The Age of Dollar Priced Metals Is Drawing To a Close and Perspective is The Key To Objectivity

Implications: Is it ridiculous to assume that a marked change in the value of the US dollar in relation to the resource backed currencies of all or even some of the BRAC countries, Brazil, Russia, Australia, and Canada, will not affect the immediate dollar price of the natural resources produced in those countries..

Analysis: Investors in metals should take note of the fact that the cooling of the US economy's demand for durable goods, housing, and soon, I think,  infrastructure is not a collapse of the US economy and that, in fact, since the US economy is now just around 25% of the global economy even a locally 'massive' 10% decline in the US economy would only be a decline of 2.5% of the global economy.

Just to put the decline in the American economy in perspective look at the decline in the demand for automotive grade steel which will occur if the US OEM automotive market demand for all of 2008 goes from the 17 million units projected in January 2008 to the worst case scenario now being bruited about, a 2008 US market of 'only' 12 million units for 2008. Basing the usage of steel per car at approximately one metric ton (A figure published for an average American mid-size car by the National Research Council) this means that the loss of demand due to the US OEM automotive market turndown for the global steel industry will be 5 million tons. This is 0.4% of the projected global production of steel for 2008.

Note well that the global iron ore industry has just doubled the price of iron ore for delivery by contract for the next year. This price increase will cause iron ore revenues to again grow dramatically next year no matter even if the global demand for iron and steel should decline by 10 or 20 times the decline caused by the reduction of American OEM automotive demand. In addition the reduced volume of high quality US generated automotive scrap steel, caused by Americans keeping their cars for a longer period of time, has already moved scrap to its highest price, in dollars, ever.

Platinum, palladium, and rhodium critically required for the manufacture of vehicular catalytic converters will see demand reduced by 150,000 troy ounces, 450,000 tr oz, and 30,000 tr oz, respectively. This represents 2%, 6%, and 3%, respectively of their global production (as newly mined metals) for 2008. But the new Chinese mandate for catalytic converters will simply cause this material to be redirected to the growing Chinese and Russian markets for 2008. If the American car economy comes back this will set off a new price war for platinum group metals until and if internal combustion engines are replaced by hybrid or electric powered vehicles.

The decline in prices for the major metals, copper , aluminum, and zinc has been more than can be accounted for by the reductions in volume demand caused by the American durable goods and, in the case of copper and aluminum, homebuilding industries recession.

The decline in the prices of the platinum group metals has been 25% over just the last couple of months and this is simply decoupled from any reasonable effect that reduced American OEM automotive demand could have created.

Speculation in all of the metals, major and minor-where possible-has certainly affected their price fluctuations, but I think that everyone is overlooking the effect on the pricing of metals worldwide by the rapid conversion of that pricing out of the US dollar.

The dollar effect on metals will I think soon become obvious when new trading markets in Asia decide to price the metals in currencies other than the dollar. I'll bet that there will be an avalanche of metal price corrections across the board sometime soon caused by the delinking of prices to the US dollar.