Reader Question

I had a very interesting reader question yesterday that I think is worth writing about. He asked something along the lines of, "With the extremely poor U.S. economic data that came out the dollar sold off, base metals sold off, precious metals sold off, oil sold off, while the the U.S. stock market gained. Is this a sign that a U.S. economic slow down, recession, or depression, will lead to lower demand for base metals? Will that equate to a lower price in base metals?" That is not an exact quote because I have deleted the email, but it was along those lines. This is a very good question. Let's dig in.

First off, I believe oil sold off after a $2 /barrel gain. Oil is up this A.M. around $.50. Oil is going up. It's simply supply and demand. The world cannot produce more than 84-85 million barrels /day. While supply is staying unchanged and in the near future will be in the process of decline, demand is picking up.

Alright, back to this notion that a U.S. economic slowdown will lead to lower prices for base metals. This idea was true 10 year ago, but it's not today and let me tell you why. China, India, BRIC, and other developing countries are industrializing, and westernizing at a rapid pace.

China and India alone have 2 billion people, compared to the 300 million here in the United States. With the majority of those 2 billion people on the path of joining a middle class, we see their desire to have thing that the middle class is associated with. Cars, TVs, houses in urban and suburban locations, and many, many other thing that the U.S. has and they don't.

What does that mean? Well a couple of different things: First off, all of these items require base metals. Copper piping for houses, aluminum in toasters, and steel for cars. To take an isolated example, China's imports of these metals is growing at 60%, 70%, and 80%.

Don't forget about the exports of these countries along with China. With cheap labor, and a weak yuan or yen, the companies are exporting a ridiculous amount of goods. All of your our TVs, cars, furniture, clothing, and other goods that come from these countries require base metals and energy to make.

This brings me right to my next point. It also take energy to produce these items. China's imports of oil are running at an annual increase of approximately 100%. They build a new coal power plant every third week and have plans to build 3 nuclear power plants every year until 2020. So along with oil and coal, don't forget about uranium and molybdenum.

Also, China is now in the process of obtaining strategic reserves in base metals and oil. They will hold 30 days worth of oil. They will use their $1.2 trillion (USD) of reserves to buy into base metals, oil, precious metals, uranium, and the companies that mine and refine these goods. Any weakness in prices will be seen as a buying opportunity by China.

Ok back to the main point.

Will a U.S. lead economic slow down effect base metal prices?

No, next question.

Why was there a sell off of base metals amidst poor economic data?

Good question, I believe that there are still a large number of people who feel that answer to the first question is yes. Their selling is based on no economic data. As each year passes, the U.S. will be less influential on a global level. The notion that "if the U.S. sneezes the world catches a cold" is a dying one.