The base metals sector and its related metals and mining sector have a history of moving higher from November to May each year. What are the prospects for this year?
According to Thackray’s 2012 Investor’s Guide, the Metals and Mining sector has two periods of seasonal strength during the year: from November 19th to January 5th and from January 23rd to May 5th. The former period is the better of the two. Average gain per period during the past 22 periods was 8.1 per cent. The trade was profitable in 17 of the past 22 periods.
A major reason for strength during the November to May period is increasing seasonal demand for base metals. Demand for copper, zinc, lead, nickel increases each spring when the construction season ramps up, and spring is also traditionally when new car purchasing picks up. Prospects this year and into 2013 are particularly encouraging. Housing construction in the U.S. is recovering from a deep slump and new car sales continue grow. It’s an unfortunate truth, but the cleanup of Hurricane Sandy damage is also expected to boost the sector. Demand also is rising thanks to a recovery in other world economies including Japan, China and emerging nations. Partially offsetting that is an anticipated decline in Europe.
Rising demand from China is particularly important. Last week, China’s newly elected President pledged to double China’s per capita GDP by the year 2020. Base metals are needed to build China’s infrastructure.
Base metal prices already are showing early signs of seasonal strength. Copper, aluminum, zinc, lead, silver, platinum and palladium prices bottomed 10 days ago despite a downdraft in equity markets and a strong U.S. dollar. Their short term momentum indicators are trending up. Their strength relative to the S&P 500 Index has turned positive.
Investors have a wide variety of opportunities to purchase base metals on both sides of the border through Exchange Traded Notes (ETNs) consisting of futures contracts and short term notes. Sixteen ETNs trade on U.S. exchanges. In Canada, Horizons offers a leveraged bull and bear Exchange Traded Fund on copper that trades in Canadian Dollars. Symbol for the Bull ETF is HKU ($9.53)
The most actively traded base metal ETN is the PowerShares DB Metals Fund (DBB US$18.40). The fund tracks a portfolio of three base metals: aluminum, zinc and copper. Each metal has an equal weight representing approximately one third of the portfolio.
Another actively traded ETN that holds a diversified portfolio of metals is the ELEMENTS Exchange Traded Notes Rogers International Commodity Index – Metals Total Return (RJZ US$10.51). The ETN holds positions in 10 metals including aluminum, copper, gold, lead, silver, zinc, platinum, nickel, tin and palladium.
Other actively traded ETNs track individual base metals including iPath Dow Jones-AIG Copper (JJC US$44.59), iPath Dow Jones AIG Tin (JJT US$47.45), Dow Jones UBS Nickel (JJN US$23.02), iPath-AIG Aluminum (JJU US$23.21) and iPath Pure Beta Lead (LEDD US$39.65).
Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. He is also a research analyst at Horizons Investment Management, offering research on Horizons Seasonal Rotation ETF (HAC-T). All of the views expressed herein are his personal views although they may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment. Horizons Investment is the investment manager for the Horizons family of ETFs. Daily reports are available here.