When Hot is Not?

Every month, in one of the portfolios that I follow, called EXPLOSIVE MINE STOCKS, I summarize performances of my stock picks by sector. For the month of March, the three best performing sectors in ascending order were copper (94.50%), gold (105.73%) and uranium (165.78%). However, for the month of April, the list looked like a mirror image, with copper taking the lead and gaining 118.70%, closely followed by gold (118.05%) and uranium (106.18%).

I know I’m not saying anything you haven’t heard before, which is that most commodities are hot. Then again, some appear hotter than others. The next logical question is, of course, when hot is not? Judging by the recent business press, most mining analysts are flashing sell signals for copper. But for some reason, buyers of copper stocks could care less, particularly if they are investing in Canadian companies.

So, what is making the case for copper at the moment? Well, the metal has a wide industrial application, from wiring to plumbing to cars. Just in the last year, the demand for copper has tripled. And, since the beginning of this year, it is all but slowing down.

Literally adding fuel to the fire was a recent announcement from BHP Billiton, the largest mining company in the world, presenting an extremely bullish outlook for copper. At the heart of it was a forecast that copper has at least until 2008 before the balance between demand and supply is restored, or at least brought down to more reasonable levels.

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Of course, the moment there is someone daring to think positively, hundreds of contrarians line up to poke holes in its argument. I’ve read what copper skeptics had to say about copper’s prospects, and was surprised to find little concrete proof that the party would soon be over for the metal.

In essence, their claims revolve around a “gut feeling” that such bullishness cannot continue forever. But, since they are talking about such an unpredictable variable as the “gut feeling,” no one is willing to commit publicly and say why their “gut” was “feeling” so poorly.

The only valid point that copper contrarians made so far has to do with excess liquidity. This is particularly the case in the U.S., where easy credit and overworked money presses are simply drowning the economy in fiat money, and increasing speculative activities in the process.

On the other hand, Canadian and U.S. economies are vastly different. Unlike the U.S., Canada has much tighter monetary and credit policies, and it operates within an environment of current account and fiscal surpluses, instead of devastating debt and deficits. So, at least up here, the excess liquidity argument can be scrapped.

In my book, a “gut feeling” is too weak an argument against hot commodities. True, after hitting a cyclical low in March of 2000, Canadian mining stocks have gained over 1,000%. It is also true that whatever goes up must come down.

However, before the cycle turns against copper, or any other commodity for that matter, so many unlikely things have to happen first. For starters, China’s demand for all commodities, including copper, will have to be satisfied. (Yeah, right!) Then, geopolitical instabilities have to be resolved. (Sure, no problem!) Then, the world’s largest economy has to get rid of its debt and fiscal deficits before collapsing everyone else’s. (OK, that’s enough!).

Then, perhaps, investors will stop running towards tangible assets, such as gold, silver, or copper. In the meantime, there is nothing wrong with investing in mining stocks. Especially if you pick the companies headquartered, and with mineral deposits located, in one of the few economically stable places left in the world– Canada!