The Hindu Business Line : Is some more test of metal due?

The last question you may find answer for is `why metals.' Metals are commodities that are bought and sold. And commodities form a sizable chunk of the investment portfolio.

These days, the metal story has been testing the mettle of the average investor. For example, on Tuesday, around noon, Sensex tumbled by 400 points and the BSE Metal Index by almost double that, "following a crash in metal prices on the London Metal Exchange" the previous night, as the media reported.

`ASX steels for metal meltdown,' reported NEWS.com.au, less than a day ago. `Police to be issued with metal detectors to tackle knife crime,' informed Scotland Today, UK 5 hours ago, but none seemed to have such a detector when stocks came tumbling on the mid-May black Monday.

The Finance Minister, Mr P. Chidambaram assuaged the anxious, saying that the fall was "a correction provoked by reasons which are quite understandable." The factors he listed were the drop in metal prices, impact of cement prices, and increase in the US Fed rate. "All markets are doing the same," he added.

True. "The Johannesburg bourse's woes were worsened by gold and platinum mining shares skidding as much as 7.7 per cent, the biggest fall in 3-1/2 years, following a plunge in major precious metal prices," as http://za.today.reuters.com informed on Monday. And Trevor Chappell wrote, `Gremlins, metals cause headache,' on May 16 in a story on www.heraldsun.news.com.au.

When the situation is frenzied, and everybody is glued to the ticker, the last question you may find answer for is `why metals.' Reason is `quite understandable.' Metals, both precious and otherwise, are commodities that are bought and sold. Prices are driven by the economics of demand and supply, both spot and the futures. And commodities form a sizable chunk of the investment portfolio.

For instance, one of the links that you see in `Investing in Metals & Commodity Trading', a page on http://metals.about.com, is about the yellow metal, as talked about on www.gold.org. "Gold, as a financial asset, is in a class of its own," it educates. "Adding gold to a portfolio introduces an entirely different class of asset. Gold is unusual because it is both a commodity and a monetary asset. It is an `effective diversifier' because its performance tends to move independently of other investments and key economic indicators."

Look at another metal, copper, which "led a third day of commodity declines," as Bloomberg reported on May 16. It seems the prices had soared because investment funds were betting that labour disputes and production declines would ensure `better returns from commodities such as metals than from assets such as stocks and bonds.' Which explains how money moves, as if in an osmotic ambience, among different avenues, in an effort to find the source of high return. China and India find universal mention in the global media for the hike in demand for raw materials.

Interestingly, a May 16 report on http://biz.thestar.com.my says that copper futures in Shanghai rose to a record for a sixth trading day. "Copper stockpiles monitored by the London Metal Exchange fell 0.3 per cent last week, as makers of wire and pipes tapped inventory while supply from mines was disrupted by strikes."

The bull market in commodities is now in its fifth year, you'd learn from Saijel Kishan's May 15 story on www.iht.com. A rally `not seen in more than five decades,' adds Kishan. "Copper quadrupled over the past five years, gold more than tripled and oil doubled, meaning that the shares of companies that mine, process and trade those metals have staged equally impressive rallies."

Nils Pratley, writing on http://business.guardian.co.uk, assures, "For now, it's a correction not a crash." The May 16 article begins thus: "The stock market has not imploded. The dollar has not collapsed. The commodities bubble has not (yet) popped." A comforting opening, that is, because "a casual reader of newspapers in the past few days might think financial meltdown is at hand."

Another such sop comes from Caroline Baum's declaration `Commodities Pass Duck Test for Bubble Diagnosis,' in a May 16 story on http://quote.bloomberg.com. What's that test? "If it walks like a duck, quacks like a duck, acts like a duck, it's a duck," explains Baum. Walk of the commodities market is like a duck because "it's not normal for metals to move up 6 per cent a day," as per a quote in the story.

The quack is also disturbingly audible because of the disconnect, such as between copper and house construction statistics. "Year to date, the Standard & Poor's 500 Homebuilding Index, which includes large builders such as Pulte Home Inc. and D.R. Horton, is down 20 per cent while copper prices are up 86 per cent. Is China really buying all that copper?" wonders Baum.

Finally, the behaviour is getting duck-like with everybody getting on to the commodities bandwagon, be it Citigroup `doubling its staff at its commodities-trading unit worldwide,' or Calpers, the US' largest pension fund, `considering allocating 0.5 per cent of its $200 billion under management to commodities.'

Is the worst over, or yet to come? Eric Beauchesne of CanWest News Service, writing on May 16 reports both the views, when talking about how "fears that the ballooning commodity bubble may be over-inflated torpedoed Canada's currency and stock markets Monday."

From Down Under, Marc Moncrief wrote on www.theage.com.au about `jittery investors' slicing $22 billion from the Australian market. "Analysts said speculative money had inflated an investment bubble in commodities — metals, coal and oil — and the mining companies that extract them." He cites AMP Capital Investors chief economist Shane Oliver to say that `despite anxiety about a commodity bubble, China's demand shows little sign of abating.' Light at the end of the bubble, sort of.

Before wrapping, let's check for the latest on metals. Nick Trevethan anticipates that metals will remain volatile in near term, on http://business.scotsman.com, 58 minutes ago. And `Palladium trade body sees boost in jewellery demand,' according to Mining Weekly, South Africa, 47 minutes ago.

`Let there be some more test made of my metal,' challenges Angelo in Measure For Measure. So too, it seems, these are times when metal is put to test, more of which may be yet to come.

ZeroBase@TheHindu.co.in

D. Murali

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