Grandich: Time to Look at Base Metals Again
The rapid deleveraging in asset markets has hit everything, including commodities. The wholesale dumping of commodities by investors, especially those that have seen strong demand until lately - crude oil and metals, suggests that reducing leverage is the overriding concern. There was a lot of leverage into this market and funds are basically being forced to sell to meet redemptions.
The first thought is to stay out of the way until these funds are done “puking up their positions.” Crude oil lost 7.5% to close at a 16-month low of $66.75, while heating oil closed at its lowest level in 14 months. Wheat hit a 16-month low as well, and copper and gold were down sharply as investors sold commodities en masse. The dollar’s strength contributed, but analysts attribute the weakness more broadly to fund sales and expectations of reduced global demand. They just want out of commodities and it’s all tied to the same thing we’re fighting with, which is worldwide concern over economics.
I’ve been avoiding base metals for almost two years but believe we’re now approaching levels that are getting quite attractive for anyone with a time horizon measured in months and years (versus hours and days). Therefore, I’m no longer bearish and believe base metals like copper are now worth accumulating on a scale-down basis (you buy some now and more if and when it continues lower). Don’t look for immediate gratification as the commodity plunge is not over. However, if there’s still anyone out there who doesn’t believe the world is over as we knew it, the time has come to entertain base metals as an asset to acquire over time. Yes, I know all those screaming bulls at $4 copper have either turned bearish or headed for the hills but that in itself makes me want to look again ( I took lots of heat when copper was $4 and supposedly going to $6 or $8. Many emails told me I was missing the boat).
In the coming weeks zinc, nickel, silver (it’s a base metal even though it’s still called a precious metal) and others should enter a buying zone.