Sit tight and don't lose your mettle Robin Bromby May 23, 2006 PREPARE for more bad news on the commodities front - possibly a lot more bad news - but don't panic and lose your nerve, say analysts and advisers. And there was certainly disappointment yesterday after Friday's stomach-churning reverses in the precious and base metals prices in London and New York on Friday.
Gold, which had fallen 3.4 per cent at the end of the week, dropped another $US11.70/oz in Asian trading yesterday to bring the retreat to $US645.90/oz.
Copper, which gave up 6.5 per cent in New York to $US3.467 a pound, saw another 4 per cent sell-off in Shanghai yesterday.
And the mid-tier producers took another hammering as trading began for the week. Zinifex, which 10 days ago hit $13.50, shed a further $1.61 to end the day at $9.20. Consolidated Minerals, above $2.70 earlier this month, was down another 22c to $2.02. Copper producer Straits Resources - $4.63 on May 5 - took a 33c pummelling yesterday to close at $3.70.
Even Kagara Zinc, largely unhedged and riding both the zinc and copper bulls, is down from a month high of $4.64 to $3.03.
But this is where, in the view of Southern Cross Equities, investors risk making the biggest mistake of all.
In a letter to clients, SCE points out that, while copper is above $3.30 at present, the average broker forecast for the metal in fiscal 2007 is $US1.85/lb.
BHP Billiton produces 1 million tonnes of copper per year.
Wait for a week or two, let the correction run its course, and then buy BHP and Rio Tinto, advises SCE director Angus Aitken.
These resources giants have much better long-term earnings growth than industrials such as Coles Myer, Tabcorp or the banks.
"Who wants to be in a company with only 6 per cent growth?" Mr Aitken said.
He pointed to recent profit downgrades by industrials such as Housewares International and Repco as typical of the danger of switching away from resources stocks to industrials during a commodities boom.
And SCE's letter rammed the point home: "The current cycle is only in its infancy due to two decades of under-investment in new capacity and the unprecedented simultaneous industrialisation of two countries that together account for one-third of global population."
And there are signs local investors are watching and waiting rather than throwing in the towel.
Rohan Edmondson, client adviser at broker Montagu, said the phones had gone quiet yesterday after a busy time late last week.
"Investors here seem to be getting more informed about resources," he said.
Mr Edmondson is telling those clients who do call that he is not concerned with corrections and that the underlying fact is that there is not enough metal to meet demand with China booming and growth picking up in the developed countries.
There were just not enough new mines in the pipeline.
"Where is the supply coming from which is going to satiate demand?" he added.
Even though he believes metals have further to fall, Commonwealth Bank commodities strategist David Thurtell sees this correction as a reaction to the phenomenal speculation that has been sending prices skywards.
But he expects zinc, which closed at $US3280/tonne on Friday, to be back over $US4000 by the end of 2006 as London Metal Exchange stocks of just 247,000 tonnes should be run down before eight months were out.
And, while no gold bug, Mr Thurtell sees the yellow metal reaching $US800/oz also by year's end.
Far East Capital's Warwick Grigor's advice to investors is that they shouldn't try to beat the hedge funds that are driving the metals market.
"These barbarians of the market push prices up to the precipice and over the cliff because this is the way they make their money. And if there's panic they make even greater profits."
Mr Grigor said the market had peaked for probably as long as six months but that was good: at recent prices, buyers like China would have refused to take metal.
His best investments were iron ore and uranium, because neither was traded on the spot market and the price-setting through long-term contracts meant the hedge funds could not manipulate their prices.
Apart from that, investors should sit on their hands and wait for this to all play out, said Mr Grigor. Follow the old market adage - go away in May.
