Metal Markets The role of metal traders

Information in metals publications, whose readers do not have at hand all of the factors governing the price of metal but might welcome such knowledge, can carry a bias, often unintended, because the writer represents a producing mine, a refinery or brokerage house; that is, he is not completely neutral. The advantage of an observer in a government department of mines, a good independent consultant or a metals trader is that he can take an over-all view of a situation, with no axe to grind, that is generally free of that bias.

On the sensitive issue of prices, we thought The Northern Miner readers might welcome an ongoing neutral view of the metal markets, so that, as individuals, they may become aware of core price trends and may regard metals trading as less mysterious.

The knottiest problem is, “You know what it says, but what does it mean?” Think how absolutely vital future metal prices are in, for example, mine planning. During the last 100 years, all the various attempts to manipulate world commodity and metal prices, usually by governments, have fortunately failed in the longer term. Attempts to “cartelize” the volatile silver and copper markets, for example, have always been unsuccessful. Trader like ship’s captain

Free price-making metal markets are like a barometer. A market does not make the weather; it merely records it (pleasant or unpleasant). A professional metals trader is like a ship’s captain who carefully studies the “weather,” intervenes by using the wheel or altering speed, and a vessel of considerable size moves.

The metal trader’s “vessel” is the large amount of money at his command for buying metals or financing his mining and refining customers. On occasion, he sells metals. He buys on expectations and rumors where fainthearts are numb with fear or without power of decision. When he and his peers buy, some metal prices strengthen. Typically, he sells out on hard news. This practice runs strongly counter to the instincts of most ordinary men and women.

What he and his peers do (or often, do not do, when they decline to intervene) plays an important part in determining the price the mine or refinery receives on a particular settlement date. The pragmatic trader is not a prisoner of cozy theories.

Think your job is complicated? Just look over the shoulder of a metals trader for a day. His is an affair of infinite complexity, and a myriad bewildering factors affecting prices come into play in any week. It embraces an enormous range of subjects he must study and master. He is always probing the future for those things that will affect metal prices. Many factors involved

He has to figure out the daily or hourly significance and price impact of factors such as the U.S. trade deficit, the Gulf confrontations, oil price changes, the deteriorating South African civil disorder and mine labor situations, the U.S., Canadian, U.K., etc. sanctions against South Africa, the U.S. economy, fluctuations in major currency exchange rates, not forgetting the unavoidable political analysis of several countries, Soviet grain harvests (because of gold) and that nation’s exports of metals.

He has to understand the ramifications of changes in inflation and interest rates, huge debts in U.S. dollars owed by many developing nations, possible sales of imf gold, increases in national coinage programs worldwide, rising or falling world mine metal output and metals consumption and inventories, mine costs, major metal exploration discoveries, Japan’s and Europe’s economies, government supervision of metal and other commodity exchanges, the stock markets, the new U.S. Treasury proposal to restart a link between the U.S. dollar’s stability and gold using a mix of currencies and commodities and gold and so on. Next month, we will start to look at why and how these factors affect metal prices.

The Northern Miner (Oct 20/86) kindly reviewed my speech to the Toronto cim of a few days before and highlighted my forecast of $8(US) silver for April, 1987 (made when the consensus was that silver was a “dog,” having fallen to $5.62 for the nearby month). The prediction came true and fortunately a number of people made money. Some respected observers are now saying gold will peak at $480-$500 this year and will go to $600 in 1988. This would benefit silver and platinum prices by attraction, and possibly copper, as sometimes happens. At present, I urge caution in buying metals for yourselves. Making profits as prices rise is comfy, but it is vital to arrange protection against a fall. A prudent fallback position is now essential, as the prognosis is confusion and sizeable sell offs are possible. However, for the longer term, higher precious metals prices are indicated.

Tom Mohide, LL.B., Jur.D., who has spent his working life in mining and metals in Canada, the U.S. and Europe and who has written and co-written a number of books, joins The Northern Miner this issue with his first monthly commodities column. A native of England who moved to Canada in 1956, Mr Mohide is a former president of the Winnipeg Commodity Exchange. After some 30 years in the private sector, he joined the Ontario government in 1973 and worked at the ministry of natural resources as director of mineral resources, retiring in August, 1986. He also served as an adviser at both the provincial and federal government levels. This column is the first in a series on “How metal prices are made.”