This Industrial Metal Is Leaving Gold in the Dust
Commodities / Metals & Mining Apr 26, 2015 - 01:14 PM GMTBy: Investment_U
Sean Brodrick writes: Precious metals are stuck in low gear (though the miners are starting to look much better). Many Oxford Club Members have asked how they should fulfill the metals portion of their portfolios.
I believe one outperformer this year will be zinc. It’s already up 12.9% since March 17. That’s much better than gold. And the good news is zinc is poised to go higher yet.
Now, zinc is not a precious metal. But in terms of how useful it is, it’s downright magical. This industrial metal is used in everything from galvanized-steel auto parts to batteries to medicine.
Mixed with copper, zinc becomes brass, so it’s probably in your plumbing fixtures. And if you’re fair-skinned like me, you probably use it on sunny days because zinc is in the better-quality sunscreens.
Still, magical or not, zinc doesn’t pop out of a unicorn’s butt.
It comes from mines. And those mines are rapidly depleting.
Falling Well Short of Demand
We can always open more mines, right? Unfortunately, no. The problem is zinc is not a particularly abundant element. It makes up only 0.007% of the Earth's crust. Miners looking for big, new zinc deposits have gone as far as Greenland. And they’re still looking.
To make matters worse, mine supply is already not meeting demand. The world’s refined zinc supply fell 310,000 metric tons short of demand last year. That’s the largest dip since 2005, according to International Lead & Zinc Study Group data.
The gap could expand to nearly 2 million tons by 2017.
To meet demand, the difference is taken out of zinc stockpiles. In the past year, the London Metals Exchange warehouses have seen their reserves drop 40%.
This likely means zinc prices will go higher. In fact, they could rise as high as $1.09 per pound by year-end, according to my sources. That’s a 9% climb from recent prices.
But let’s say a new big deposit is discovered. And let’s also say it’s rushed into production at twice the rate that most mines are developed. That would still mean five years until more supply hits the market.
How will the supply/demand gap be bridged in the meantime? I think by higher prices. Zinc isn’t waiting around, either. It’s already heading higher.
Look at that breakout! And I don’t think it’s done yet.
How to Play Zinc Now
There are different ways to play this. You could buy a zinc miner, though there are few pure plays in that industry. (As always, be sure to do your own due diligence before you buy anything.)
Or you could buy something like the PowerShares DB Base Metals ETF (NYSE: DBB). It tracks a basket of three metals - aluminum, copper and zinc. Aluminum is still weak, but copper is starting to show signs of life after its January low (which I wrote about here). The ETF has a total expense ratio of 0.82%.
And if you want a really interesting play on zinc, look in your pocket...
Pennies are 97.5% zinc. For years, it’s cost more to produce these coins than they’re actually worth. (It cost 1.83 cents to mint one penny in 2013.) All told, the U.S. loses over $100 million minting the coins each year. The government will lose even more when zinc prices headed higher.
So if you can find a good alternative metal for minting pennies, you can probably name your own price from Uncle Sam. Just be aware that the zinc lobby is very powerful in Washington D.C...
They’ll no doubt spend millions to keep pennies in the red.
All the best,
Sean
Have thoughts on this article? Leave a comment below.
P.S. With prices down, many investors have opted to sidestep the resource sector for the time being. That's INSANE. Just when, exactly, do you think you should buy? When the price of gold hits $1,500/oz? When oil is back at $100 per barrel? The folks who will profit most from the downturn in resource prices are investing NOW. And I can show you how to join them – while taking on as little risk as possible. Click here to see what I mean.
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