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-- Posted Friday, 22 December 2006 | Digg This Article
The price of copper is down $0.15 a pound since Monday, and it’s only Thursday: a 5% decline in less than a week. Since mid-October the copper price has fallen by 18% and if you go back to the peak during May, the copper price is down 27% already. Boy, am I glad I stayed out of the copper market. I had lunch with Raymond Goldie, a Vice President and Senior Mining Analyst at Salman Partners here in Toronto, about six months ago. Ray is one of the smartest and most knowledgeable base metals analysts I know. During lunch I told Ray that I was bearish on base metals, particularly copper, because I did not believe the copper price was sustainable nor did I believe that Chinese and Indian demand for raw materials was properly understood by the market -- in short, that I thought the market is far too optimistic about the impact China’s internal economy is having on base metal consumption. Ray did not tell me that I had taken leave of my senses, but he did say that he did not expect the price of copper to fall significantly until the end of the year. He was right. Ray explained that the copper market would most likely remain tight until the end of labour negotiations in Chile since these often coincide with strikes that could disrupt production and delivery of copper to the market. The copper price was over $3.20 a pound during the first week of December and the sharp decline since then coincides with the end of labour negotiations, just as Ray said it would. Now that the market has no more fear of imminent supply disruptions, the copper price is correcting. The next logical question is how low we can expect the copper price to fall. I talked to Ray this morning and asked him that exact question. He said he expects copper to trade down to around C$2.50 a pound by the middle of next year. Some other analysts are more bearish, and expect copper to be below $2.00 by the end of 2007. Ray also believes that copper could fall below $2.00 but he does not have any particular timeframe in mind; he did, however, say that his long-term copper price forecast is somewhere between $1.35 and $1.50 a pound. If we see copper below $2.00 I think it will be time to start looking at copper investments again. Until then, I will just sit back and enjoy the show. While copper and other base metals prices have been under pressure this week the price of gold has held up very well. As you may recall, my biggest nervousness about the gold price is that a decline in base metals prices could drag the gold price down as well. The fact that gold held up this week gives me a little more encouragement that the worst may be over for gold -- but not enough that I would cast caution to the wind just yet. In contrast to copper, the gold price in US dollars is up more than 20% this year. This increase in the gold price can be explained by the decline of the US dollar exchange rate and the increase in US dollar inflation. The US dollar fell 10.37% against the euro, 12.51% against the pound and 7.62% against the Swiss Franc this year. On average, the decline of the dollar against these major currencies comes to 10.2%. In addition, the dollar was devalued by 9.6% as measured by the increase in M3. Adding 10.2% and 9.6% together we get 19.8%, which corresponds very well with the 20.2% increase in the gold price this year. I suspect we will see a similar rise in the gold price next year, if not more. But every time I think I have the market figured out it throws a curve ball, so I never take such forecasts too seriously. I wrote about Japan and the yen carry trade quite a bit this year, explaining that the end of Japan’s policy of Quantitative Easing and their announcement that they are ready to start raising interest rates implies the yen carry trade is over. This week Japan decided to leave their short-term interest rate unchanged at 0.25%. While Japan leaves its interest rates unchanged the yen carry trade is alive and well. The yen has appreciated by only 0.4% against the dollar this year and has, therefore, been falling against all the other major currencies alongside the dollar: it is down 10.7% against an average of the euro, pound and Swiss franc, and is even down 3.5% against the Chinese renminbi. Not surprisingly, the gold price in Japanese yen is up 20.7% this year. Gold acts as a store of wealth and a protector of capital in all currencies. I believe it is only a matter of time until the dollar starts falling against the yen as well, and that will most likely be the last shoe to drop. When it happens, I expect to see the dollar decline further against most currencies and the gold price (in US dollars) to rise to around $1,000 an ounce. Special Event I will be speaking at the Cambridge House Resource Investment Conference to be held in Vancouver, BC on January 21st and 22nd. On the day before the conference Cambridge House is testing a day of workshops during which I, and several other newsletter writers, will hold mini-seminars and introduce two companies of our choice. I chose two companies that I have substantial investments in and both of which epitomize what I look for in a small exploration company. Space for this event is limited and will be allocated on a first-come basis, so if you would like to attend please register early. I have attached a direct link to the registration site below: http://www.cambridgehousecollege.com/registerpve.asp Happy Holidays, Paul van Eeden PS Remember that if you would like to receive these commentaries by email you can subscribe free of charge at http://www.paulvaneeden.com/pebble.asp?relid=34. Rest assured, your email address will never be rented or sold. Disclaimer: This letter/article is not intended to meet your specific individual investment needs and it is not tailored to your personal financial situation. Nothing contained herein constitutes, is intended, or deemed to be -- either implied or otherwise -- investment advice. This letter/article reflects the personal views and opinions of Paul van Eeden and that is all it purports to be. While the information herein is believed to be accurate and reliable it is not guaranteed or implied to be so. The information herein may not be complete or correct; it is provided in good faith but without any legal responsibility or obligation to provide future updates. Neither Paul van Eeden, nor anyone else, accepts any responsibility, or assumes any liability, whatsoever, for any direct, indirect or consequential loss arising from the use of the information in this letter/article. The information contained herein is subject to change without notice, may become outdated and will not be updated. Paul van Eeden, entities that he controls, family, friends, employees, associates, and others may have positions in securities mentioned, or discussed, in this letter/article. While every attempt is made to avoid conflicts of interest, such conflicts do arise from time to time. Whenever a conflict of interest arises, every attempt is made to resolve such conflict in the best possible interest of all parties, but you should not assume that your interest would be placed ahead of anyone else’s interest in the event of a conflict of interest. No part of this letter/article may be reproduced, copied, emailed, faxed, or distributed (in any form) without the express written permission of Paul van Eeden. Everything contained herein is subject to international copyright protection.
-- Posted Friday, 22 December 2006 | Digg This Article
Previous Articles by Paul van Eeden
Paul van Eeden is an independent investor, analyst and newsletter editor.
Born in South Africa, Paul graduated from university with a degree in chemistry and applied chemistry with additional credits in accounting, economics, business economics, philosophy, statistics, mathematics, biochemistry and physics.
Paul's first business was an African art distributorship, of which he acquired a 50% interest during his first year at university in 1985. He has experience, either as an owner, manager or director, in plastics manufacturing, food supplements and cosmetics distribution, advertising & marketing as well as the manufacturing and distribution of gas detection equipment.
Paul van Eeden left South Africa in 1994. He joined Yorkton Securities in Toronto as a stock broker in 1995 and moved to Global Resource Investments in Carlsbad, California in 1996. In November 2002, Paul decided to leave the brokerage industry and joined Doug Casey as co-editor of the International Speculator (www.internationalspeculator.com) newsletter.
His investment approach was shaped by the ideas of Benjamin Graham and David Dodd so Paul is always on the search for tangible value that can be bought at a reasonable price. That can usually be accomplished only during the trough of a market, which is currently not the case for general US equities.
Therefore Paul decided to focus on the natural resources sector, specifically gold. The period from 1996 to 2001 was a trying time - the bottom of the worst bear market in gold in twenty years - but, of course, it was also a time of opportunity.
At the San Francisco Gold Show in November 1998, Paul van Eeden introduced his original thesis that the gold price in US dollars is driven by the US dollar exchange rate, and that traditional commodity style analyses would not yield predictive results when applied to gold. He showed that a dollar-only view of the gold market is inadequate: understanding the gold price requires a global view, incorporating exchange rates across many currencies. This novel line of thinking is now ubiquitously accepted.
In 2003 Paul went further, showing that the price of gold in US dollars is tightly correlated to the expansion of US monetary aggregates (M3) and that an analysis of gold as money not only clarifies the gold price from 1971 to the present, it has other implications that are still unforeseen by most financial and commodity analysts today. One of these is that the gold price will soon exceed $1,000 an ounce. Another is that, aside from operational differences, not all gold mining companies will benefit equally from this increase in the gold price.
Paul van Eeden not only does his own research on the fundamental drivers behind the gold market, he also takes a hands-on approach to investment analysis: interviewing management, studying exploration projects and visiting mining operations. Whilst investing in mining and exploration companies is inherently risky, value is never far from his mind and features forcefully in his selection criteria.
Most of Paul's time, now, is devoted to finding investments for his own portfolio.
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The Last Shoe to Drop
