If you are in the metals market, your eyes are certainly watching the action out of China. The more the country builds and expands, the higher its demand for anything that is pulled from the ground.

If you have been paying attention, you already know copper prices reached their highest prices since last October early yesterday. Buyers had to shell out $6,258 for a metric ton of the vital base metal.

While it is disappointing to see prices slipping today, it is no surprise. The commodities markets have often moved in lock step with the global equities market. And with mixed economic data coming from Beijing today, it is surprising prices are not down even further today.

Even with a few nuggets of less-than-expected data, China’s economy is one of the quickest expanding on the planet. Earlier today, Goldman Sachs (NYSE:GS) made the not-so-bold move of increasing its GDP expectations for the country from an annual rate of 8.5% to 9.4%.

Many investors are starting to wonder if it is time for Beijing to begin unwinding its recent stimulus measures.

No matter what the government does in the next few months, there is no debating China is at the center of the world’s commodity demand. Its desire to expand is the lifeline keeping the sector afloat.

With virtually no chance of a major disruption in its role, China is making the commodity and mining sector a fine investment.

Go ahead, make your move

While I have recommended several optimized plays for TFN Strategic Trader subscribers, I know of plenty of investors looking for a plain-vanilla sort of way to play the situation.

Anytime we need simple, the ETF market is there.

The SPDR S&P Metals and Mining (NYSE:XME) fund gives investors a pure shot at one of the most potential-filled industries on the planet. The fund includes holdings of powerhouses like Massey Energy (NYSE:MEE), United States Steel (NYSE:X) and Titanium Metals (NYSE:TIE).

Between those three companies alone, investors get a shot at a recovery global economy.

Of course, ETFs are great investments for the set-it-and-forget-it investing crowd. But they are not for everybody. With diversification comes lowered risk and lowered reward.

And anytime you are paying somebody else to do your buying and selling, it will come with a cost. In this case, SPDR charges 0.35% of your position, a fairly low fee in a high-priced industry.

But if you have been watching the commodities sector on the sidelines, eager to make a move, and are unsure how to do it, I think you just found your answer.

ETFs are a great way to enter the investing world on a low-cost, low-risk basis.

Source: Use the ETF Market to ‘Mine’ Commodity Profits

Many of the mines in ROY’s portfolio are not yet producing. When they do, and commodity prices recover, ROY stands to make serious profits.

This from The Rude Awakening:

When panic guides the financial markets, reason is an orphan. It enjoys no comfort whatsoever. It wanders aimlessly – wondering when it sorrows might end. But the sorrows do end eventually. Reason does ultimately reunite with profitable investment results. Therefore, the successful investor clings to well-reasoned tactics, even when the stock market calls him crazy. At the moment, the stock market is calling a lot of investors crazy. But successful investors use such moments to capitalize upon the stock market’s lunacy. They use these moments to buy good stocks on the cheap.

International Royalty Corp seems like a good stock that has become way too cheap.

International Royalty Corp. (AMEX:ROY) is like a big bucket of call options on more than 80 mining projects. But the great thing about these options is that they don’t expire. Only one of ROY’s projects is really producing big cash flow. A few gold mines come online in 2008. And then you have 78 other properties that could pay off down the road.

ROY is a unique company. It doesn’t operate any mines. It doesn’t own any mines. What it does is acquire royalties. Basically, ROY is like a venture capitalist of mining companies. It provides funding. Early in a mine’s life, before anybody is sure what might come of it, a miner might go to investors and partners and look for ways to spread the risk a bit.

Enter ROY. The management team at ROY takes a look at the property and runs it through their hurdles. If they like it, they come back and say something like, “OK, we’ll give you $10 million. In exchange, you pay us 3% on the gross price, minus shipping and insurance costs, of everything that comes out of this mine for the life of the mine.” Also, ROY points out, it’s up to the miner to run the place. “It’s still your mine, Mr. Miner, and any other money required will have to come out of your pocket.”

The miner says yea or nay. If it agrees, it gets its money and starts work on the mine. It may be years before the mine produces anything. It may never produce much of anything at all. Or it could turn into a huge mine… in which case, ROY’s little initial investment pays off big.

This is what happened with Voisey’s Bay, which turned into a huge nickel mine. The miner in this case is a giant – Companhia Vale do Rio Doce (CVRD). No one knows just how much nickel CVRD will get out of Voisey’s Bay. But right now, Voisey’s Bay is one of CVRD’s core assets. CVRD has sunk nearly a billion dollars into it. The mine should produce for 20-25 years yet.

Voisey’s Bay beckons comparisons with Goldstrike, a fabulous gold mine owned by Newmont (NYSE:NEM). A little royalty company called Franco Nevada had the royalty on that mine. It went up 50-fold over a decade. Shareholders who sunk some money in Franco Nevada and just sat on it got rich.

Some call Voisey’s Bay the Goldstrike of nickel…

And ROY has a piece of it. Every ounce of nickel that CVRD pulls out, ROY gets a cut. Doesn’t matter if CVRD makes money or not. Doesn’t matter what happens to mining costs. When CVRD pulls nickel out of Voisey’s Bay, a piece of the proceeds goes right in ROY’s pockets.

This makes ROY a straight-up play on metals. Higher nickel prices mean more money for ROY. More volume through the mine means more money for ROY. It’s price and volume, and that’s it.

Well, that’s not all…

Because ROY owns a portfolio of royalties, not just Voisey’s Bay. Most of them don’t produce anything right now. But they may. And most certainly, some will. Recently, ROY picked up another 16 royalties from mining giant Rio Tinto (NYSE:RTP) for $61 million in cash. It was a big acquisition for ROY, boosting its total portfolio by 20%. Now ROY owns a portfolio of over 80 royalty properties.

And so what?

Now that commodity prices are tanking, ROY’s share price is also tanking. This looks like a buying opportunity to me. Commodity prices will recover eventually. And when they do, ROY’s stock should provide ample rewards.

Source: A Good, Cheap Stock

This from Byron’s Energy and Oil blog:

Back in mid-summer, oil approached $145 per barrel. People were asking whether or not oil was in a bubble. Well perhaps it was the “froth on the beer,” but not a bubble.

And oil was rising as the dollar was falling. In fact, oil has been rising for well over a year, as the dollar has tumbled. For the currency traders, life was easy. Bet against the buck, and the Euro would rise. You saw this in gold and other precious metals as well.

Then in mid-July, it all changed. Overnight. There was no big announcement from the Federal Reserve or the European central bank. Nobody said “We’re Tanking the Euro.” But it’s pretty clear that they decided that enough was enough. The falling dollar and rising Euro was killing exports from European countries. It was putting Germany and France into recession.

So the central banks of the world started buying dollars. The U.S. buck strengthened. Oil fell from $145 into the $115 range. And even the Russian invasion of Georgia, or Hurricane Gustav, could not cause oil to rise. Stay tuned as this drama unfolds.

And while you are tuned-in, don’t give up on the long-term prospects for energy, precious metals and resources. The dollar is rising? This too shall pass.

Really, is the U.S. economy strong and getting stronger? No. Is the U.S. tax code becoming friendlier to investment and long term capital creation? No, again. Are the demographics of the U.S. labor force changing towards a long period of increasing productivity? Nope. Has the U.S. solved its problems in banking, finance, housing, energy, trade deficit, government spending? No, no, a thousand times no.

So it’s frustrating to watch as falling oil prices, falling gold prices, falling other things take down many of the companies in the OI portfolio. But have faith over the long haul.

Over the long haul, go with companies that own real stuff. Like oil reserves, or mine reserves, or critical technology in advanced resource industries. Go with the hard-stuff. Avoid the fluff. Or come the next financial hurricane, you might get blown away.

Source: Hurricanes, Price of Oil, Rising Dollar…

Falls in the copper price are almost at an end. A profit opportunity is approaching.

I expect the market will bottom over the next two months… so you need to be ready to pounce.

I will tell you what to buy and when.

The copper price is continuing to slide – despite the fact that global stockpiles are down by almost a fifth this year.
This defies logic.

Miners are not discovering enough copper to meet the world’s insatiable demand. It is getting scarcer by the day.

Some analysts believe that current reserves of the metal will run out in less than 30 years.

As things get scarcer, prices soar. This is what I expect will happen to the copper price… no matter what the dollar does.

The fundamentals for the copper market are so stunning that Lakshmi Mittal reckons that the copper market offers his next chance to make big money. And you don’t get to be Britain’s richest man by not being able to spot a money-making opportunity, do you?

Here’s our opportunity

The company I am looking at is developing one of the largest copper deposits in the world. It is right on the doorstep of those key Asian markets. I had the opportunity to speak to its chief executive a couple of months ago. He was very impressive.

The company has 22.3 billion pounds of copper in the ground and 9 million ounces of gold. And that’s just a conservative assessment.

The value of the company’s copper in the ground is $78 billion at today’s prices… and the gold is worth $7.3 billion. The company is valued a fraction of this amount.

I’ll give you more details about the specific investment soon. But first, I want to explain why the copper price may be about to hit a bottom.

The biggest sign that a bottom is approaching is last week’s movements in the spot market. It’s all down to the “copper spread”.

There was a significant price move on the London Metal Exchange over the course of last week. The difference between copper for immediate sale and the price for copper to be delivered in November jumped by 33% to $105.

This is an indication of a tightening market.

The jump came after four weeks of declines. The premium hit a six-month low of $12.50 on 11 August.

Copper stockpiles have actually risen by 15% at the London Metal Exchange in August. But this needs to be taken in context. These gains are seasonal… and they are about to be reversed.

The copper market is usually weak in August. European holidays means many factories are closed in France and Italy — and copper stockpiles have risen by 15% at the London Metal Exchange this month.

This trend has been compounded by China.

Factories were closed to cut pollution ahead of the Olympics. This stifled demand for copper. Now the party is over, these factories are going to start producing goods again… and copper demand will rise.

Despite the seasonal rise in inventories this month, total stockpiles of copper have fallen 17% so far this year. Demand still outstrips supply… and I expect it will for the foreseeable future.

The reason I expect that copper demand will rise significantly is because of Mr Gore and his hybrid cars.

Double the amount of copper

The average new car contains 27.6kg of copper. Hybrid cars contain twice as much because they also have an electric motor as well as an engine.

Hybrid car use is going to soar. Governments are encouraging the use of hybrids as a way to cut emissions. It’s starting to make financial sense to buy a hybrid car.

If you have a hybrid, you don’t pay the London congestion charge. I expect this will be the same in Manchester when their scheme starts in 2012 and in other countries currently looking at introducing similar schemes such as New York and Tokyo.

On Australia’s Gold Coast, hybrid-only car parks have started to open already… all of them at plum locations. The best parking spots at IKEA in Houston, Texas are all reserved for hybrid vehicles. The charge towards green vehicles is unstoppable… and the outlook for copper is brighter than ever.

Because of this political will, sales of hybrids are expected to rise 400% over the next seven years. By 2013 hybrids are expected to make up around 6% of annual US auto sales… that’s more than a million hybrid vehicles per year. All with twice as many copper components than the average car.

High fuel costs will also accelerate the move to hybrids. So I expect demand for copper is about to go through the roof over the next few years… at a time when global stockpiles are falling rapidly.

All this means that copper is about to rise again… and I am about to reveal what I believe is the best way to play this trend. Click here to sign up for Smart Commodities and get into the stock when the time is right.

Watch this space.

Source: Copper Is Your Next Profit Opportunity

Dan is particularly interested in black coal investments in Queensland, uranium mines in South Australia, and a whole host of junior projects in Western Australia’s Pilbara region.

During pandemics and plagues (so we’ve read), you dig graves to bury the bodies (or leave them lying in the street if it gets really bad). While a bull market in gravediggers is good for gravediggers, we think investors should prefer a different kind of digging…for world-class mineral deposits.

That, by the way, is why your guest editor jumped ship from London to move to Australia in 2005. Having sussed out the big picture (sell paper, buy stuff), we wanted to find good ’stuff’ to buy. We’re not alone. Canadian mining legend Robert Friedland was in town a few weeks ago, talking up the copper prospects of Ivanhoe Australia Limited.

Friedland’s business strategy is simple. Buy a distressed asset. Front up the money to drill it like nobody’s business. Demonstrate that it’s worth a lot more than you paid for it. Then find a JV partner to front up the rest of the capital to make it a producer.

Friedland is also a big fan of “polymetallic mineralization,” a kind of selling Peter’s copper to pay for Paul’s gold production. When you have a world-class polymetallic deposit, you can use the cash flow generated from one metal to sustain, or at least offset the production costs, in another.

Friedland thinks he’s got a world-class project going at Mount Isa in Queensland. “The Mount Isa mining district is one of the top five mineralized districts on planet earth,” he told the local paper. “It doesn’t have to apologise to anyone. There’s the Witwatersrand in South Africa, there’s Norilsk in Russia, there’s the Cadillac district fault in Canada, there’s the main structure in Chile. This is one of the great mining regions in the world.”

Friedland is clearly on to something. He points out that these great new ore bodies of the mining world will replace many tired, old, bed-ridden mines that are nearing the end of their productive life. “Our view, and we talk to Rio Tinto about this a lot, is around the year 2012 or 2013 we are going to have a crisis in copper because a lot of the great copper mines are like little old ladies lying in bed waiting to die.”

Younger mines will have plenty of cost blowouts (see BHP’s Ravensthorpe nickel project). They will have to endure volatility in underlying commodity prices. But they have one thing the older mines don’t: a lot of ore in the ground. That’s worth something, especially at today’s resource share prices.

How are we playing it here at the Daily Reckoning’s Australian outpost?

While Frieldand looks for copper at Cloncurry, we’ve been targeting our investments to black coal and coal-seam-methane in Queensland, new uranium mines in South Australia (the only State which is permitting new mines right now), and, most importantly iron ore, vanadium, molybdenum and rare earth juniors in the vast expanse that is Western Australia (especially in the Pilbara region where we’re headed next week. A full report will follow).

Source: Clear and Present Financial Danger

 One company is playing a waiting game… It’s waiting for change in Iran… Gold and copper deposits could be huge…

I don’t know which football ground was described by just-retired John Motson as ‘a football stadium in the truest sense of the word’, but John Teeling might very well be described as an Irishman ‘in the truest sense of the word.’

This twinkling, sixty-two year old serial backer of bold mining ventures stepped off an overnight flight to tell me about one of his mining ventures which has not done too well of late – but only in share price terms.

This is Persian Gold (PNG), which has built a portfolio of mining projects in Iran on the sound principle that ‘while rocks do not change, politics do.’ Teeling is hoping that the west’s political relationship with Iran might change for the better next year when new leaders will be installed both in Iran and the USA. That might persuade to investors to look at the opportunity offered by the geology of Iran rather than take fright at the failed relationship between this major Middle Eastern state and the west.

A more-than-usually-interested observer, too, will be Mike Thomsen, Persian Gold’s geologist who believes that Iran could be host to some of the largest undiscovered gold and copper deposits anywhere in the world.

Formerly the international exploration chief of Newmont Mining, his job then was simply to find gold, and what he noticed was a particular pattern of volcanic rock that hosted major copper and gold deposits in places such as South America, Indonesia and the Philippines. Without going into the exact geological details this pattern is also found in Eastern Europe and runs down from Turkey to western Pakistan – right through the centre of Iran.

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 RECOMMENDED

Can you imagine what 1.1 billion barrels of oil looks like?

Can you imagine what it’s worth – now we seem to be hitting a new record oil price every few days?

One undervalued company owns the port that has to be used to get this oil out.

And they’ll permit it’s removal for the right price…

Oh and the share price of this company is currently less than 30p… but when this story breaks… it looks set to double before the end of 2008.

Click through here to find out more

Forecasts are not a reliable indicator of future results. Your capital is at risk when
you invest in shares, never risk more than you can afford to lose. Please seek independent financial advice if necessary. Fleet Street Publications Ltd. Customer Services: 0207 633 3600.

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So in 2003 Persian Gold was set up to explore for large gold and copper deposits in this territorial swathe known as the Tethyan belt. As usual the course of exploration has not been entirely smooth and Persian Gold’s first project in the north of the country has been delayed by the presence in the vicinity of a protected species – tortoises. Thomsen, who told me that he ‘has previous experience of dealing with tortoises’ (in the USA) is confident that this obstacle can be overcome but in any case since that first project Persian Gold has signed three others, two of which have progressed with real promise. Resource estimated good The most advanced of these is the Char-e-zard gold project, which is right in the middle of the country. Here two phases of drilling and trenching have been sufficient for Persian Gold to estimate a resource of 160,000 ounces of gold and 1,000,000 ounces of silver. A pre-feasibility study will begin soon and if all goes well – and this is a straightforward open pit mining operation – production should commence in 2010.This will be a small operation, with capital costs of no more than $20m, but according to Thomsen it could ‘clear a profit of three times Persian Gold’s current stock market value’ of just £5m. But it will also provide a valuable lesson in dealing with the local bureaucracy, a lesson that could prove valuable for a second and potentially much larger project at Dalli, which is about 200kms south of Tehran.Here Thomsen has spotted a promising volcanic rock formation, and four drill holes have all encountered copper and gold. Two of these holes were drilled in an area to the north and two to the south, and the latter encountered copper grades of around 0.5%, equivalent to the best grades found at major copper mines in the region – but also the presence of gold.

So this early results indicate sufficient mineralisation to support a mine, and the question now is whether it is sufficiently extensive. Three more holes are now being drilled with results expected before September, but several more will be necessary before Persian Gold can confirm the presence of the sort of world-class deposit that it is looking for.

Last year there was sufficient excitement about Persian Gold’s projects to see the share price bid up to 40p. Today, following months of sabre-rattling between Iran and the USA the price is back down to 7.5p. For those who are prepared to live with the political risks this looks as good a time as any to get into a company that has made some discoveries, and has first mover advantage in a country of undoubted mineral potential.

Source: What Price Iran?

No other precious metal has a tighter supply than platinum.

Though platinum prices have remained high over the last few years, supplies are getting thinner by the day as South African production draws to a standstill. Lately, these tight supplies have helped platinum prices shoot up north of US$2,000.

In fact, platinum has climbed so high that its sister metal, palladium is becoming the new exciting speculation. Right now, palladium is sitting at 56% off its all-time high in 2001 of US$1,100 an ounce. The platinum-to-palladium differential hit its widest level in history in late May as platinum prices rocketed to new highs.

So the question is: Has the price of platinum climbed so high that industries will start switching to palladium?

The Boom in Platinum

Platinum has a variety of uses. The automobile industry uses platinum for gasoline-powered catalytic converters and it’s also widely used in jewelry.

Investment demand is also draining platinum supplies. Recently, another platinum exchange traded fund (ETF) began trading in New York. In 2007, two platinum ETFs began trading in London and Zurich, respectively, effectively draining more supply from a thinning market.

Platinum initially led the bull market in the precious metals complex earlier this decade. But now platinum has fallen behind silver (+330%) and gold (+234%). Since December 2001, platinum has recorded a 230% total return.

Meanwhile, platinum’s sister, palladium has lagged behind the other metals. Palladium also still has an abundant supply. That’s mainly because Russia dumped a large supply of palladium on the market earlier this decade. As other metals have risen in price, palladium prices have declined 54% over the last seven years.

Deficit of 480,000 Ounces in 2007, 711,000 Ounces in 2008

No other precious metal has suffered more from growing supply shortages since last year than platinum. And it’s getting worse.

According to Johnson Matthey, a metals and chemicals forecasting firm, platinum reached a deficit of 480,000 ounces last year. They’re forecasting platinum will hit yet another record deficit of 711,000 ounces in 2008.

Platinum Sails to the Moon and Beyond

This follows massive production downgrades from AngloPlatinum (OTC-AGPPY-PK) and Lonmin (LON:LMI) – two of the world’s largest platinum mining companies.

Platinum production in South Africa accounts for about 80% of global output. Just in 2007, South African production declined 4.9% to 5.04 million ounces. South African mines are facing several issues including smelter closures and a host of safety issues interrupted mining operations.

Worse, widespread electricity shortages in South Africa this year are lending to another major price increase. Still, supplies continue to shrink and extend into a major net deficit situation. South African platinum output has hit its lowest levels since 2002 and continues to contract in 2008.

Can’t Hide Production

Unlike crude oil, which has doubled year-over-year in the midst of a parabolic bull market, spot platinum is much easier to quantify in terms of overall supply.

It’s hard to hide platinum output. We know that one country mines more than 75% of all output. And if that one country can’t boost supplies, it’s an easy speculation that prices are going to rise much higher.

In short, South Africa can’t produce enough supply to meet demand. And according to Johnson Matthey, global platinum output last year fell 4.1% to 6.55 million ounces and that amount was easily absorbed by the auto industry and jewelry market.

Palladium to Benefit?

Palladium is the worst-performing precious metal this decade. But it might receive a big boost if platinum prices remain so high.

Palladium always competes with platinum in the auto industry for catalytic converters. So if prices continue to rise, the industry will have to switch to the cheaper metal — palladium.

In the absence of a significant drop in jewelry demand or a major recession in new auto sales outside of the United States, platinum prices are likely to remain high. That should help palladium, which has gained a cumulative 29% in 2008.

Palladium Starts Its Rise to the Top

Palladium, however, remains in net supply surplus heading into 2009. Unlike platinum, there are no threats to palladium’s production. Russia is the main palladium producer. And unlike South Africa, where mining output has stalled, Russia continues to supply the palladium market.

Platinum prices will have to rally significantly from current levels if palladium is to absorb market share in the auto industry. Still, judging by technical chart patterns since 2006, palladium is looking strong.

Platinum Up-Crash Ahead?

Since 2003, spot platinum prices have soared a cumulative 250% from US$594 an ounce to US$2,077 now. Platinum reached an all-time high of US$2,290 in March and sits 9.3% below that best level.

According to RBC Capital Markets, platinum demand continues to average about 3-4% annual growth. Once again, that’s mainly from catalytic converters and jewelry.

If platinum supplies continue to shrink, which is almost a virtual guarantee with these production problems in South Africa, we will have a much higher platinum price by Christmas.

The advent of exchange traded funds investing in platinum since last year in Switzerland and now in the United States since May will continue to suck more supplies from an already strained market. This is bad news for consumers, but great news for investors seeking the Perfect Storm in the commodities markets.

Platinum and palladium are probably two smart speculations in mid-2008. If you divide your portfolio equally between these two metals, you’re likely to get a handsome reward over the next 12-24 months.

Source: Why These Two Twin Metals Will Skyrocket By Christmas

Today Rio secured a massive 97% price increase from its Asian steelmakers – piling the pressure on BHP to get an even bigger increase. BHP claims that Rio’s agreement isn’t enough to cover extra shipping costs.

BHP Billiton, Rio Tinto and the American Civil War

Dan Denning

Let’s get the ugly part out of the way first. The S&P ASX/200 limped home yesterday to finish the fiscal year down 16.9%. Let’s call it 17. It was the first down year since 2002, or 1 BB (Before the Boom).

If not for the iron-ore solid performance of BHP Billiton (ASX: BHP)-up 24.7% on the financial year-it would have been much worse for the ASX 200. Rio Tinto (ASX: RIO) did its part to hold the line for the resource sector as well. Rio was up 38.2% for year, from $98 to $135.50.

But wait, why is BHP’s 24.7% gain more weighty than Rio’s 38.2%? Is this some weird new math? Some sleight of hand or trickery? No.

The ASX/200 is a market-cap weighted index. A stock is judged not by the colour of its performance but by the content of its market capitalisation. BHP’s market cap went from $194 billion to $244 billion in the last twelve months. Rio went from $98 billion to $135 billion.

You reckon Rio’s CEO Tom Albanese will not be happy to hear that BHP still means more to Australia – at least the performance of its share market index-than Rio. Yet Rio is not unattractive. The Financial Times reported yesterday that ArcelorMittal (AMS: MT) – the world’s largest steel company – may be interested in buying a piece of Rio.

Does that kind of deal make sense? Arcelor is trying to bring its resource supply chain back on to the balance sheet. Buying the world’s second-largest iron-ore maker sure would do that. But Rio’s biggest customer is China. So does Arcelor just want a piece of Rio’s growing earnings? Does it want the ore? Or does it want a piece of Rio’s assets in a post-BHP merger carve up?

Who knows? Lakshmi Mittal does probably. But he’s not telling.

Yesterday we mentioned we’d look at the markets geopolitically. What we meant by that is that most pundits are assuming the resolution to the credit crisis will come in form of a normal economic cycle or some change in monetary policy, or a currency readjustment. But maybe it will end in bullets.

This current state of affairs is not just a friendly tilt between inflating commodities and deflating financial assets. An allusion is in order. At the First Battle of Manassas on July 21st 1861 the American Civil War got underway. Everyone thought it would be a short, quaint affair. Manassas is not far from Washington D.C.

Today, you take Interstate 66 to Route 50 West, if memory serves (our brother used to live in the area). But back in 1861, day-trippers from DC took carriages out to watch the opening of the war. They brought picnic baskets and clapped. They anticipated a Union rout of the rebel troops led by Confederate General PGT Beauregard.

It was all going the Union’s way until a bunch of Virginians under General Thomas Jackson held the line at Henry House Hill. “There stands Jackson like a stone wall,” said Brigadier General Barnard Bee Jr. The Southerners rallied and won the battle and the war was much longer and bloodier than anyone expected.

We mention the battle for three reasons. One, it was a nice way to think of BHP and Rio in your portfolio, buttressing it against a larger route. Two, the Civil War was much worse than anyone expected because it was really the first war where industrial production mechanised warfare. You had tremendous firepower concentrated in large masses of men. The result was industrial scale slaughter and a preview of World War I fifty years later.

No one went into the war thinking it would be newer and deadlier. And no one has gone into globalisation believing that there were drawbacks as well as benefits. The obvious drawback now is that a synchronised global asset bubble has become a synchronised global asset bust, with falling asset values leading to reduced consumption, lower corporate earnings, and more falling asset values… all in a downward spiral.

The third reason brings us to Clausewitz, the German military strategist. He wrote many famous things. One of them is that, “war is a continuation of politics by other means.” Clausewitz used the German word Politik, which can mean either policy or politics.

One reader writes in that our theory of a seamless migration of wealth and capital from West to East is rubbish. “People never relinquish what they have easily,” he writes. “If Asia is to become rich and the West poor, we will see war, actually many wars, first. The history of man is war.”

This is the other possibility, then. The economic tensions created by globalisation turn into hot resource wars, via both politics and policy. It’s no coincidence that the oil price has gone up since the Iraq war began.

Will Americans under John McCain or Barrack Obama take their new position in the world with good grace? Or are they going to fight it? What is China’s ultimate resource policy? Does Australia even have one? Should it? Will markets take a back seat to geopolitics in the coming years?

Let’s not be so dire. We could be in the midst of a painful but necessary financial adjustment.

Dan Denning
The Daily Reckoning Australia

Source: BHP Billiton, Rio Tinto and the American Civil War

The next big inflationary threat – steel prices

This week we saw a 96.5% rise in the price of iron ore. Yes, 96.5%.

The oil price has refused to budge below $130 a barrel, despite Saudi pledges to increase production and the best efforts of those two fixers, George Bush and Gordon Brown.

And Her Majesty’s Treasury released this summer’s must-have beach-read – a 70-page document entitled, Global commodities: a long-term vision for stable, secure and sustainable global markets.

The commodities boom is not rolling over. In fact, it is gathering pace.

Anyone who thinks China’s insatiable hunger for metals is going to subside any time soon need think again. On Monday it was announced that Chinese steelmakers has agreed a new contract with Rio Tinto for the price of iron ore which saw a 96.5% rise on last year.

Like coal, the price of iron ore is not set in any futures market, so governments and lazy journalists cannot make any wild claims that speculators are somehow to blame for this one. Rather, an annual contract is agreed between the major producers (BHP and Rio in Australia and Vale (RIO) in Brazil) and the major steelmakers (China) and that tends to become the guide price for the year.

Normally, the cycle is that Brazilian miner Vale agrees a price in the spring with the Chinese, which becomes the benchmark for the Aussie miners BHP and Rio. Vale negotiated a 65%-71% increase earlier in the year, but that wasn’t enough for Rio. They argued that they should be paid a higher price than the Brazilians because, with Australia’s proximity to China, Chinese shipping costs are lower.

Rob Clifford, of Deutsche Bank, said that, based on Rio’s agreement, Australian ore trades at a $39-per-tonne discount to the Brazilian ore at current spot freight rates. It would have been $47-per-tonne if Rio had settled at Vale’s level, he said.

But despite this record price rise for Rio, BHP says the increase is not enough. “There are still big differences between what we want and what they are requesting,” it said.

BHP, it seems, have another agenda. They want to end the annual contract system which has been in place since the 1960s. Marius Kloppers, BHP Billiton chief exec, said they would not sign any new traditional annual contracts, preferring “new contracts on new transparent terms”. It seems he wants a system that also incorporates some kind of spot market with automatic price revisions that will reflect any tightness in the market.

Will steelmakers absorb these new higher prices? Will they heck! The rise in costs is going to be passed on to customers, which will mean higher costs for construction companies, car manufacturers, you name it. This will subsequently lead to yet more inflation. The Bank of England governor had better brace himself.

This the largest ever annual price rise and disproves, once again, the notion that a US slowdown will lead to lower commodities prices. It doesn’t work that way.

The argument of shipping costs has, of course, much to do with oil prices. Despite the best efforts of governments worldwide and Saudi pledges to increase production; despite most commentators (including me) stating it was overbought and due a retrace; the oil price remains stubbornly high. It is now almost two months since we crossed $125 and we have remained above $130 for fourteen days in succession. What we thought might be a short-term spike in an ongoing bull market, now looks to be a consolidation at higher levels.

There are some inventory level numbers out later today. These numbers never seem to be good, so we may get a further spike on the back of these.

Finally, HM Treasury released a 70-page study on the commodities markets called Global commodities: a long-term vision for stable, secure and sustainable global markets. It’s not exactly a page-turner, but whoever has compiled it – and no one seems to have put their name to it – has been extremely thorough in their research and should be applauded.

It’s a little light on precious metals for my liking – but then I’m an old goldbug – although it does spell out the role of gold as a hedge against inflation. It focuses more on energy and food, and it spells out pretty clearly what’s been driving these higher prices, what the consequences for the poor around the world will be if these higher prices continue, and what governments should be doing about it.

Unfortunately, what’s worrying for us in the UK is that there is in fact very little our government can do about it except make noise. We don’t mine any metals, we consume way more energy than we produce, our production of soft commodities such as cotton, sugar, cocoa and coffee is virtually non-existent. At least we do still have a farming industry – just. I hope those involved in it enjoy a long-overdue boom.

Source: Why the commodities boom just won’t slow down

The value of announced mining takeovers more than tripled to $199 billion in the first five months of 2008 from a year ago – the first time mining mergers have topped Bloomberg’s mergers and acquisitions table since it began 1998.

Meanwhile, gold prices are set to reach record levels, says Mike Caggeso in Money Morning.

Those new catalysts are:

• Inflation.
• Oil prices.
• Fatter wallets in emerging markets.

Inflation and Gold

Global inflation will be a key – if not the key – factor because of gold’s established reputation as an inflation hedge.

Since September, the U.S. Federal Reserve has lowered interest rates seven times – chiefly because of a subprime-mortgage mess that grew into a global financial crisis.

Many foreign central banks have either reduced interest rates in kind, or opted to stand pat, even though inflationary forces in their own markets actually dictated that a rate increase might be a wiser move.

Low worldwide interest rates – arguably an artificial situation, of sorts – has stoked global inflation and caused the greenback to plunge to record lows against other major currencies. And the weak greenback has been a key catalyst behind the escalation of oil prices.

As Money Morning’s Hutchinson has predicted, however, the Fed and other central banks will eventually be forced to start pushing interest rates higher – a stance that even Fed governors are starting to support.

“And during that period, expect speculative demand for gold to intensify and its price to increase steeply,” Hutchinson said. “The longer the period before the Fed is forced to increase interest rates, the higher gold will go.”

“Black Gold” and Gold

There is a very tight correlation between rising oil prices and rising gold prices. While the torrid oil-price advance may moderate at some point – no market goes straight up or down without interruption – the trend in the crude-oil market clearly is toward higher prices, MoneyWeek reported.

And high oil prices tend to support gold prices.

Referring to the “magic relationship” between oil and gold, Moaz Barakat, the managing director of the World Gold Council, said the fluctuations were natural and in accordance with historic price adjustments.

“If you look at the past 100 years, the gold price was always 10 or 12 times that of oil prices,” Barakat told MoneyWeek. “With oil basically around $100 a barrel, gold prices should be at $1,000 or $1,200. That’s the magic relationship between the two.”

[Editor’s Note: Gold investors have made a killing in the past few years, and gold’s meteoric rise is hardly over. Money Morning contributing editor Martin Hutchinson has predicted the precious metal could climb as high as $1,500 in the near future. For additional profit plays on gold - as well as oil, the U.S. dollar, sovereign wealth funds, emerging markets, agriculture, uranium, biotech and much more - check out Money Morning’s just-published global investing guide, The Essential Investors Playbook. It’s Money Morning’s first foray into the investment-book market, but we’re certain you’ll find it worthwhile.]

Asian Wealth

Naturally, as per capita wealth increases in such emerging markets as China, India and Latin America, demand for “American” goods will soar. That holds true both for American “brands,” as well as for so-called “lifestyle goods” – products that foreign consumers identify as being part and parcel of the “American” way of life. Jewelry, gold, gems, other precious metals all will benefit from the growing ability of the newly forming middle classes to spend on wares that aren’t just necessities.

That’s different from past bull markets for gold, which were solely inflation-driven; that is, investors who were seeking to hedge their bets against rising prices caused gold prices to skyrocket.

To be sure, inflation has been a big factor this time around. Gold prices usually move in the opposite direction of the U.S. dollar. With the dollar weak, and interest rates low, an up-tick in inflation could send gold prices higher.

But for gold prices to really zoom, consumer demand will have to act as an adjunct to inflation. And rising demand from increasingly wealthy consumers in China and India may be just the ticket.

Now that the Internet and satellite TV have allowed these aspiring consumers to see what kinds of wares U.S. consumers regularly have, this new group of Asian consumers also want their own houses, cars, appliances, cell phones, computers and jewelry. They are willing to work to get it. And they are all-too-happy to pay the rising asking price.

The upshot: The wealthier this new group of consumers becomes, the more they’ll envy these goods – and the higher the price tags on those products will climb.

This new source of demand could potentially blunt gold’s run toward $1,500. Naturally, demand drives up prices. And, recently, steep prices are to blame for the 11% decline in gold sales during the Hindu holiday of Akshaya Tritiya, where long-term investments such as gold, silver and real estate are religiously merited as purveyors of prosperity.

Like Christmas, Hindus are constantly reminded of Akshaya Tritiya by a bevy of special sales and advertisements from jewelers and real estate companies.

This is important to note because Hindus were curbing the religious tradition of buying gold, which sheds light on “how much is too much?”

Read on here for Mike’s maximum profit plays on gold.

“My ongoing confusion about the current state of our markets tells me one simple thing,” says Merryn Somerset Webb, “that I should hang on to my gold.”

The price of gold has already fallen 14 per cent since its peak of $1,033 back in March, and it also had a bad week as the dollar rose.

But, in uncertain environments, what we all need most is insurance. And gold is the best financial insurance you can get over the long term.

There is a perfectly reasonable fundamental case to be made for holding gold: supply is limited and demand high. However, the real point is that the future is very uncertain and not in a good way.

We could see an inflationary recession. We could see a deflationary recession. But what I think we can be pretty sure we won’t see, over the next few years, is stable growth with stable prices.

Tim Price of PFG Wealth puts the case nicely. “There are few things you can count on in a full-blown economic and financial crisis,” he says.

“Not central banks, politicians or Wall Street banks, and not paper currencies – the dollar lost 98 per cent of its purchasing power during the 20th century.”

“But several thousand years of world history point to an alternative store of value, in the form of this iconic, shiny yellow metal, whose very scarcity is its abiding strength.”

You can get exposure to said iconic metal by buying the ETFS Physical Gold ETF (PHAU).