.7149/lb., while lead also bombed out, dropping 5 cents, to $0.7463/lb.

Copper led the second straight day of major retreat among the industrial metals, as the stronger dollar hammered commodities across the board.

And, as MF Global analyst Edward Meir put it, “The correction is likely to run its course for a little while longer as many metals were overextended on the upside.”

Traders are getting a bit nervous about China as well. That country has been importing copper in massive amounts, swelling Shanghai inventories to 60,647 metric tons last week, the highest level since March 2008.

That gain “may signal that China’s reserve purchases are coming to an end,” wrote Eugen Weinberg, an analyst at Commerzbank in Frankfurt. “There is more than sufficient supply in the market.”

Meir also commented on China, saying that, “We are particularly concerned that the rebound in Chinese demand has yet to show up in the rest of the world, meaning that China’s critical export sector will continue to struggle.”

Elsewhere, London stockpile data continued to lend support, with copper inventories monitored by the LME slipping 3,300 metric tons yesterday, to 286,975 tons. But canceled warrants – metal set to ship – declined by nearly 15%.

In company news, BHP Billiton (NYSE:BHP) and (NYSE:RTP) Rio Tinto’s proposal for a joint Australian iron ore venture is likely to be cleared by the European Commission, UBS said.

But the project “will significantly affect global iron ore supply, so it’s a rightful concern for companies and business circles,” said Yao Jian, spokesman for China’s Ministry of Commerce. China’s anti-monopoly law mandates a government probe into any deal that causes a “certain level of market concentration,” Yao said, but there haven’t been any requests for an investigation yet.

Source: Base Metals Take Bath