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Zinc and the Base Metals Are Telling Us Something Important

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Posted by Eric Fry, Macro Strategist - The Oxford Club

on Thursday, 16 November 2017 15:52

  • Investors have avoided commodities like the plague for the last half-decade.
  • But today, Eric reveals how one base metal may be signaling a turnaround in the sector...

Just like Lassie, the lovable TV canine, zinc may be trying to tell us something important. Zinc's message probably has nothing to do with Timmy falling into a well, but it may have a lot to do with the prospect of rising commodity prices. 

You see, the price of zinc has been conspicuously strong, which often portends good things for the rest of the commodity complex. 

Unlike Lassie, zinc doesn't receive much love or attention. No one ever searches for zinc-filled treasure chests... or slides a zinc ring around a wedding finger. In fact, most folks couldn't identify the stuff if you dropped a chunk of it on their kitchen table. 

But this overlooked metal deserves a closer look... right now. Not only is its high-flying price leading the base metals sector, but it is also leading the entire commodity complex.

zinc-takes-flight

For most of the last six years, the commodity sector has been a great one to avoid. After hitting an all-time high in early 2011, the Thomson Reuters CRB Commodity Index tumbled 60% to a 15-year low. Many individual commodities plummeted more than 80%

But the CRB Index finally hit rock bottom early last year. Since then, it has bounced about 20%. However, not all commodities have enjoyed a similar revival. Many are still languishing near their 2016 lows. 

As the chart below shows, base metals and energy have registered the biggest gains from their 2016 lows, while agricultural commodities and soft commodities like coffee and cotton have barely budged.

base-metals-take-the-lead

Within the very strong base metals sector, zinc has been the strongest metal of all. Its price has doubled during the last two years.

zinc-shines-brightest

In other words, zinc is the red-hot metal that is leading the red-hot base metals sector... which in turn is leading the rest of the commodity sector. That's why zinc deserves our attention. 

Since the prices of base metals like zinc tend to respond to global economic trends, a weakening economy causes their prices to drop, whereas a strengthening economy causes their prices to rise... all else being equal.

In times past, the relationship between global economic activity and the price trend of base metals was so close that copper gained the nickname "Dr. Copper, the metal with the Ph.D. in economics." 

During the current economic cycle, however, zinc is the metal with the advanced degree in economics. Its rising price indicates that the global economy is gaining strength. The other base metals seem to agree. 

Therefore, if a strengthening economy is lifting the prices of zinc, copper, aluminum and nickel, continuing economic strength should spur demand for most other commodities, which should lift their prices higher as well. 

This exact scenario has played out several times in the past. In early 1994, for example, base metal prices started moving sharply higher. The rest of the CRB Index eventually kicked into gear and soared 80% over the next three years. 

Again in early 2009, base metal prices began ratcheting sharply higher. And again, the CRB Index followed - climbing 80% in just two years.

pointing-the-way

History appears to be repeating itself. The price of zinc and the other base metals are soaring, which means the prices of most commodities should also work their way higher. 

Unlike Lassie, zinc might not receive a star on the Hollywood Walk of Fame. But this base metal is playing its own starring role in the new commodity bull market now underway. 

Good investing, 

Eric Fry

Eric Fry is The Oxford Club's Macro Strategist and the head of Fry's Pinnacle Portfolio


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