Sometimes it’s the unsexy, unloved investments that can pad your retirement. Let’s face it, gold and silver have been superstar investments to own since 2000, but there are other hard assets you should educate yourself about as well. I am talking about base metals and their long-term potential to round out your investments.
In our new Real Assets Mega Guide, Seth Van Brocklin writes, “Among investors aiming to preserve wealth from the threat of inflation, base metals don’t receive as much attention as their more precious counterparts (i.e., gold and silver). It’s not practical to hoard aluminum, lead, tin, or other industrial metals (base metals)… There are viable ways to invest in industrial metals, besides stockpiling them… In order to cover your bases, you should own base metals.”
Virtually all raw materials are becoming scarcer worldwide. The developing world will continue to build out modern infrastructure to the extent that it can, and that in turn will put upward pressure on metals prices in the long-term. Likewise, for the U.S. to simply maintain its existing standard of living, it will require a massive buildup and repair of our aging infrastructure.
Eureka! Natural Gas Geysers in Downtown
Boston Point Up New Demand for Base Metals
A natural gas geyser would normally be good news! Unfortunately, corroded underground copper pipes used to transport gas are the cause of these geysers. Bostonia Magazine reports between 14,000 and 30,000 leaks exist in the area, wasting at least 13.5 million cubic feet of gas throughout Massachusetts in 2009 alone. Watchdog agencies believe this is an extreme under-count.
Boston University associate professor of geography and environment Nathan Phillips found one leak that spewed 400 cubic feet of gas per day. “The average household uses about 200 cubic feet per day,” says Picarro CTO Eric Crosson, manufacturer of gas analyzers. “So that leak was equivalent to two households opening up their gas stoves and heater without igniting them.”
According to Bostonia, these leaks “shaft rate-paying gas customers who must pick up the tab for wasted gas.”
The American Society for Civil Engineers
Gives U.S. Infrastructure an Overall Grade of “D”
The gas leaks in Boston are just one example, in one city. Spread it across the country and look at the roads, bridges, dams, electricity transmission, water pipes, and more, and the waste and costs rise. The American Society for Civil Engineers says a whopping $1.6 trillion will be needed to replace deficient structures. Doing so requires tons more copper, concrete, steel, and raw material of all kinds.
In the long-term, the fundamentals of rising global demand and scarce available supplies of crucial industrial metals are what count. According to the World Economic Forum’s May 2010 report, Positive Infrastructure, the world faces an infrastructure deficit of $2 trillion per year over the next 20 years. It’s a deficit that can’t be closed by printing currency. It requires investment in actual, physical hard assets.
Yes, the Big Banks Make Tons of
Money from “Physical” Base Metals
Big banks are make a killing “managing” the paper markets and creating financing deals for metals. But Goldman Sachs, for example, makes a nice mint holding and storing base metals like aluminum as well. As reported by Reuters, Goldman owns a London Metal Exchange (LME) registered warehouse operation in Detroit holding a staggering 1.1 million tons of aluminum. According to LME, as of the end of June 2011, these warehouses represented 42 percent of global inventory arrivals and 26 percent of aluminum delivered out worldwide.
Reuters reports because of archaic LME rules, there is “much less aluminum leaving the depots than arriving, creating a supply pinch for manufacturers of everything from soft drink cans to aircraft… The resulting spike in prices has sparked a clash between companies forced to pay more for their aluminum and wait months for it to be delivered.”
In other words, this supply pinch is caused by administrative rules, which cause ‘fake’ shortages in the aluminum market, thereby raising prices.
This concern isn’t only with aluminum. Critics of the exchange see a similar problem growing with zinc held in New Orleans’ LME-approved warehouses, which store 61 percent of total stocks! And it’s happened in the past as well. Back in 1998, there were similar complaints affecting copper when 80 percent of total copper stocks rested in LME-registered warehouses in Long Beach and Los Angeles, California.
According to Reuters, critics such as Credit Agricole in London want U.S. and European anti-trust regulators to weigh in because there might be a conflict of interest allowing big players like Goldman to own the warehouses which store huge quantities of metal even as they trade the commodity.
Here’s How You Can Profit from the Base Metal Market
You and I may not be inclined to start up an LME-approved warehouse to store base metals, but there are certainly other ways to profit from this market and protect our savings.
For instance, Global X Aluminum ETF (ALUM) is one method to hold a position in the aluminum market without needing to store tons of it at home.
What’s more, on page 105 in our new Real Assets Mega Guide we reveal 14 additional ETFs and one big company that enable you to stake a position in other base metals and raw materials, which industrialized and emerging economies depend on for their infrastructure and future growth.
Raw materials should be a part of a well-balanced portfolio. The debasement of the U.S. dollar and the misallocation of dollars into bailouts, social programs, and bureaucratic government jobs only make economic matters worse. The depreciation of the U.S. dollar, in which most commodities are priced, makes the case for investing in commodities and related stocks even more compelling.
One last point: All the fighting in Washington conceals the fact that both major parties agree on the need to rebuild infrastructure. When the dust settles after the next election, whoever is in power, you can count on infrastructure rebuilding as a major point of agreement among the political class. Expect base metal demand to create some nice profits in that situation.