Metals Remain Attractive For Good Reason

By Kevin Grewal

As developing nations continue to prosper, grow and decouple from the Western world, the demand for certain alloying metals is likely to surge making them a highly sought after commodity.

There is a direct correlation with the demand for alloying metals and economic growth.  In general, as economies grow, they consume and hence demand more alloying metals.  Some of these metals, like aluminum, iron and copper are invaluable building a modern economy due to their roles in the development of roadways, communications and other areas of infrastructure.

Additionally, these metals are vital to the development and expansion of a nation’s manufacturing sector.  This was seen in 2009 as China’s economy and manufacturing sector grew forcing increased consumption and demand of copper, which further resulted in higher copper prices. 

As for the coming year, developing nations are expected to be at the forefront of economic growth and will likely be the drivers of increased demand for these metals.  Copper has positive fundamentals and is likely to see a market imbalance on the supply and demand side resulting in a deficit in the metal, pushing prices up. 

Aluminum is likely to see price support due to the general buoyancy expected in the base metal sector as well as improving demand.   As for iron ore, prices are likely to increase due to its fundamentals as well as basic supply and demand forces.  Demand is likely to increase in both developing and developed nations and supply is expected to remain relatively stable.  Rio Tinto (RTP), Vale (VALE) and BHP Billiton (BHP) are the world’s largest producers and suppliers of iron ore and are likely to benefit from these trends.

From a more diversified approach, the following ETFs could also benefit from the overall expected uptick in alloying metals:

  • the PowerShares DB Base Metal Fund (DBB), which holds futures contracts in aluminum, copper and zinc.  DBB closed at $21.23 on Wednesday.
  • the iPath DJ UBS Copper TR Sub-Idx ETN (JJC), which is an ETN that tracks the copper markets.  JJC closed at $44.26 on Wednesday.
  • the iShares S&P Global Materials (MXI), which holds BHP and VALE in its top holdings.  MXI closed at $59.30 on Wednesday. 

As with most commodities, these metals can be volatile and carry risks.  To help mitigate these risks, it is important to implement an exit strategy which triggers price points at which an upward trend could potentially be coming to an end and enable one to preserve equity.

According to the latest data at www.SmartStops.net, an upward trend in the mentioned ETFs could come to an end at the following price points: DBB at $20.20; JJC at $43.57; MXI at $57.08.  These price points fluctuate on a daily basis and updated data can be found at www.SmartStops.net.

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