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GoldSeek Radio interviews Dave Morgan and James Turk
12:25p ET Sunday, February 5, 2006
Dear Friend of GATA and Gold:
The story appended here from the business section of
Sunday's New York Times may be interesting for two
reasons:
First, it approves investing in gold and commodities
while carefully failing to mention the best reasons
for doing so, monetary debasement and strains on the
gold price suppression scheme.
And second, it asserts that Middle East oil producers
are putting surplus cash into gold, which is exactly
what GATA consultant Reg Howe recommended they do at
the Gold Rush 21 conference last August.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
* * *
Have Commodities Become the New Tech Stocks?
By Conrad De Aenlle
The New York Times
Sunday, February 5, 2006
http://www.nytimes.com/2006/02/05/business/yourmoney/05comm.html
Returning to basics has been a major theme in the markets. If
investors in the late 1990s took a bold leap into the future with
technology stocks -- off a high ledge, as it turned out -- they are
now embracing age-old economic mainstays like copper, lumber, oil
and gold.
A widely followed benchmark of commodity prices, the Commodity
Research Bureau index, reached a record high recently after nearly
doubling since late 2001. Shares of companies that supply these
materials -- gas pipeline operators, miners of industrial and
precious metals, forest products concerns -- have followed a similar
trajectory, but some analysts contend that prices have risen too
far, too fast.
"There are probably some areas that offer better prospects" for
investors "because commodity price expectations are very high," said
Stuart Schweitzer, global markets strategist at J. P. Morgan Asset
Management. "I would be surprised if the commodity-type stocks are a
top-performing group in 2006."
Commodities, especially industrial ones like copper and lumber, are
a bet on economic growth. Mr. Schweitzer expects continued strength
in Asian and other emerging markets -- a trend that has underpinned
commodity prices -- but he expects growth elsewhere, especially in
the United States, to be more subdued than it was in the last couple
of years. "I suspect the U.S. economy will slow down somewhat this
year," mired by softness in housing, he said. "If that's right,
commodity demand will ease back along with it."
Some fund managers with portfolios that specialize in commodity
producers are also beginning to show concern about rapid price
gains. While they maintain optimistic long-range outlooks, they
express reservations about the near future.
"We're going through a long-term recovery from stupid oversold
levels," said Fred Sturm, who manages the Ivy Global Natural
Resources fund. "Prices of many of these commodities were
unsustainably low." In the late 1990s and early 2000s, he pointed
out, gold and oil traded at nearly 20-year lows after having fallen
by more than two-thirds.
The depressed prices helped to force commodity producers to merge --
Alcoa and Reynolds in aluminum, for example, and Exxon and Mobil in
energy -- and to take other steps to improve their finances. That
drove the first move in what he expects to be a three-stage rally in
commodity markets.
The last stage, he predicted, will be "a true scarcity phase when
Mother Nature slaps us in the face and grabs our attention and tells
us we're running out of commodities like oil when people keep
wanting more."
But that's well in the future, Mr. Sturm said. Right now, "we're in
a big fat middle phase where commodity prices are expected to remain
above their average ranges but will not continue to trend higher,"
he said. "We expect them to modify from recent levels in energy and
in some of the metals, including copper."
He described his view of commodity stocks during this stable period
as "persistent but moderated bullishness" and said valuations "are
still very attractive, even if earnings don't continue to grow at
the same supercharged pace" as in recent months.
A bit more than half of Mr. Sturm's fund is invested in energy
suppliers, including ChevronTexaco, Thai Oil, and Massey Energy, an
American coal mining company. For the last six months, he said, he
has been allocating more of the fund's $2.5 billion in assets to
producers of precious metals as a play on growth in developing
markets.
"Gold remains a form of money, and in much of the emerging world
where they don't trust what comes out of the ATM machine, people may
buy an extra gold bangle and store it as money," Mr. Sturm said. He
said too that energy producers in the Middle East and elsewhere were
prone to buying gold with surplus cash, of which they have plenty
these days.
His bet on precious metals is also a hedge against unforeseen
negative events. "Gold is the best form of insurance when you're not
sure what you're insuring against," he explained. Among the miners
of precious metals in his portfolios are Buenaventura in Peru and
Impala Platinum in South Africa.
John Hill, an analyst at Citigroup, says he also thinks that the
rally in gold has further to go. He has told clients that prices
have continued to climb against an economic backdrop often
associated with weakness for the metal, including rising interest
rates, controlled inflation and a stronger dollar.
"We continue to be positive on gold," he wrote, citing "healthy
underlying supply-demand fundamentals in the form of Indian
fabrication, Chinese retail investment, and recycled Middle Eastern
petrodollar flows."
Citigroup's analysts have buy ratings on Newmont Mining and Barrick
Gold and they are neutral on another large North American producer,
Placer Dome. They also recommend buying Alcoa, United States Steel,
and the specialty steel maker Nucor. Other prominent components of
Mr. Sturm's portfolio are Aracruz Cululose and Suzano, the Brazilian
pulp and paper companies; Nalco, an American water treatment
company; and Companhia Vale do Rio Doce, or CVRD, a Brazilian miner
of base metals.
Mr. Sturm highlighted one segment -- chemical making -- that
benefits when prices of other commodities fall. Energy is a major
cost in chemical production, and with energy prices due to moderate,
in his opinion, the chemical makers could thrive.
He is especially optimistic about suppliers of industrial
gases. "Companies may enjoy stronger profitability and an ability to
pay down debt" for the next two years as prices increase for the
gases they manufacture, he said. Shares of companies like Praxair,
Air Liquide, and Air Products and Chemicals "are more attractive
than they may appear." The outlook for Praxair appears so bright
that one investor who seldom buys commodity producers, Rick Drake,
co-manager of the ABN Amro Growth fund, keeps it in his portfolio.
Mr. Drake shuns commodity stocks. "They tend to be cyclical
companies," he said, "and our focus is on consistent, sustainable
growth through all parts of the cycle."
"They do well when prices skyrocket," he added, "then eventually
someone comes along and builds up supply, the price comes down and
companies get hurt."
Praxair's performance is not nearly as volatile, he said. It is a
basic materials company producing hydrogen, and Mr. Drake expects
its use to expand. "The hydrogen business has been real strong
because of oil," he said, "not because oil prices are higher, but
because environmental laws are such that when you get low-grade
crude oil, you need more hydrogen to refine it."
Hydrogen also produces efficiencies in steel making, Mr. Drake
noted, and is used in clean rooms for, among other things,
semiconductor production. "It is more of a play on industrial
production" than commodity price inflation, he said, describing
Praxair as "a very steady, consistent growth company."
Steady growth is desirable, but investors are often willing to take
a chance on companies with more volatile earnings streams if they
believe they can catch the upswing. Gil Knight, a senior portfolio
manager at Gartmore, contends that the rally in commodity prices is
robust enough to warrant significant exposure to the sector,
although he also worries that prices may have moved ahead too fast.
Mr. Knight has long held shares of oil drilling and exploration
companies, such as Hilliburton, Ensco International, Southwestern
Energy, and Range Resources, but he warned against following his
lead.
"I wouldn't buy any of these stocks up here," he said. "They're in
nosebleed territory." Still, he said, "in terms of percentage gains
versus other industries, I don't think they're going to do as badly
as people think."
He finds greater opportunity in other industries. He said he added
to his position in Freeport-McMoRan Copper and Gold in January, when
the stock dipped slightly amid allegations that the company had
inappropriate ties to the Indonesian military. Its shares have risen
about 50 percent in the last six months.
His other favorites include Jay Global, a manufacturer of mining
equipment that he called "a fantastic little company," and two
suppliers of cement and other basics, Florida Rock and Vulcan
Materials.
He agreed that commodity prices would be supported by strength in
emerging economies. "If you pay attention to growth," Mr. Knight
said, "you have to stick with energy stocks and probably some
commodity stocks this year."
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http://www.a1-guide-to-gold-investments.com/euro-vs-dollar.html
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Ted Butler silver commentary archive:
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----------------------------------------------------
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