A Footloose Yankee on the Trail of Mexican Silver and Copper

While you’re reading this, I’m on a journey far into the hills of Mexico. There, I will venture deep into copper and silver mines, on the trail of another potential addition to Red-Hot Global Small-Caps.

I like to check these things out in person — to get my boots dirty, get my hands on the rock, and talk to the miners. It tells you more about a company than pushing a metric tonne of paper ever will.

And it’s also important to get a feel for the big picture. Let’s look at what’s going on with both of these metals.

First, look at this monthly chart of both silver and copper. You can see they track each other pretty closely.

The fact is silver is an industrial metal as well as being a precious metal. In 2008, the latest figures available, industrial uses of silver accounted for 54% of global fabrication demand and 50% of total silver demand, according to data from the Silver Institute. So it’s not surprising to see the metals move together.

Copper is often called “Doctor Copper,” because it tells you the health of the global economy. Well, “Nurse Silver” is right there taking the economy’s temperature as well.

Both metals are off of their recent highs. And I think they should correct further. But that’s okay — that’s just going to give us an opportunity to buy great stocks on the cheap. Because as you can also tell by looking at that chart, the long-term uptrend is intact for both metals.

Longer-term, I expect both metals to keep hammering away at overhead resistance, and finally break out to the upside.

And that breakout may come sooner rather than later, due to rip-roaring growth in China, India, and other emerging markets. Here are some developments I’m watching …

• China Power Use Surges. China’s electricity consumption jumped 40.1% in January from a year earlier. It was 2.7% higher than electricity demand in December. What’s more, China’s power consumption may rise 9% this year — 2% more than in 2009 — as that country’s factories ramp up production.

• China’s Economy Is Roaring Ahead. It’s not just electricity use that is ramping up in China. The country clocked 8.7% economic growth last year, and some analysts say it could grow 9.4% this year. The International Monetary Fund set its sights for China even higher — at 10%! To be sure, China is trying to keep a lid on its booming economy. The Bank of China raised reserve requirements for a second time in a bid to cool off that country’s red-hot real estate market. Good luck with that.

• Good News along the Pacific Rim. The good news from China is spilling over onto its neighbors. Japan and Korea came out of recession sooner than later because of their exports to China. Korea’s economy is expected to grow 4.5% this year, according to the IMF, while Japan has finally climbed out of a steep contraction and is finally clocking positive growth.

• India Also Picks Up Steam. According to the IMF, India’s economy should grow 7.7% in 2010 and 7.8% in 2011.

• The Global Economy Slowly Gathers Momentum. While developing Asia should lead the global economy this year, with 8.4% growth, the developed world should see some positive traction. As a result, the IMF says that the global economy should grow by 3.9% and 4.3% this year and 2011 respectively.

This economic growth should be bullish for both copper and silver prices. After all, some Chinese steel makers have agreed to a 40% increase in the price of iron ore — another industrial metal — which shows that demand is picking up.

China Demand Counts in Copper

Figures on China’s copper demand for 2009 run through October. During that time, China’s use of refined copper grew by 43% to 1.8 million metric tons to account for 40% of world use. It nearly offset an 18% decline in the rest of the world. Use decreased by 21% in the European Union’s 15 countries, by 31% in Japan, and by 21% in the U.S.

In all, global demand for copper slipped by 1% to 15 million metric tonnes, according to the International Copper Study Group (ICSG). But as the global economy heated up toward the end of 2009, global demand for copper — you guessed it — increased as well.

At the same time, world mine production grew by 1.9% in the first 10 months of 2009 compared with the same period of 2008.

There is a large copper stockpile in China, but the Chinese seem to be working through that. And that opens the door to potentially much higher prices and a supply-demand gap in 2011.

I should mention that the Chinese say they may use only half as much copper in 2010 as they did in 2009. I should also mention that the Chinese routinely lie to try and manipulate the markets.

It is true that Chinese demand for copper has weakened in recent weeks. But that has been offset by growing demand elsewhere.

In sum, it’s my view that China’s buying strategy, ebbing domestic stockpiles, the constrained global copper scrap supply and continued end-user demand are all supportive of higher copper prices.

Silver Inventories Are Low … We Could See a Price Spike

The financial crisis saw many industries use up their stockpiles of silver — and now they need more. Silver is used for many industrial demands — from mirrors to photography to flat-panel TVs. The stress on global mine supply could cause prices to spike higher. Meanwhile, there are new industrial uses for silver all the time. For example, migration to long-life silver-zinc batteries will only add to demand.

I haven’t even mentioned investment demand for silver. I mean, you wouldn’t care about a chart showing how exchange-traded funds have become a major force in the market, would you?

I thought not. Anyway, in the short-term, I still think silver prices could go lower. In the longer-term, I’m very, very bullish on silver.

And that, in brief, is why I find myself trudging deep into the hills of Central Mexico. The nearest sizeable town is the site of a famous Catholic miracle.

See, when the conquistadores arrived, they squared off against the local Aztecs. Legend has it that an agreement was reached, under which the natives would accept Spanish rule and embrace the Catholic faith if they were defeated in a weapon-free battle. The Spanish conquerors were about to lose, when suddenly the sky went dark and Saint James appeared holding a fiery Holy Cross, causing the Indians to immediately give up.

How did they know it was St. James? Why did the natives accept that this fire-wielding apparition was on the side of the conquistadores? Hey, it’s all part of the mystery, one that will never be solved. But I plan on solving some mysteries of my own, starting with whether the mines I’m going to see are good values.

How You Can Get Your Piece of This Mexican Treasure

Now is a great time to join Red-Hot Global Small-Caps. You want to get onboard when the best stocks are cheap, and I have a bushel of red-hot stocks that I believe will be going higher longer term. You can get onboard now … or wish you had later.

I’m not long silver or copper now. When the time comes, you could go long copper with the iPath DJ-UBS Copper TR Sub-Index ETN (JJC). But if you’re doing this on your own, for Pete’s sake, be careful.

Yours for trading profits,

Sean

P.S. To join Red-Hot Global Small-Caps today, call 800-898-0819 to speak to your personal customer care representative or order online.

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