Investors ride the wind as LME speculation grows

The whirlwind of base metals prices is as wild as ever, owing to the sales policies of producers over recent years.

Those policies consist of selling all output at the best price the market can provide (based mainly on the London Metal Exchange, or LME, quotes). The effect has been to push surplus materials on to exchange stockpiles where they are not only visible but available to all who wish to take positions. Consumers, traders and producers (Inco, for example, is in the latter category) are often buyers and sellers on the exchange; they hedge exposures by freezing transaction prices and profits associated with their normal business activities.

In addition, the market is also open to anyone — investors, speculators, and even producers who sometimes buy or sell material. Lately, we have seen the rise of the well-heeled and researched investment fund industry whose manoeuvrings in and out of exchange metal inventories are reaching new levels of sophistication and impact. Even for funds whose bylaws prohibit the direct buying of metals, options markets have grown to accommodate their needs. The combined activities of all the parties are creating an environment in which prices for the rather small amount of metals stored on the exchanges can be manipulated at ever-increasing rates.

Announcements of production increases, difficulties, or curtailments by major suppliers — or just leakage announcements by large investors in a particular metal — can have a profound impact on how investors react. The recent, sharp and (at least for the short term) unsustainable run-up in gold and silver was an example of what can happen when a few major investors announce that they intend to buy gold. (Apparently, most of their buying was in options and not in physical metal.)

The recent technical tightness in copper and last year’s similar run-ups in lead and zinc are other examples of major, undisclosed attempts to move prices.

While producers appreciate any improvement in price and while their shareholders may be temporarily happy with the results therefrom, small investors and shareholders may have reservations when all the bullish activity suddenly evaporates and the bears arrive.

Accountants and metal exchanges, like the stock exchanges, may soon have to set material disclosure requirements for those taking positions which could harm small investors.

During September, precious metals retreated to consolidate at lower levels, awaiting further news regarding currencies and the political upsets in Russia and South Africa.

Gold prices to date in October (all parenthetical figures refer to the previous month) are holding steady at US$356.47 (US$355.56) per oz. Gold rose this past week to US$366. If this upturn is sustainable throughout the month, it would indicate that perhaps the market has rebounded off its recent lows and will test the July US$400-per-oz. level. Like gold, and for all the same reasons, silver was steady at US$4.21 (US$4.22) per oz. and then rose this past week with gold.

Good news for platinum group metals: Consistently good auto catalyst numbers and stronger Japanese buying for jewelry supported platinum, at US$361.99 (US$362.49) per oz. Palladium, which is more widely used industrially and which was also buoyed by news of the development of a palladium-only auto catalyst in Japan, rose to US$126.56 (US$121.37) per oz. Mainly as a result of the auto catalyst news, spot rhodium showed strength at US$1,025 (US$950) per oz.

Still beset by high inventories, and with market-watchers expecting more severe cutbacks, base metal prices nevertheless held and began moving up slightly. Investors seem to be anticipating long-term improvements. News that Russia is decreasing production and that Inco will cut output significantly beginning at Christmas caused LME nickel prices to bounce off their recent spot lows of US$1.82 per lb. However, October is still showing a lower average to date of US$1.92 (US$1.97), as LME inventories again jumped to 118,572 (115,668) tonnes. If the other nickel producers do not follow suit, it is unlikely Inco will allow its market share to deteriorate by being the only one to reduce output.

In quiet but firm trading, cobalt prices in October are steady so far. Western brands are at US$13 (US$12) per lb., and Russian at US$11.50 (US$11). Recent closure announcements by producers and by secondary refineries are causing shortfalls in lead and zinc mine concentrates. This is now having an impact on refinery production and will eventually ripple into the finished metal markets.

LME lead prices have been in a narrow range, at US17 cents (US18 cents) per lb., as LME stocks were up slightly at 287,250 (287,525) tonnes. Meanwhile, LME zinc stocks increased again, reaching 808,800 (797,650) tonnes as prices eased slightly to US40 cents (US39 cents) per lb.

When the governing board intervened to ease the squeeze on the shorts, copper prices quickly dropped to US76 cents (US84 cents) per lb. as the combination of LME and Commodity Exchange of New York inventories rose again, to 683,691 (675,284) tonnes. Now produced mainly as a byproduct of copper mining, molybdenum oxide traded quietly at US$2.55 (US$2.45) per lb., with producers attempting higher fourth-quarter quotes.