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Coxe: Global bull market for metals has just begun

BMO strategist Don Coxe is singing the praises of “the music of the metals markets,” whose final movement will be “the longest and loveliest performance of metals music in history.”

Author: Dorothy Kosich
Posted: Thursday , 28 Feb 2008

RENO, NV -

In his latest "Basic Points" report, BMO Commodity Portfolio Strategist Don Coxe declared "platinum is the current commodity star" as prices have soared due to South African power failures.

"Ominously, the South African government's repeated failures to implement a program of strengthening the state-owned electricity system mean that such production cutbacks will last for years. At some point, the catalytic converter in a scrapped car could be worth more than the rest of the wreck," Coxe asserted.

"Although gold stocks have not, as a group, performed as well as gold in recent months (largely because of perceived political risks), shares of many junior, speculative gold and/or silver companies have produced rich rewards for their backers," he said. "It is paradoxical that the collective market value of the hundreds of gold exploration companies that trade in Canada, Britain and Australia has risen so sharply, while the value of the companies that collectively produce most of the world's new-mined gold has increased so moderately."

Coxe noted increasing skepticism from clients "about the investment merits of the leading gold mines. They say it makes far better sense to buy the gold ETF than to buy the miners. They cite growing political risks and soaring production costs."

"We respond that the least-risky investment strategy is to own both the gold ETF and the well-managed mines," he advised.

BULL METALS MARKET

Nevertheless, Coxe does believe that base mining stocks have been hurt by the mortgage mess as stock prices are sliding "and the margin clerks take charge." Meanwhile, the bursting of the real estate bubble has pushed the U.S. into recession, which "has always been punishing to the prices of industrial metals. Finally, if the U.S. and Europe enter recession, exports from China and India will suffer. That means, Wall Street believes, that the two fastest-growing large-scale commodity-consuming economies will no longer be supporting raw material markets," he explained.

Although Coxe believes "we have entered the time when western metal demand will shrink in response to economic slowdowns. This will mean a modest slowing in the growth of the total world demand for metals."

Nonetheless, Coxe asserts that "the global bull market for metals has just begun."

"When the commodity bull market began, the total global capitalization of mining stocks was less than the market cap of Microsoft and Cisco...Now, the major mines are the global giants."

"The BHP-Rio Tinto-Chinalco-Alcoa battle may end in the biggest merger in world history," Coxe noted. "That statistic in itself shows how China is changing the global economy. Faced with a takeover of the #3 iron ore shipper by the #2, China authorized a blocking attempt by one of its state-controlled entities. Alcoa, once the world's leading aluminum company, was tapped as the junior partner in the swoop that bought 12% of Rio Tinto, giving it potentially a place at the bargaining table-or maybe the dissecting table-where it can scoop up precious parts of Alcan."

Coxe asserted that what is needed "is to get the investment community to share the industry's new-found convictions about the impact of the Chinese-Indian renaissance. Already China's consumption of copper is roughly twice America's, and its demand for iron ore dwarfs U.S. demand. This is no mere hiccup, but a hinge of history."

"It has become clear that this is a once-in-a-millennium commodity boom that will last at least as long as the commodity crash-two decades," he declared

INVESTMENT RECOMMENDATIONS

1) Coxe advised that long-term investors ‘should remain heavily overweight commodity stocks, including the base metal stocks. As the bear market grinds on, use days of stock market weakness to add to commodity stock exposure. They not only remain the asset class with the best earnings outlook, but remain the asset class that is least understood by conventional asset allocators, who still see them as cyclicals dependent on OECD growth."

2) "In the near term, gold will continue to outperform stock markets and to act as a form of hedge against two kinds of shocks-financial panics and inflation stocks.

3) "With the commodity groups, continue to emphasize investment in companies with long-duration unhedged reserves in the ground in politically-secure regions."

4)"Long-term oriented investors should use any temporary pullback in base metals producers to build their portfolios for the Final Movement of the Sonata-which will be the longest and loveliest performance of metal music in history."

http://www.mineweb.co.za/mineweb/view/mineweb/en/page67?oid=48246&sn=Detail