When it comes to commodities, there are two factors that dictate
prices. The first factor is the underlying demand for the
, which can exceed or lag relative supply. The second factor is the
technical picture, which is in focus for global investment-bank
desks, which simply respond to the direction of a price of a
commodity while paying little attention to the fundamental forces
Right now, it's the latter factor ruling the markets. Many
commodities are being dragged down by technical factors as losing
sessions beget more losing sessions. As a result, silver, platinum
and copper have all been sucked down, each trading more than one
standard deviation below their
50-day moving average
. On a technical basis, this "oversold" condition usually is a
considered a "buy" signal. Come to think of it, the fundamental
picture also means it's also time to buy. Let's take a closer
These three metals sold off sharply in recent months on fears that
-- led by a sputtering U.S. economy -- was headed for a slowdown
that would crimp demand for these commodities, which have a range
of industrial applications. Yet as we've seen in recent weeks, the
potential systemic shock that some were anticipating in July and
August is now less likely to happen: Recent U.S. economic data have
been decent enough to likely deter a
; Europe is belatedly tackling the Greek debt crisis, and the rest
of the world is cooling to a more moderate but still-respectable
rate of growth.
This means demand for these commodities is unlikely to slump
sharply from current levels, and pricing should rebuild at least
part of the way back. This isn't acall for a boom in the
commodities sector, but a solid opportunity for a rebound snapback.
If that's the case, then what's the best way to play for each
Couer D' Alene (
is always a solid play on silver when the metal is in an oversold
state. I made a pair of suggested trades on this stock earlier this
year. Back in January, I thought it looked undervalued at $22. But
in April, I thought the stock had run too far too fast -- up to
$35, and suggested profit-taking (or even possibly shorting the
With the stock back at $23, it looks like the light is flashing
This is because industry watchers have set their 2012 price targets
for the underlying
for silver in 2012, and the outlook is good. A survey of 11 silver
analysts by Bloomberg predicts silver will rebound to $42 an ounce
in the first quarter of 2012, up from a current $32. The most
of the analysts surveyed sees silver falling from its current price
around $30 to about $27, so the current price isn't far from that
Assume silver stays put at just $30 an ounce in 2012. In that
event, UBS' analysts figure Couer D'Alene could offer up a solid
in 2012 -- yielding 7% at current prices, which assumes a 50%
). As I noted back in January, the miner has completed the most
exhaustive phase of its capital spending program and will soon be
free cash flow
. In a recent note, UBS noted: "On their most recent conference
[Aug. 8], management indicated that the dividend policy is
something the board will be evaluating as cash continues to
accumulate. Management indicated they believe 'returning capital to
shareholders is a 2012 event...'" In a more
scenario, the dividend math becomes more striking. Assuming silver
rebounds back to $40 in 2012, a 50% payout equates to a 12.5%
, according to UBS.
Couer D'Alene will release quarterly results on Nov. 7. Pay close
attention to management's commentary about potential dividend
plans. This could wind up being a nice snapback AND dividend play.
There are several ways to play a rebound in copper, but miner
Freeport McMoran (
is the most logical candidate, due to its heft and global exposure.
plunged from $55 to $30 late this summer and are now inching their
way back to the $40 mark. The fall from those mid-summer highs is
largely due to concerns that China, the biggest consumer of copper,
was on the cusp of an economic slowdown. Yet on Monday morning,
Oct. 24, a key manufacturing
showed that China's manufacturing sector expanded in September for
the first time since June.
Analysts at Merrill Lynch predict copper prices will stay in the
$3.40 to $3.80 per pound range from now through the end of 2013.
is $3.40, down from $4.50 this past July). Based on this range
Merrill Lynch's analysts think Freeport-McMoran's stock is quite
undervalued. They figure the firm's mining assets are worth roughly
$65 a share, and they have an overall
of $57 a share (which is derived on a blended
price-to-net-asset-value, price-to-cash-flow and price-to-earnings
basis). That price is where the stock was earlier in the year, and
reflects 45% upside from current levels.
The recent sharp drop in platinum, from $1,900 an ounce in
mid-August to a recent $1,500 is a bit curious. Demand for the
metal isn't really dependent on China, but instead is a key metal
for the auto industry, which uses platinum in catalytic converters.
Scarcity is the real driver here, as it is only mined in South
Africa and Russia, and Russia has warned that its output will begin
falling. Meanwhile, auto industry production is expected to rise
the next few years.
If you're looking for a way to play the sector, then the
ETFS Physical Platinum Fund (Nasdaq: PPLT)
is now at its lowest level since it was introduced in early 2010.
Risks to Consider:
These commodities could fall further if the European debt
crisis fails to get resolved and the major world economies are
Action to Take -->
Commodities go through deep
cycles. Even within these cycles, you'll
major moves. The current pullback looks simply to be a re-entry
point in a longer-term
, especially as it increasingly appears that the U.S. and Chinese
economies -- the greatest driver of these commodities -- will not
slow to the extent some had feared just a few months ago. Any of
the options I mentioned above are suitable for investors to play
these snapbacks, but there are other options out there as well. For
specific examples, watch our latest presentation, "
The 9 Best Stocks to Own For the Next Decade
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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