Ive re posted a part of a post I put on the ZINC thread as I believe it might be of interest in the context of the last days trade in zinc.
Have a look at
http://www.kitcometals.com/charts/Zinc.html
now and how the swings in price are noticebly less.Swings are still around 2 to 4c,suggesting we're not quite done yet in reducing the volatility and bringing in heavier consumer demand(another 5 to 10c correction?).
But the reduction in price volatility is undeniable(in the later part of this corection move) which imo coupled with a confirmed increase in stockpile drawdown(which one days increase does NOT confirm imho-I'd be looking to a consistant drawdown between 1000/1500t per day to confirm the resumption of heavier consumer demand)MAY show we are in the final stages of the correction.
If the zinc price behaved perfectly to the long term fundamentals then we'd see a nice climb up the flagpole then a flattening of the price for a few years then a nice gradual decline as new mines came on-line and demand was gradually met.
But the LME,in its wisdom(?),allowed funds unprecedented access to the base metals as an investment vehicle,not that there have ever been controls to my knowledege anyway.And it has not been restricted to the base metals.Just have a look at the new Barclays initiated silver investment vehilce.Im all for freedom of movement of money but when it jeopardises whole industries demand then it gets beyond the ridiculous as evidenced by the number of meetings that the Copper Consumers Association had with the LME during the recent spike.
Their fears were well founded as they saw the problems with the prices of these base metals starting to seriously hurt base metals consumer costs/demand(reflected in the large decline of zinc stockpile drawdown rate-in zincs case),which in the short to medium term was always going to have a drastic correcting effect on the zinc price rather than that perfect world scenario.Copper has not been so easy to "read" as zinc as the stockpile drawdown rate has been all over the place as of late,but the overall long term trend has been that the copper stockpile has been gradually turning surplus if one has a look at the 1 year and 5 year copper stockpile charts.
And this is a very useful tool in itself when looking to a good longer term investment.Imo I wouldnt have gotten into an unhedged copper producer in recent times if you'd offered them too me on a barge pole as the prices(for most)of these stocks will be inflated.Thats not to say there arnt still some good bargains in these companies on a growth curve(AVM) being one,and no Im not investsed in AVM before you all start crying ramper!
A generalisation?But like I say there are some stocks worth being in and others you wouldnt awabt to be in.
It appears the investment community never learns when looking at commodity cycles.The last microcosmic metal cycle was in fact tantalum and it illustrated perfectly just what can happen to a metals price when it becomes overheated.It nearly had the effect of destroying the tantalum supply chain as it just became so ridiculously expensive it was only because there were certain applications in stressful conditions that kept its demand above water.It also drove the major user of the metal,capacitor manufacturers,to investigate cheaper(?)ceramic technologies,that have subsequently taken a significant market share of this metals use as the ceramic technology gradually became more dependable in these conditions due to technological advances in the capacitor field.
What has been so worrying though with base metals is that it had the potential to seriously hurt world growth via the upward movement of ALL base metal prices as a complex.In other words there were no alternatives to a rising metals price as all the others were rising at the same time.The base metals COMPLEX effect.
In ra "perfect" market reality the price of these metals should always reflect the BASE fundamental factors but the prices had become so super sensitive to every small fundamental change(individual mine strikes,etc)due to a dramatic restriction of the number of sell contracts on offer on the LME-Comex markets which had the consequent effect of gradually spreading the difference between the buy and sell prices and hence the nasty swings we were seeing in base metals prices as a complex prior to the recent corrections.
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