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Silver Industrial Demand - Steel May The Commodity to Watch

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January 4, 2012 - 8:56pm

 

Forecasting the future of the economy is a difficult task; one who can do it with regularity will most certainly see massive investment profits.  Most of this complexity comes from the lack of clarity in commodities prices.

 

Commodities earn their price from demand.  Most commodities are tied to a specific industry – palladium is a barometer for autos, while steel is a barometer for real estate.  Some commodities are then related entirely to geography – copper is the commodity for a growing Asian economy, while oil is the commodity for all emerging markets.

 

Localized Commodities

 

Some commodities are localized due to the large price differences from one location to another.  In general, it is the heaviest and least valuable commodities that vary the most in global price.  A heavy and inexpensive good usually does not allow for shipment necessary to arbitrage differences from one locale to another.

 

Steel is one such commodity.  Already, we’re seeing how steel prices and steel demand around the globe is pointing toward a slowdown in Asia and growth in North America.  This trend is certainly important; it would be a complete 180-degree turn from much of the past decade of slow developed world growth and faster emerging market expansion.

 

In China, profit margins for steel are disappearing.  The country suffers from quickly faltering demand amid concerns that a multi-year housing expansion is quickly turning south.  In October, profit margins for Chinese steel producers fell more than 80% month-over-month to fall to .047%.  Thus, for every $10,000 in steel sold by producers, companies can expect to earn only $47.  That small margin reflects slumping demand.  In general, steel demand in China is a product of real estate.

 

Meanwhile, the situation across the Pacific Ocean is decidedly different.  Rating company Fitch upgraded the credit-worthiness of US steel companies, noting that even slow growth in real estate and automotive manufacturing could give companies a lift.  Profit margins would naturally rise to reflect growing demand as production possibilities remain constant.

 

Balancing Act

 

Investors should be careful to balance the changing trajectory of macroeconomic growth.  Growth in the Americas is bullish for the US dollar, but also the commodities sector, as industrial demand livens up the markets for hot industrial commodities like silver and steel.  Meanwhile, a slump in Asia could threaten monetary expansion, which has been a key support for rising monetary metal prices.

 

Investors have most certainly priced in more slowdown than might otherwise be necessary.  Silver’s plunge to $26 per ounce is by-far an overextension of recessionary fears.  Even without growth in Asia, silver’s industrial demand should not fall greatly.  Economics allow for silver to rise in a bear market, as sure-fire investments in photovoltaic cells and emerging sources of silver demand in RFID chips lead the demand frontier regardless of investment interest. 

 

This is a time to start accumulating more industrial exposure.  Real production is a necessity in any global economy, and silver represents the perfect play on rising industrial activity while maintaining its history as a world currency in time of distress.  Buyers would be wise to accumulate at any price under $30 per ounce, as even at this price silver is still far more valuable to industry than the small $30 price point would suggest.

 

Dr. Jeffrey Lewis

 

www.silver-coin-investor.com

 

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About Dr. Jeffrey Lewis / Commentary Author

"In addition to running a busy medical practice, Dr. Jeffrey Lewis is the editor and publisher of Silver-Coin-Investor.com, where he provides practical information for precious metals investors".

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