By Dan Oancea

"Bull Market is a random market movement causing an investor to mistake himself for a financial genius.

Bear Market is a 6 to 18 month period when the kids get no allowance, the wife gets no jewelry and the husband gets nothing."

Note: If you liked these little jokes pay a visit to these folks - they are hosting a whole bunch of financial jokes.

Getting a little bit more serious I want to share with you a meaningful commodities insight that was provided to us by Bill Belovay at Vancouver’s Mineral Exploration Roundup in late January 2008.

We have to admit that metal prices are governing the exploration and development money available on the market at any given time and (un)fortunately our technical jobs too – geologists, metallurgists, mining engineers, we’re all weathered not only by wind and rain but also by traditional economic cycles. I realize that I just omitted an important weathering factor: beer – well, nowadays from an investor’s point of view aluminum kegs seems to be as good as gold – i.e. aluminum prices have recently skyrocketed. As far as I remember, Bill tipped us into buying beers hops, too. Can’t remember why though…

Back to metals. I wish it were just those straight, easy to understand factors that are generally regarded to influence the future of metal markets – i.e. supply and demand. Because it is not, enter Bill, who is a Vice President and Portfolio Manager, Canadian Securities, Jones Heward.

The magical word here is Portfolio Manager – they’re the literati of the financial markets and we have to pay attention to what they have to say, and we have to try to uncover things that they’re trying to hide. They’re better and more successful than any of the world’s best poker players. They’re making the news even though they avoid being in the spotlight.

I’ll start by giving you the good news. According to Bill we’re on a strong secular Super Cycle. We are rising and metals are going to outperform the poor Dow Jones. What are the fundamentals of this new demand? It seems that we’re actually experiencing the largest mass-migration in the history of mankind – some 200 million people to be urbanized by 2020. That means building infrastructure, which also translates in increased metals demand.

What to look for when guessing trends?

The London Metal Exchange is the world’s leading market for non-ferrous base metals trading and it has a network of warehouses around the world that stock metals. This network is described as a market of last resort where users can buy and sell metals. The rule is simple: whenever their stock inventories are down, metal prices go up. Keep an eye on the LME Warehouse Stocks by regularly checking InfoMine’s Commodities section. The value of the LME stock inventories: somewhere around 4 billion dollars.

I’ll give you a few figures and I hope that my notes are right – I wrote them down as fast as I could once I realized that important data is going to be revealed to an audience made of rock lovers – i.e. ore and minerals not Led Zeppelin and Kiss.

An important factor is the size of the metal markets, and you will see that they’re not that large:

Remember the Hunt brothers who tried to corner the silver market some years ago? Nowadays the game is pretty much the same – big financial funds try and succeed in influencing the market.

How much would you need to control the price of any given metal? No more than a mere 0.5% of the targeted market’s volume. So let’s see, in the case of palladium you need a mere 150 million dollars to get the price where you want to be – it already happened in 2000 and 2001 when the 1,100$/oz Pd peak was a result of speculative actions taken by brazen investors. Indeed, this is how Portfolio Managers would make money – they would drop a fraction of the money that they have on their hands on a tight metal market and then they would get out when the price is right for them, of course at the expense of the small investors and honest natural resource companies. At least this is what we found out by following Bill’s presentation. One of the speakers, a distinguished geologist frankly remarked that he didn’t know that somebody could ‘jerk’ the price that easily.

Considering how tight most of the metal markets are it would be no surprise to see speculative prices wandering high before diving back. Note: total investments in the commodities market amount to 142 billions of which 3 billions are invested in precious metals markets.

A few more sketchy notes derived from Bill’s speech:

- Silver market is thin; some might pump money to manipulate prices. Note: I want to add here that according to a presentation hosted by the Silver Institute in 2008, fabrication demand would be slightly lower, production higher but investment demand will keep prices up.

- Platinum: power failures in South Africa and environmental uses would keep the price up. Some speculation possible though.

- Palladium: this is a sensitive price for North American producers because deposits here have a higher Pd : Pt ratio than in South Africa.

- Rhodium: is pretty much at the peak now.

- Diamonds: keep on rising on real terms.

- Iron ore: there is no speculation here; prices would definitely go up.

- Zinc: spiky, many speculators.

- Copper: lots of funds are playing it.

- Nickel: has already achieved some historical high prices.

- Molybdenum: very thinly traded market; is open to doing funny things; it almost reached its peak; can be substituted by other metals. Note: others are arguing that huge steel demand would keep the prices up; and that it looks like oil & moly prices are highly correlated.

- Cobalt: other thinly traded market.

- Uranium: thin market too; investment banks started buying and raised the price, which by the way it has already reached its peak.

Bill also indicated that copper and zinc prices are expected to go up 20-50%. And then he said that big funds try to make you little investor to do crazy things, so he provided us with yet another important means of measuring the health of the metal markets: the largely unknown Baltic Freight Index .

Some 250 years ago merchants and sea captains started to meet in a humble coffee house in the city of London. Nowadays, the Baltic Exchange arranges for the ocean transportation of industrial bulk commodities from producer to end user and also calculates the Baltic Dry Index , an index that shows how much it would cost you to ship by sea some dry mineral concentrate or cement, or coal (in our case). Basically it gives you an insight into global trends of supply and demand.

Why would you care about the BDI? Read this Daniel Gross article and remember that while the index deals with commodities (‘precursors’ to production) it is totally devoid of speculative content. It shows a high correlation with demand and also with interest rates – e.g. a higher index would mean a higher demand and is immediately trailed by higher metal prices.

Hope that my little incursion into financial and metal markets made you a little bit more knowledgeable of risks associated with investing, deciding to go ahead with an exploration program or opening a mine. Or it might just provide you means to take the pulse of the market prior to accepting another exploration job in the bush instead of a steady environmental office job.

Speaking of which, do you know that over a year a full-grown moose through ruminant processes – belching and farting – emits 2,100 kilos of carbon dioxide? That is the equivalent of a 13,000 km trip for a regular car and more than it takes a commercial plane to fly two return trips from Oslo, Norway to Santiago, Chile. When are we going to see a Kyoto Accord for ruminants too?!