Zinc and the Base Metals Are Telling Us Something Important

by Eric Fry
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Just like Lassie, the loveable 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.

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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.

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

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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 metals 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 metals prices began ratcheting sharply higher. And again, the CRB Index followed - climbing 80% in just two years.

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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

Thoughts on this article? Leave a comment below.

One of Eric’s Most Profitable Base Metal Mining Plays

As Eric said, base metals have already started rebounding from their mid-decade lows. And Fry’s Pinnacle Portfolio subscribers have already profited from this recovery.

That’s because Eric has recommended Ivanhoe Mines (OTC: IVPAF), a prominent copper miner, since the summer.

Here’s Eric checking on the miner back in June...

Today’s recommendation is a blast from the past, an oldie but goodie: Ivanhoe Mines (OTC: IVPAF). We’ll be tracking it on the OTC, but it also trades on the Toronto Stock Exchange under the ticker IVN.

This stock is a bet on the world’s largest undeveloped copper project, the world’s highest-grade zinc project and what will soon be the world’s largest producing platinum group metals mine in the world.

In short, the company’s deposits are huge and VERY high grade. It’s located in Africa (more on this below).

But the part I’m most excited about? The stock has just re-entered my Pinnacle “Buy Zone.”

Before I get into the specifics of the trade we’re going to make, let me tell you a little bit more about Ivanhoe’s three world-class mineral deposits...

The Kamoa-Kakula project in the Democratic Republic of Congo holds an estimated 116 million pounds of copper, based on a minimum grade of 1.4% copper per metric ton. Ivanhoe owns 39.6% of the project.

The Kipushi zinc-copper deposit in Congo holds 350 million pounds of zinc and 250 million pounds of copper. Ivanhoe owns 68% of the project.

The Platreef PGM deposit in South Africa holds 59 million ounces of PGMs plus gold. Ivanhoe owns 64% of the project.

Of particular note is the Kamoa-Kakula deposit. Let me explain why...

A major Chinese company, Zijin Mining, has partnered with Ivanhoe on its copper project in Congo. That partnership adds both financial security and political security.

China is an enormous player in the Congo economy. It takes about half of all of Congo’s natural resource exports and accounts for 20% of Congo’s GDP.

So on the one hand, Congo needs China. On the other hand, China is unlikely to take any grief from Congo lying down.

Additionally, all three of Ivanhoe’s main deposits are open “along strike,” which means the proven reserves at each location are nearly certain to continue increasing. Big resource deposits tend to get bigger. As the Geico commercials say, “That’s what they do.”

- Samuel Taube with Eric Fry

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