Traditional Future Metal Price Analysis is for the Birds

Implications: As published in Recycling Magazine Feb 2007, “Survey of Forecasts”, basemetals.com compiled price predictions of 22 analysts. These analysts are paid researchers that spend their time analyzing the metal markets.   In order to determine the price prediction, in this case in one year, the analyst compiles the list of facts he desires, and computes in a formula and possibly graph detail where the price will be in a predetermined time period.   All the facts are available to all the analysts, yet each come up with a different result. This may be because of the weighting factor each one uses for their determination. Or, an analyst may throw caution to the wind and make a prediction on his intuition.   But, I believe, we have entered a new era of pricing that is much less predictable because of the investment community.

Analysis: As published in Recycling Magazine Feb 2007, “Survey of Forecasts”, basemetals.com compiled price predictions of 22 analysts. These analysts are paid researchers that spend their time analyzing the metal markets.  

In order to determine the price prediction, in this case in one year, the analyst compiles the list of facts he desires, and computes in a formula and possibly graph detail where the price will be in a predetermined time period. All the facts are available to all the analysts, yet each come up with a different result. This may be because of the weighting factor each one uses for their determination. Or, an analyst may throw caution to the wind and make a prediction on his intuition.  

But, I believe, we have entered a new era of pricing that is much less predictable because of the investment community. An exorbitant amount of funds are placed in commodity markets that have more influence on price than the actual seller or consumer of the physical commodity. Principally done by hedge funds, these “players” are betting the commodity price will move in their desired direction. Because of the enormity of these transactions, the simpler supply/demand theory of economics some of us learned in high school is practically discarded.  

Some of my accounts ask for aid in short term purchasing strategy based on price. I generally advise anecdotally on supply and demand situations. I may also use stock inventory as listed in major commodity markets. I can also use chart and graph data. One of the things I do not find readily available is what percentage of trades are done by the hedge funds vs. that by actual users or producers. This issue causes actual ‘physical’ traders to be caught in the tailwind or run over by the price that hedge funds have created.  

While I personally have capitalized on these often higher than rational prices, I still have a problem with hedge funds determining the price. In this marketplace, it seems the fund or funds with the largest position wins. Being right or wrong on analytical pricing has taken a back seat.