Copper, Oil, & Silver

Silver Stock Report

by Jason Hommel, July 20, 2005


So, do you feel you missed out on investing in oil since it made the move from $10/barrel to $60/barrel? Don't worry, not all commodities move up at the same time, so this means there is the opportunity to invest in those that have lagged behind, such as silver and/or copper.

It is important to look at charts of ratios between commodities. For a good site with these charts, see sharelynx.com, (access for paid subscribers only).

In 1980, at the prior peak prices for both silver and oil, oil hit about $43/barrel, and silver hit $50/oz. In other words, an ounce of silver was worth more than a barrel of oil.

At the recent low prices of silver and oil, a few years ago, silver languished at $5/oz., and oil bottomed out at $10/barrel.

Using those high/low prices as guides, and given the price of oil today, silver should be somewhere between $30 to $60 per ounce! Either that, or oil should be worth between $7 and $14/barrel. But which is more realistic?

My point is that if you are bullish on oil, you should invest in silver instead, because in the long run, silver will surely outperform oil prices as the ratios return to historic ratios of 2:1 or 1:1. See also "Of Oil and Silver", by Yi-Chang Wang, April, 2005. www.gold-eagle.com/editorials_05/wang040405.html

Wang point out that a historic divergence between oil and silver was in 1974-76, when oil was at $14-16/barrel, and silver at $4-6, for a ratio of about 3.7. Today, the ratio is over 8! Wang makes the dramatic conclusion that 0.1% of the Oil industry is $2.3 billion, which, if it went into silver, would overwhelm the silver market, and I agree. (Remember, the Huntbrother's oil money, and Arab oil money went into silver in the 1970's.)

Furthermore, remember the advantages of silver and why silver is used as money, and why oil isn't. People who wish to invest about $5000 can either invest in about 90 barrels of oil or buy 1 bag of silver that weighs 55 pounds. Which is easier? The silver is infinitely more convenient to buy and store! The masses are never going to store oil in barrels on their front lawns. But the masses will return to buying silver and gold as paper money continues to lose value.

And what about copper? At current prices of $1.60/lb., $5000 is 3125 pounds. Again, it's not nearly as convenient as 55 pounds of silver! Furthermore, most copper is produced in a form that is inconvenient to store, such as pipes or wire! Copper's recent low price was $.70/lb.

I'm interested in copper because I have invested in several silver exploration companies that also happen to have copper with their silver, such as O.T. Mining (OTMN.PK), Mines Management (MGN), and Capstone Gold (CSG.TO). Just in the course of keeping track of my stock picks, I've watched copper prices rise over 100% in the last few years.

The copper market may be getting ready to see prices explode upwards. Now, if copper moved up 6 times like oil has, copper would be $4.20/lb.! I don't think that's unrealistic, since the oil market is probably more than ten times bigger than the copper market, and it's much easier for smaller markets to see greater volatility.

Copper, like silver and oil, is traded on the abominable futures markets where liars make promises to deliver things that they do not have. Call it "phantom" copper, these excess promises to deliver copper that does not exist. To see my full disdain for the other participants in the futures markets, see my essay, "The Moral Failures of the Paper Longs." January 2003 www.gold-eagle.com/editorials_03/hommel012203.html

The most interesting data in the copper market is the copper in the warehouses at the LME and the NYMEX. You can find this data here:
www.kitcometals.com/charts/copper_historical.html

The LME is down to only 28,000 tonnes of copper left, down from about 1 million tonnes in 2002.

The NYMEX is down to only 13,500 tonnes of copper left.

It appears to me that both of these piles of copper will be gone in about two months, say, by the end of August, 2005. By that time, or sooner or later, perhaps we will see the end of copper trading on the LME and NYMEX if those markets default!

Here are a few recent articles on copper:
FOCUS: Copper Bias Remains On Upside In Near Term -- Monday June 27 http://au.biz.yahoo.com/050627/18/525x.html

Key Excerpts: "Driving the market are the lowest warehouse stocks in more than three decades, with no signs of an immediate turnaround. Last week, stockpiles on the Shanghai Futures Exchange fell 1.4% to 29,762 tons, while LME stocks shrank 7% to 32,100 tons.

China's sustained demand is a key component in the supportive short-term fundamental picture, Rennie said, pointing to recent data indicating China's copper imports and consumption generally will remain strong.

In addition, the Shanghai exchange has been something of a price maker in recent sessions, largely shrugging off downside pressure from the LME and New York's COMEX mid last week, he said. "

My comments: The LME and COMEX are clearly involved in price capping, by selling excessive amounts of futures contracts. They now have the lowest inventories in 30 years?! And it appears that China is calling the bluff, and taking delivery of inventory! China is not just some "speculative long" who is engaging in "manipulation". China needs copper for the things they make for us, and also for their own developing infrastructure!

The point is that China is not going to be bullied out of the copper markets by manipulative regulation changes that favor those people who are selling short "phantom" copper!

Next article:
Shanghai Copper Falls; Strike at Placer Mine in Chile Ends -- July 12 (Bloomberg)
www.bloomberg.com/apps/news?pid=10000086&sid=aP_bOCppjF34&refer=latin_america

Key Excerpt: Chinese copper output may rise to 2.45 million tons, from 2.035 million tons last year, Yang Changhua, an analyst with Antaike, said in an interview from Beijing. Antaike is a research unit of the China Nonferrous Metals Industry Association.

Next article:
Commodity Strategists: Copper to Fall, Canaccord Says -- July 19 (Bloomberg)
www.bloomberg.com/apps/news?pid=10000082&sid=aIG7_ykmiRDs&refer=canada

Key Excerpts:

Copper prices, which reached a 16-year high of $1.61 on June 17, will remain above $1 a pound on average through 2007, said Barnes, who was rated the top metals and mining analyst in Canada this year in a survey by research company Brendan Wood International. Copper averaged less than $1 from 1998 to 2002.

Prices rose 41 percent last year as consumption in China, the world's largest buyer of the metal, climbed, leaving a supply shortage of 755,000 metric tons, according to estimates from the Lisbon-based International Copper Study Group.

Global copper demand exceeded supply by 59,000 tons in the first three months this year, compared with a deficit of 452,000 tons a year earlier, according to the International Copper Study Group. The gap is narrowing as mining companies increase production.

My comments: First, who is "Brendan Wood International" who endorses Barnes's view that copper prices are headed lower? Thank the Lord for google.com. see www.brendanwood.com

If you go to their web site, you can see that they are consultants to the big moneylenders, and active promoters of derivatives. To me, that appears that they have a stronger bias than I have--and my bias is as a Christian and a shareholder in the companies I mentioned above.

But more importantly, the headline in the last article does not seem to match the facts! There is still a deficit in copper of about 20,000 tons per month! That means the LME and NYMEX stocks could be completely used up in about 2 months! Further, given the rates that copper has been leaving the LME and COMEX warehouses, that figure seems about right!

A default of futures contracts in the copper market could lead people to understand the fraudulent nature and harmful effects of naked short selling in the silver and gold markets. Perhaps in a month or two, or perhaps by the end of the year, I think we will see something that will be long remembered, and could change the landscape of American markets forever.

Besides the three silver/copper explorers that I hold (OTMN.PK, MGN, CSG.TO), here are a few other silver/copper companies that I do not own, but you might consider examining:
Explorers: Western Silver (WTZ) (formerly Western Copper), CHARIOT RESOURCES (CHD.V CHDSF.PK)
Producers: Polska Miedz (KGHM), Grupo Mexico (GMBXF.PK)

On July 15th, I produced a new silver stock report, #57, at
www.silverstockreport.com/reports/silverstockreport57.html

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Jason Hommel