Strong Demand for Zinc

“Everyone is probably cautious, but everyone also has a decent equity allocation because you just don’t know when the music is going to stop, so you have to keep playing the game,” says Geoff Wilson of Wilson Asset Management in today’s Australian. But what if you don’t like to dance with risk?

The institutional investors-the ones who dance with other people’s money-have no choice. To them, risk is a tipsy dance partner in heels and a red dress with loose morals and quick feet, to be twirled around the floor in a display of careless excess. But as they are dancing with someone else’s partner (playing with other people’s money,) you might say institutional investors have no real personal risk, or risk, at most, losing a high-paying job.

We’re pretty sure institutional money managers don’t’ want to lose their jobs. Who would want to lose a job where you’re over-paid for average or below-average performance? And risking a little embarrassment by sending your dance partner for a very public tumble is not the same as, say, losing your retirement savings to a hedge-fund manager with two-left feet, which is exactly the risk you run when you turn your money over to the “pros.”

Here’s a dance tip: the stock market isn’t a dancing contest or a game, nor is it a savings account. It’s a capital market for buying and selling shares in public companies. And the risk of paying too much today for tomorrow’s earnings is a clear and present danger.

“Worries about the U.S. economy are bound to result in a few bumps in the market this week but there are at least two rocks that investors can cling on to-interest rates won’t go up but meal prices might,” the article concludes.

What are the bumps? On Friday we learned that the U.S. Institute of Supply Management’s Index showed the first decline in 41 months. The 49.5 reading indicates contraction, the opposite of expansion. Durable goods orders fell 8.3% in October. And construction spending fell by 1%.

We’re not sure it’s a good idea to cling to any rocks, particularly when most Western consumers are drowning the proverbial sea of debt. But if a rock won’t do, zinc will be more than acceptable. Goldman Sachs-Wall Street’s fabulously rich credit dealer-increased its price forecasts for zinc and nickel last week. Goldman does everything with a certain cravat-wearing panache, and increased its forecast for 2007 zinc prices by 49%.

This indicates the original forecast was dismal and uninformed. So why should we trust the new forecast? Goldman is now paying attention to those two most- basic of fundamentals, supply and demand. With a deficit of supply and surplus of demand, Goldman’s crack research team has “raised our price outlook for the year…. Demand for galvanized steel looks strong currently, driving strong demand for zinc metal… we continue to expect supply constraints as the industry struggles to cope with current demand.”

We like zinc as “rock,” which is why we tipped an Aussie-based zinc stock in a recent issue of Outstanding Investments. Aussie resource companies are in demand. And with a falling U.S. dollar, investing locally ensures that you won’t have any future capital gains destroyed by a stumbling American currency. This benefit to Aussie-based investing is comforting, but wouldn’t be the main reason for buying up local shares.

The main reason is that valuations in the resource sector aren’t insane yet, as they are in the financial sector, and that the fundamentals in the industry support higher prices. You can’t create resources out of thin air. You have to open a mine and dig for them. That takes time and money, and in the meantime, supply can’t be quickly ramped up to meet demand. You’ll know the bull market in zinc is well and truly over when you see a bevy of zinc companies listing on the ASX. We’re not there yet.

Dan Denning

Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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