There’s an old traders’ story from the Chicago commodities market. It’s about a tank of corn oil, a roaring bull market... and a lot of foolish speculators.

Traders were buying and selling tanks of corn oil for higher and higher prices as the bull market raged. Of course, the physical tanks themselves never moved. All that moved was the traders’ hands and tongues as they struck deals for these tanks... usually for a higher price than the last contract. 

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Eventually, of course, it was time to actually make use of the physical commodity. The tanks of corn oil — which the market had been going crazy for — were opened.

I’m sure you can guess the punch line. Yes! The stuff had sat there so long it was completely inedible. As such, it was utterly worthless!

No one had obeyed a basic market adage and checked the fundamentals. We can — and indeed should — learn from this when it comes to investing in metals.

Just now the "fundamental" that needs checking for metals is physical demand. The big speculative punters’ funds seem to be retreating from playing metals as a haven from currency, inflation and other perils. Figures just out for net long positions — bets that prices might rise — are down 11% for gold and 2% for silver. So trade buyers are needed to support prices.

Who’s actually USING all this metal?

It’s a time for questions! What is the real demand for metals out there? Is China still stocking up with copper, lead and zinc? Factories are expected to shut down to cut pollution at the Olympics. But will demand step up after that?

Traders are on tenterhooks awaiting the World Gold Council’s quarterly report, due in a few days. Key for precious metals is buying at the gold stalls of India’s bazaars, the counters of Manhattan, Beijing and Dhubai stores or Geneva jewellers? Fortunately business in the bazaars is picking up.

India’s jewellers are doing brilliantly now that gold is down from its peak. Also, the price is now relatively stable — an essential for gold buyers on that continent. In eastern markets jewellery is bought by weight. So the cheaper the price, the more metal can be put in the bangle!

The latest figures show Indian jewellery demand — both at home and abroad — is up. Indian gem and jewellery exports rose by 36% in May compared to a year ago. They now stand at to $1.8bn. Shipments, mainly gold jewellery, were up almost 50%.

And domestic demand also looks robust. India leads the world in growth of high-net-worth individuals — the numbers are rising by 23% a year!

Indian merchants say that if gold does down below 12,000 rupees per 10 grammes, then buyers will be even more enthusiastic. Right now it is hovering just above that level. If India has a good harvest — which, of course, will boost revenues — then we could see very strong demand...

Global demand remains strong

China is busy shopping, too. Hong Kong’s orders of diamonds and jewellery from India were up by 42%.

Neither Singapore, the Mall of the Emirates nor jewellers in Geneva has yet seen cut backs on watches and gems, according to the FT’s latest Watches and Jewellery round-up.

And for the base metals, US investment bank Lehman Brothers forecasts that supplies are shrinking. By the end of the year copper stocks at benchmark market the London Metal Exchange could be down to 1.25 weeks of demand. Aluminium stocks are forecast to reach 3.34 weeks, zinc and lead 3.07 weeks and 1.25 weeks. These are all around half historic long-term averages.

As Lehman’s director of metals research, Michael Widmer, commented, miners are having all sorts of production problems. Shortages of machinery, labour and power are rampant. Costs are soaring. Yet, he added, major customer China’s appetite is still strong — its industrial production expanded by 16% in May.

The general economic backdrop may not be encouraging right now. But prospects for the metals are all still looking good...

Erin and Isabel

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