Where should investors spend, if not gold?

If you ask economist William Gamble which metals he believes have the most upside over the next two years his answer is an unequivocal “None whatsoever.”

Gamble, the president of Emerging Market Strategies, a specialized consulting firm in Newport, Rhode Island, even recommends shorting gold — which he argues is at an all-time high and too expensive.

“Every time you get a historic market top my immediate reaction is it’s got to go down,” he argues. “If you slow demand down, slow money flow and raise interest rates, you have a deflationary environment and that ain’t good for gold.”

The rationale for his bleak outlook on all metals, however, is simple: the party is officially over in China. And as the central leadership in Beijing starts to panic about the threat of hyper-inflation and slams the brakes on spending, demand for base metals, in particular, will evaporate.

“I think China is going to have real problems,” Gamble opines. “What you have is a banking system that is allocating capital to the most inefficient parts of the economy and is consequently saddled with enormous bad debt, which the government is not prepared to bail out.”

Chinese officials also can’t tap the country’s massive foreign reserves and flush that money back into the economy without fear of inflation. “It’s not like that’s a big piggy bank they can use whenever they want to,” Gamble explains. “It’s a lot more complex than it seems.”

Of course, Gamble’s take on China isn’t shared by everyone and there are a number of metals apart from gold that many analysts and fund managers believe offer good upside over the next two years. In a random survey of experts, those polled said they liked a variety of metals ranging from copper and iron ore, to zinc, indium, coking coal, tin and uranium.

Nic Brown, head of commodities research at Natixis in London, dismisses the Chinese doomsday hypothesis and thinks the demand story in China has a long way to run. And he believes copper offers the most solid fundamentals.

“There isn’t a worrying China slowdown story as far as we can tell,” he asserts, adding that China’s recent efforts to cool its heated real estate market “will not be enough to slow Chinese economic growth materially.”

While there will be a withdrawal of some of the fiscal stimulus supporting the Western economies, he thinks the monetary stimulus will continue and will remain supportive.

Brown has followed the China market closely. Last year, Chinese companies were importing vast quantities of finished metals, particularly in the second quarter, which sucked prices upward, he explains. In 2010, it’s been very different.

“This year we think China is producing more metal itself and instead of importing finished metals it’s importing scrap and concentrates,” he says. But he maintains that it would be wrong to conclude that Chinese demand for metal has diminished just because Chinese imports of finished metal have fallen.

Brown holds that Chinese demand for base metals is as strong as last year and says that apparent demand for copper has even risen to new highs in the last couple of months.

“Demand is still there — all that is happening is that rather than being seen in the finished metal it’s showing up instead in higher imports of scrap, ores and concentrates,” he claims. “As a result, we’re seeing increasing scarcity of scrap, ores and concentrates,” and “that is an early warning sign that at some point, as demand continues to improve, we will get substantial scarcity of finished metal. And that’s when we could start to see metal prices moving up quite quickly.”

He also points to the wide spreads between copper prices on the Shanghai Futures Exchange (SHFE) and the London Metal Exchange (LME). “The premium on copper has remained wide enough to encourage Chinese merchants to import (that) metal, which again illustrates that Chinese demand for copper remains good.”

Brown forecasts copper prices to trade above US$8,000 per tonne and could potentially go higher than that, partly because global stockpiles of the metal are starting to go down both at LME and SHFE warehouses. And while there are plenty of copper mines being developed at the moment, they won’t be in production until at least 2013. That leaves two or three years where the copper market could potentially shift further into deficit.

“In the investment climate we have at the minute, if investors start to believe there is a scarcity story going on, and they can enhance their total returns by rolling long positions down an inverted forward curve, we’d expect that to result in substantial investment flows,” he says.

Brown also points out that on a relative basis, copper looks cheap when compared with gold. “Where you get gold outperforming copper or oil to any substantial degree, this typically implies an expectation that global industrial production will slow, or inflation will fall, or both,” he declares. “While the global economy may be facing a number of headwinds, we don’t think that’s a reasonable scenario.”

Carl Firman, a metals analyst at commodities consultancy VM Group in London, Barbara Thomae, a senior mining analyst at Mineral- Fields Group in Vancouver, and Michael Smith of T&K Futures and Options in Port Lucie, Fla., also like copper.

Firman points to the thinness of supply in the market and contends that while copper may look a little shaky at the moment, over the medium to longer term, demand for the metal is going to continue to rise in China. As well, finding new deposits in the developed world is getting more difficult, while building mines in emerging economies involves political risk. “There hasn’t been a huge amount of discoveries over the last decade,” he says. And with the exception of the Oyu Tolgoi copper- gold project in Mongolia and a few others, there have been no major discoveries, and none on the same scale as the Escondida copper deposit in Chile. Firman forecasts copper prices in 2012 averaging US$8,200 per tonne or US$3.72 per lb.

Smith of T&K Options and Futures concludes that copper prices at the end of this year will be up somewhere in the US$3.30-US$3.50 per lb. range and within 18 months could reach as high as US$3.70 per lb. because the markets have already factored in most of the bad economic news. “Portugal, Ireland, Italy, Greece, Spain, they are all having problems and now England is, too. We all know this. Markets have already reacted to the news. Seriously, what worse news could come out now? We’ve already factored in the end of the world so I just see a lot of upside.”

Smith, who has worked as a broker for 15 years, says he has always used copper as an indicator of global recovery. “They say copper has a PhD in economics, so when you see prices starting to flatten sideways and start getting a little upside — it’s an indication of recovery.”

Apart from copper, Smith says he likes silver and argues prices are going to go a lot higher. Before the end of this year he believes silver could reach US$21 or US$22 per oz. and within 18 months claims he wouldn’t be surprised if it’s running in the high twenties, if not US$30 per oz. “I like silver better than gold because it just makes sense to buy the one that is at 60% from its all-time high rather than the one that keeps making its all-time high,” he reasons.

Smith asserts that there just isn’t enough silver around and that it is not often recycled. “You’re not going to bust apart your television or cellphone to get your silver,” he says. “You throw the whole thing out.”

By contrast, roughly 90-95% of all the gold that has been mined is somewhere where people can get their hands on it. Smith forecasts that there will be an improvement in the silver-gold ratio, which since 1970 has hovered around 15-to-1 (15 oz. silver to buy one oz. gold).

“I just like the idea that silver is used,” he explains. “It’s in computers, cellphones, plasma TVs and they even use it in hospitals to stop infectio
ns.”

What’s more, investors are starting to wake up to the fact that they can invest in silver through exchange- traded funds, or ETFs, says Smith. “Now someone who doesn’t want to have 30 to 40 pounds of silver in their house can just go buy an ETF.”

Firman of the VM Group also likes tin, which is used extensively in the electronics industry. There are only two projects due to come on stream within the next two or three years and it’s getting harder to find new tin reserves. In addition, Indonesia, the world’s largest tin exporter, is suffering from increasing problems with regards to the accessibility of its ore reserves and continued government clampdown on illegal tin-ore mining. “Tin supply is possibly tighter than copper but it doesn’t have the same type of exposure to investors. So, you might not see the same sort of price appreciation,” he says.

Thomae of MineralFields Group believes prices for lead, zinc, nickel and molybdenum, which are lagging, as well as metallurgical coal, should recover towards pre-crash levels, particularly once the U.S. recovery takes hold. Industrial minerals like potash, phosphate and coal should also strengthen to meet rising demand, she argues. The outlook for uranium is bright too, she says, as hundreds of nuclear reactors are being built around the world. “Uranium is perhaps the most undervalued commodity when considering the long lag time from discovery to production and the technical aspects of mining a radioactive substance,” she explains.

Tim Schroeders, who manages a global resources fund at Pengana Capital in Melbourne, also likes zinc. While he admits the base metal is a more contentious call over the next two years and has been a “perennial laggard as far as metals are concerned,” he insists that a lack of new mine supply over the next five years could make zinc attractive. “It’s been a difficult industry historically to invest in and has provided sub-par rates of return but that dynamic could change quite dramatically over the next five years and could emerge even faster.”

He reasons that a lot of smelters are already crying out for feed and over the next few years there simply won’t be enough mine supply to meet demand. As evidence, he points to the increasing appetite among smelters in taking interests in zinc mines, particularly in Australia.

Schroeders also likes iron ore. Over the next two years on the supply side, infrastructure constraints will probably prevent iron ore from flooding the marketplace, he says. And on the demand side, there is a supportive case from strong growth in the emerging economies. He concedes that there will be some volatility as the market gets used to a new pricing regime, but on the flip side says that probably provides a new opportunity for investment. “On balance, the market in a lot of iron producing stocks hasn’t fully reflected the tightness of the market,” he concludes.

In terms of both zinc and iron ore, Schroeders says the dynamic is probably similar in terms of the high level of Chinese ownership and corporate interest in iron ore and zinc mines in Australia. This was particularly evident during the global financial crisis, he argues, when companies in both sectors had difficulty financing their projects.

Finally, coking coal, uranium and indium are the picks of Simon Gardner- Bond, a mining analyst and head of research at Ocean Equities in