wall st journal metals outlook 2005

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    The Wall Street Journal
    Forget plastics. The word on Wall Street these days is metals.

    Amid the voracious global demand for precious and industrial metals, the investment industry is creating a host of new vehicles designed to profit from them. Some strategists are also recommending that individual investors move a portion of their assets into metals.

    Last week, Merrill Lynch & Co. resurrected its Metals & Mining Weekly research report after three years of silence. Earlier this month, Byron Wien, Morgan Stanley's senior investment strategist, said that silver, now at $6.71 an ounce, has the potential to trade above $10 this year; gold, he said, may rise above $500. (It's currently trading at $422.) A new gold exchange-traded fund, or ETF, launched last year to track movements in that precious metal, and the Comex division of the New York Mercantile Exchange, where metals trading occurs, is soon to release its own ETFs that will act as metal index funds.

    The flurry of activity comes in response to rising global demand for precious metals, such as gold and platinum, and base metals, such as copper and nickel. Economies depend on them for everything from stainless steel (made with nickel) to electrical switches (made with silver) to new homes (loaded with copper wiring). Depressed metals prices in prior years, though, meant that mining companies didn't invest in increasing supplies. As such, nickel demand, for instance, has outstripped supply for the last four years, and is expected to continue doing so for another year or two.

    Deutsche Bank AG last year began encouraging some investors to include in their asset allocation decisions a 3 percent stake in commodities, including metals. Morgan Stanley's Individual Investor Group also recommends investors increase their short-term position in alternative investments, which includes, among others, metals and managed futures funds, in which a manager actively trades commodity and financial futures, including metals contracts.

    In many cases, Wall Street's interest in metals is coming after the easy money already has been made. Metals prices have moved higher, and many metals-related stocks have soared recently. As copper prices essentially doubled during the past two years, shares of Phelps Dodge Corp., the Phoenix-based copper giant, have tripled.

    Nickel in December averaged $6.30 a pound, up from $1.89 a pound in 1998. That's the highest price the metal has seen in 15 years. Silver is up about 40 percent for the past two years, and gold is up more than 50 percent since Sept. 11, 2001.

    But some are betting that the bull market in metal prices isn't over. For one thing, China's growth continues to absorb vast amounts of the world's metal production, particularly steel, copper and aluminum.

    There are several ways for individuals to invest in metals, including stocks, mutual funds and ETFs, direct and indirect ownership of the metal, or futures contracts.

    The most obvious route is buying stocks of companies that mine for and produce various metals. This is often a leveraged play, since a small price movement in, say, copper is magnified on a company's earnings line.

    While many metals and mining stocks have roared ahead, some are just now primed to move, such as aluminum stocks, which have spent the past year generally flat to down. Aluminum tends to move later in a metals-price recovery, and as such, Daniel Roling, the senior metals and mining analyst at Merrill Lynch, predicts that 2005 "will be the year for aluminum."

    He is particularly bullish about Alcoa Inc., Alcan Inc. and Century Aluminum Co., expecting aluminum prices will move toward 90 cents a pound from 78 cents a pound in 2004 and fatten these companies' bottom lines.

    Zinc, which hit a seven-year high last week, will also help companies such as Lundin Mining Corp., which trades on the Toronto Stock Exchange, given China's demand for the metal and the lack of zinc mining production on the horizon. Investors looking for pure silver plays should consider Silver Wheaton Corp., a unit of Wheaton River Minerals Ltd. that also trades on the Toronto Stock Exchange, and Pan American Silver Corp., says Frank Holmes, chief investment officer of U.S. Global Investors Inc., a San Antonio firm that runs natural-resources mutual funds. He also likes FNX Mining Co. for exposure to nickel and Anooraq Resources Corp. as a way to play the growing demand for platinum.

    With stocks, though, investors take on corporate risks that can send share prices slumping even as metals prices surge. Moreover, some stocks have already been played out for now. Bear Stearns Cos. in December cut its ratings on shares of copper and nickel producers like Phelps Dodge, Freeport-McMoRan Copper & Gold Inc., Inco Ltd. and Falconbridge Ltd., a unit of Toronto mining company Noranda Inc. The firm cited valuations and the likelihood that 2005 will be the peak year for the underlying commodities.

    Various precious-metals mutual funds exist, though many focus largely on gold, which tends to act more like a currency, while other metals are much more industrial. One exception: the Vanguard Precious Metals and Mining Fund. It reopened its doors last year and broadened its strategy to include metals such as platinum, nickel and copper. The fund gained 8 percent last year, according to Chicago investment research firm Morningstar.

    The World Gold Council in November launched the streetTRACKS Gold Shares, an ETF in which investors own shares backed by actual gold. Each share, listed on the New York Stock Exchange under the symbol GLD, represents one-tenth of an ounce of bullion. Barclays Global Investors is working on its own version of a gold ETF, and the Nymex says it will very soon unveil its own metals-tracking ETFs. (ETFs resemble index-tracking mutual funds, but trade on exchanges like stocks.)

    Owning the metal directly is another option. Investors can buy gold, silver, platinum and palladium ingots from precious-metals dealers and online trading firms, such as www.kitco.com, www.apmex.com and www.bulliondirect.com. Sizes generally range from less than an ounce to 1,000-ounce bricks. Prices are based on whatever the so-called spot price is at the moment, plus a markup of between 2 percent and 15 percent or more, depending on the size of the trade.

    Kitco.com also offers pool accounts, in which investors own a nonspecific portion of a large pool of precious metals held by Kitco. Pools are available in the four key major precious metals as well as rhodium. The benefit: Prices per ounce are much closer to spot metal prices. With silver recently at $6.69 an ounce, Kitco offered an ounce of pooled silver for $6.79, while other dealers were selling one-ounce bars for as much as $7.92.

    Finally, there are futures contracts, which obligate a buyer or seller to purchase or deliver a set amount of some commodity at a pre-established price on a specific date in the future. Metals contracts trade on the Nymex, the London Metals Exchange and Chicago Board of Trade.

    Investors use these as speculative tools to bet on a rise or fall in a metal's price. Futures allows investors to own large sizes of a particular metal for a relatively small investment. With gold, for instance, investors can control a 100-ounce contract -- roughly worth an underlying $42,230 -- for a minimal $2,025.

    The leverage means the potential for huge profits if gold prices move higher, since every $1 gain in the price of gold translates into a $100 change in the contract's value. Of course, it also means that if gold tumbles, you can lose your entire investment and possibly more.

    Metals Choices

    Some ways to gain exposure to metals:

    * Stocks: Owning companies that mine for and produce various metals.

    * Mutual funds and exchange-traded funds: Most focus on gold, which tends to be influenced by currency and geopolitical issues.

    * Direct ownership: Precious- metals dealers and online trading firms sell silver, gold, platinum and palladium.

    * Futures contracts: Potentially the riskiest -- and most lucrative -- way to play metals.

    What s Ahead for Metals

    Many metals and mining stocks have already had a strong run. Here's the outlook for some key metals.

    METAL: Aluminum

    OUTLOOK: Still room for appreciation, as prices tend to rise later in a metals recovery. Will benefit from tight supply and strong demand from China.

    POTENTIAL WINNERS: Alcoa Inc.,Alcan Inc. and Century Aluminum Co.

    METAL: Copper

    OUTLOOK: Prices are expected to remain firm in the first half of 2005, although additional production could boost supply next year.

    POTENTIAL WINNERS: Phelps Dodge Corp., Freeport-McMoRan Copper & Gold Inc.

    METAL: Gold

    OUTLOOK: Given its role as an inflation hedge and a store of value, the outlook for a return of inflation may benefit the precious metal, as will a weak dollar.

    POTENTIAL WINNERS: Precious-metals mutual funds, such as American Century Global Gold, or an exchange-traded fund such as streetTracks Gold Shares.

    METAL: Nickel

    OUTLOOK: Although prices are likely to peak this year, demand should still continue to outstrip supply over the next year or two.

    POTENTIAL WINNERS: Inco Ltd., Falconbridge Ltd., a unit of Noranda Inc. and FNX Mining Co.

    METAL: Silver/Platinum/Palladium

    OUTLOOK: New uses for silver will help bolster demand, while China needs platinum and palladium to develop clean-air technologies.
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