The Case For Industrial Metals

Our research as to what asset classes make the most sense investing in over the next decade requires us to broaden our investment opportunities beyond the traditional ones of past.  During our search, one that comes off the lips of virtually every investing great that we come across, as well as numerous college endowments, is commodities.  We have all heard the stories about China buying large percentages (30% to 40%) of world supplies in steel, scrap steel, iron ore, coal and coke among other commodities.  Other reasons commodities make sense now include the fact that oftentimes they perform well due to their non-correlation with stocks and bonds and their counter-cyclical nature, economically speaking, their current low prices, the fact that inflation is creeping up, the falling of the U.S. dollar and the lack of stocks and bonds as viable investment alternatives.  Research provided to us by the Leuthold Group further confirms our thought process, but their most compelling argument is for industrial metals.

The following table presents a historical look at eight industrial metals which dates back to 1980.

	12/31/2004 Price	2004 Performance	2003 Performance	25 Year Price High	% Down From High	25 Year* Constant Dollar High	%Down* Constant Dollar High
Aluminum	$       1,963	23.5%	18.5%	$     3,246	(39.5%)	$     5,260	-62.7%
Copper	$       3,264	40.8%	49.1%	$     4,237	-23.0%	$     9,583	-65.8%
Lead	$        1044	41.8%	75.6%	$     1,044	0.0%	$     2,337	-55.3%
Nickel	$     14,877	-10.3%	134.5%	$   18,750	-20.7%	$   29,482	-49.5%
Palladium	$     186.50	-3.6%	-14.5%	$1,111.00	-83.2%	$1,213.20	-84.6%
Silver	$         6.82	14.8%	24.4%	$     35.20	-80.6%	$     85.30	92.0%
Tin	$       7,733	17.9%	51.3%	$   17,424	-55.6%	$   41,591	-81.4%
Zinc	$       1,254	24.9%	34.5%	$     2,050	-38.9%	$     3,223	-61.1%
	Average				-42.7%		-69.1%

Note-Historical prices for Palladium only go back to 1994

All prices expressed in USD per metric tonne, except Palladium and Silver-expressed in USD per ounce

*Constant Dollar calculation adjusts each month price by monthly change in the Consumer Price Index to remove the effects of inflation on price change

On average, these metals are still approximately 43% below their 25 year highs.  To get back to previous highs, a 75% gain would be required.  When adjusted for the effects of inflation (as measured by the Consumer Price Index), prices are, on average, 69% below their 25 year highs.  Therefore, a gain of 220% from today’s prices would be required.  Nevertheless, it appears there is plenty of upside left.  The real question is how to play this.  Unfortunately, this is not an easy play to make.  The Leuthold Core Fund is one way to have a small play.  We use this ourselves.  This fund invests 6.0% to 6.5% of its assets directly into their industrial metals partnership which invests directly into physical industrial metals not futures.  Investors can also invest in the partnership, but the minimum is high:  $500,000.  Still another possibility not yet available although this may change as they continue to develop new ones are exchange-traded funds (ETFs).  Realistically, if one were developed, it would invest in the stocks of metals companies themselves, not exactly a pure play either.

We continue to be extremely interested in this area of investment and will continue to research all possible opportunities.  We are enthusiastic about finding additional alternatives.