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Metals Update

Bob Hoye
Institutional Advisors
May 24
, 2007

Base Metal Prices: The April 11 ChartWorks on copper outlined that a number of different technical tools were at the "tilt" reading.

The one we liked was the "Sequential Sell" pattern which was opposite to the pattern that got us in.

Copper's reversal was likely to be "right around the corner" and the high was 3.80 (NY) on May 7. It has plunged to 3.24 this morning.

With this the index of base metal mining stocks (SPTMN) rallied to 807 last week and is quite overbought. Usually the mining stocks will peak before the metal, but the mergers and all are remarkable.

These and the usual labour problems are indicating peak action.

This is well-timed as typically the final stages of a boom can run some 12 to 16 months against inverted interest rates. As mentioned above May is Month 15 and the end of speculation usually occurs fairly close to the reversal to steepening.

July copper is moving with steepening and has given up 14% in 9 trading days.

There is some significance to copper's latest extreme exuberance and failure. The high was 4.07 in May 2006, and that was the biggest rally on data back to 1900.


This compares the "big one" for gold which, adjusted by the PPI, soared 491% from 286 in August 1976 to 1693 in January 1980.

However, this is modest when compared to the 840% gain made by nickel's adjusted price from 5,757 in November 2001 to 54,100 this week.

It is worth emphasizing that on each of these outstanding gains the consensus was that it would continue because "this time it is different."

Instead of going along with this we'll stay with our game plan of having bought mining equities in the fall with the intention of capturing most of the seasonal move into spring.

We have been lightening up over the past 3 weeks and this week's drop in metal prices is ominous. Traders and investors can sell more aggressively.

Golds: Our April 26 edition pointed out that gold bug excitement about soaring commodities and a plunging dollar is always hazardous to the gold sector.

We turned cautious as gold's nominal price rallied to 688 on May 7. Senior gold stocks were not performing and our gold/commodities index was still declining.

The latter, which is a good measure of the real price, has been likely to set a significant low as the business and stock market boom maxes out. This has been the case as our index, which was at 255 in mid 2003, has declined to 143 yesterday.

Since the level of 240 in April 2006, this has been a relentless plunge of 40%, and it's worth looking at the outlook for the sector during the halcyon days of April a year ago.

That March we thought that the speculation in gold and silver would go to a blow off. Moreover, we thought that the reversal in the gold/silver ratio would anticipate the top by about 3 weeks. The ratio reversed to increasing on April 19 which suggested the top would be close to May 10, the high was May 16.

Our gold/commodities index has provided worthwhile guidance and this week's break in base metal prices is critical to the eventual recovery in gold's real price.

Another condition needed for the turn in fortune for this sector has been the big change in the credit markets.

The treasury curve is turning to steepening in a manner unseen since November 2000 when the wheels started falling off that great speculation. This is significant and as noted a few weeks ago this change typically has a more immediate effect on gold than does the change in credit spreads.

The spread crowd is still dangerously complacent in the longer maturities, but the guys on the money market desks are seeing a change in credit spreads. The commercial paper treasury bill yield ratio, which was as narrow as 104.8 in early April, has widened to 111.8.

As this ripples out to longer maturities, and it will, the credit conditions that typically prompt a massive increase in investment demand for gold will be in place.

The advice has been that the sector would weaken and that some accumulation on the bad days would be appropriate.

Tuesday May 22, 2007
Institutional Advisors

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