By Dan Oancea


I have mixed feelings after attending the commodities talk. Maybe it’s because we’ve been bitten hard and we are still hurting, so we cannot easily digest some overoptimistic views. I found out that other participants subscribed to my opinion.

Let me explain it to you.

The first speaker delivered a nice talk focused mostly on stats. So we found out that G7 countries pursue a ‘socialist policy’ - you know the bailing out of innumerable private enterprises that went bankrupt because of their greed and stupidity. The same countries and governments basically penalize the cautious and reward the incompetent. I couldn’t agree more to that.

His predictions are that the economic downturn would last until 2010 and the recovery would come from emerging economies that are starved for raw materials - because they need a better life (they’re moving from bicycles to automobiles, computers and Blackberries) and they also have savings.

And the stats continued to pop up: India & China have 240 people per one car while U.S. have 2 people/car; in China they consume 1.7 barrel/person, in India 0.7 barrel/person, while the developed South Korea consume about 17 barrel/person; China jumped from practically the ‘Stone Age to capitalism’ in 30 years and in 5 years from oil exporter to net importer. Good and valid stats, no doubt about that; and the trends are indicating an underlying strength for the demand side, but …

Well, we heard the same lines last year during the bull market and we believed them, but now we watch TV and we see droves of Chinese workers (26 million) getting back to their villages because the city jobs simply disappeared. Once back home (at the countryside) they won’t consume anything else other than rice, they would wear home-made sandals and would spend no more - i.e. they would stop buying Western type items. It doesn’t look to me like they would move to cities anyways, regardless of the health of the economy which translates in job availabilities. It is not an implacable trend or a movement which has a life of its own; they’re not following any Joan of Arc; they’re following a trail of money – if money are to be made in large cities and jobs to be found there then here you go, you would see them migrating toward urban centers; otherwise they would stay home. At least back home they have a roof over their heads.

I would suggest that we pay less attention to what Chinese workers are doing and we just bring those manufacturing jobs back to America. And to Canada, and Germany, and Italy, and France. Millions of jobs have been exported during the last decade so it looks to me like a good moment to start encouraging enterprises to open factories in America and not in China, India, etc. And let’s penalize them if they continue to export jobs so they would lose their competitive edge generated by the extremely low wages that they pay in China, etc.

Back to the session: we’ve heard that governments print money (well, they own the press; and they just keep it rolling, duh); that leads to inflation so metal prices would go up. Well, commodity prices would go up but I want to find out what it is that is happening in real terms (costs). Because the costs would go up too. Profit margins during an inflationary period, anybody? I’m a geologist not a banker, so …

The difference between geologists/exploration companies and bankers/banks? Well, similarities are that they are both getting money from somebody else - the geos are getting money to spin the drill while the bankers are getting money to safely produce more money. The exploration company investor is aware that not every single hole would turn a profit (au contraire), but on the other hand each and every bank/financial institution investor would expect that every single cent that is invested in a bank would produce profit. The exploration company is upfront with the risks; the bankers are not – at least this is what the present financial crisis taught us.

I wasn’t impressed by the copper, uranium and silver presentations. Reasons? They looked like clichés to me; more like some apocalyptic Tom Cruise/Hollywood movie. Because most of all that was said was the same old same: a catastrophe that cannot be averted is about to unroll - the upcoming demand is huge and about to blow metal prices through the roof. It is about the unstoppable growth of the world’s population and their need for a better life, for Western type products, which translates in an increased need for metals. Well, here we go: January 2009, fundamentals are the same but I don’t see any spike in metals demand only because billions of people want a better life and more products. Au contraire. That simply means that other factors are also at play.

We all know about the supply side - mines that weren’t able to replace their reserves, no new major discoveries, not enough exploration, operational problems, environmental problems, geopolitical risks, etc.

What the experts/speakers tried to figure out was the demand side of the equation. And it is my opinion that we don’t have to be alarmist; we’re going to cope well with an increased demand – e.g. not all Chinese would move to the cities at the same time, etc. And yes, there is an underlying strength and metals do have a bright future – there would be shortages of certain metals, countries and companies would fight over some mineral resources, etc. But no panic or market manipulation, please.

What bothers me most is the small size of some of the metal markets which makes speculation easy – is speculation that confuses the market/investors to the point that you cannot forecast metal prices and use them in a decent feasibility study. The silver guy was also worried by the amount of investment in physical or not that physical silver that takes place right now; if things go wrong then one could expect the market to be flooded with silver and prices to crash.

The last speaker delivered an excellent gold presentation. He did the same thing last year and his last year’s gold price forecast wasn’t too much off.

I won’t get into too much technical detail but bullish arguments include: USD devaluation; affluent OPEC countries need to invest their money in a safe vehicle; central banks that want to increase reserves; investment to grow; and geopolitical risk.

Bearish arguments include: Recession reduces demand; dehedging would end (636 t only left to be dehedged after 2008); U.S. real interest rates will rise; euro and gold could recouple; and, a need for liquidity.

His forecast: 2009 gold prices would average $945; at the end of 2009 gold prices would be close to $995; and, a 2010 average was forecasted at $1,050.

He also provided us with a comforting view of banks, bankers and economists by telling us that bankers are not better than us; they’re buying at top and selling at bottom. That’s good to know but then, why do they commend such high salaries? The speaker provided us with an answer by telling us that economists are used to look backwards and for a hefty fee they’re going to tell you what would happen next. The problem is that they cannot see around the corners so they are able to figure out the trends only (up or down) and not specific events.

They cannot really see in the future but the economists and geologists are both doing the same thing - they identify a trend (mineralized for geos) and then they would build a chart by placing some dots on its inferred extension (geos are placing drill holes there).

Most analysts are saying that later this year or sometime in early 2010 we would start a recovery process. Fingers crossed everybody; conserve your cash; highly paid field geologists/professionals that found themselves temporary out of work – take it easy, visit some sunny places and drink even more beer if possible (‘una cerveza por favor’). Good times ahead, for sure.