Danger lurks in ‘safe’ metals

LONDON - When it comes to metals, risky is the new safe. At least it seems to be for the fund managers that have invested millions in these volatile markets.

By (Reuters)

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Published: Thu 3 Apr 2008, 8:07 PM

Last updated: Sun 5 Apr 2015, 11:35 AM

Only two years ago, analysts warned that, after a meteoric rise to historic highs, buying metals such as copper and nickel could be too dangerous.

But since the start of this year, the term “safe haven”, which describes an asset that can weather bad times in the broader economy, has been used more and more often to explain why money has poured into metals.

So why, if two years ago metals were only for those with an strong stomach for risk, have they become a first choice for investors seeking safe assets?

With copper and tin close to record peaks, metals may now be riskier than ever.

Analysts say they may only have been rebranded ’safe’ because they have risen this year, in contrast to other assets.

“It’s just another way of saying: ’it’s because they’re going up’,” said economist Stephen Briggs at Societe Generale. ”Nobody wants to hear about stock markets, nobody’s interested, so the banks have got to find something else to sell.”

“Metals are ’safe’ partly because they are not related to other asset classes, but in order to persuade people it’s true, you have to have the history,” he said.

PANICKED MARKETS

“By definition, it has to have been as true then as it is now. So why were they not invested in years ago, and why are they being invested in now?”

In today’s panicked markets where investors have seen almost 20 percent stripped from the value of their shares in corporations from Goldman Sachs to Microsoft, anything that makes money will attract attention.

Copper, which last month hit an all-time high of $8,820 per tonne and has gained almost 25 percent since the start of the year, is doing just that.

When the metal, used mainly in pipes and wires, was trading at $3,000, the investment case was based on extremely strong demand and equally tight supply. But now, with prices at nearly $9,000, institutions that offer commodity investment products use different arguments.

“Metals are very often described as one of those assets that always work. They say that they have an inverse correlation with everything else. They are a safe haven. They are physical assets. They are a hedge against inflation, and they are a hedge against the weak dollar. Overall this is questionable,” said Christoph Eibl, head of trading at Swiss-based commodities investment fund Tiberius Group, which manages $1.5 billion.

“LEVERED TO THE CYCLE”

As the building blocks of industrial growth, metals are acutely sensitive to what happens in the wider economy.

“There are hedge funds that are long/short equities looking for a safe haven in commodities, which stuns me because commodities are not safe havens,” said Austin Brown, analyst at Touradji Capital, a New York hedge fund with about $2 billion under management in commodities and natural resource equities.

“I do not understand how a negative economic view makes people think ’Oh, I should be buying copper because it’s safe’. Copper is an industrial metal levered to the economic cycle,” he said.

Even recently, it’s been far from a one-way street for metal prices, and wild lurches are more than possible.

“We do not know whether prices will rise or fall from here but feel that the risk-reward trade-off may be symmetrical and risk averse investors should therefore look to reduce exposure,” Jonathan Bell, chief investment officer at wealth managers Stanhope Capital, said in May 2006, before metals were considered safe.

Since then, there have been some sharp moves: zinc halved in 2007, while nickel halved in just three months last year.

“We are at the edge of a recession, and commodities prices have been exploding—something is wrong,” Tiberius’ Eibl said.

“Base metals are industrial metals that are used for building houses, making cars, and if this market shrinks then demand is going to fall.”



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