A tarnished outlook for base metals

UBS SHOCKED short-term traders on Friday when it issued a report calling time on copper’s upside. Spread betters should take note of the conditions facing industrial metals and consider switching to precious ones. UBS’s research says that the global environment in the fourth quarter will not sustain the big mining companies’ Antofagasta and Kazakhmys’ current share price. The spread better should pay attention because the fate of these mining companies is correlated with the copper price (see chart below). This could be a sign of things to come for other industrial metals since the economic conditions the research warns against are equally applicable – slowing factory orders in the West and lower demand in the East.

But RBS says the opposite, believing that there will actually be a supply deficit due to Chinese demand this winter. Spreadex’s Phil Gillett says that traders should walk away from the market if there are opposing signals and look elsewhere.

Precious metals seem to be the obvious choice. Gold is at a record high having hit the $1,300 mark for the first time on Friday while silver has hit a 30-year-high. The prospect of further quantitative easing is still on the cards and precious metals are likely to continue to act as a safe haven for as long as this continues. CMC Markets’ Michael Hewson says: “Watching out for indicators of improvement in precious metals prices is really a matter of watching out for the weakening of the dollar. For as long as that happens, they will strengthen.”

But there is speculation on whether gold or silver will be the better performer. Hewson believes silver will emerge from gold’s shadow. He thinks that the gold bubble could burst and could cause punters to flock to silver. There is a problem for long-term silver bulls though. There are silver mines lying dormant in Latin America. They were closed years ago when the price of silver collapsed. If silver continues skyward the owners could be tempted into re-opening them to meet demand. This would boost supply and prices are likely to fall. Interested traders should get in and get out quickly in case this occurs.

Platinum and palladium, however, are worth some consideration. Platinum is up 7.8 per cent this month while palladium has climbed 10.4 per cent. With plenty of potential for them to return to their April highs these could offer safe, easy climbs.

Savvy traders should steer clear of the murky picture presented by industrial metals and instead follow the momentum of precious metals.