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Gold/Mining/Energy : MIRANDOR-MIQ ON MONTREAL -- Ignore unavailable to you. Want to Upgrade?

To: saul mikaliukas who wrote (2048)	7/17/1998 3:16:00 PM
From: Sailfish	Respond to of 2635

Greetings Saul... Thank you for a very interesting and informative post... Regards....Ray

To: saul mikaliukas who wrote (2048)	7/17/1998 4:44:00 PM
From: jocko	Respond to of 2635

Hello Saul and thank you for the information. I don't think FV will mind if I post this..... it supports your idea of the Jrs coming back. July 16, 1998 Frank A. J. Veneroso Global Economy Asia ú The Deflation Trade and the Base Metals We have commented recently that a large bet has been placed by participants in all markets based on a conviction of a deepening recession in Asia which threatens to engulf the world in deflation. One aspect of this deflation trade is large short positions in commodities. We have argued in recent pieces that the policy environment in Asia now suggests stabilization in these economies and recoveries in coming quarters. If this happens and US and European final domestic demand continues above trend, this deflation trade will be disappointed, leading to large reversals in recent trends. This reversal should encompass the base metals. Despite the decline in the Asian economies, there has been enough strength in the North American and European economies to keep global demand on an uptrend this year. As a consequence, according to our associate Simon Hunt, global demand for base metals will be positive this year. At the same time, aggregate mine and scrap supply will be down. Simon attributes this to production declines in the former East Bloc countries and sharp curtailments of scrap supplies. On balance, despite the Asian recession, base metal markets are moving further into deficit. This is apparent in the movements of visible stocks of such metals, which have tended to decline this year. Of great interest is the fact that stocks are not rising this summer. Base metal demand declines seasonally during the summer months. Even when these markets are in deficit, there tends to be a stock buildup in the summer. The absence of such a buildup this year suggests a overall "seasonably adjusted" trend toward low stocks. Sensitive commodity prices are a leading economic indicator because of inventory dynamics. During recessions stock liquidations add to supplies. Toward the end of recessions reliquification of the economy reduces pressures for further stock liquidations. Depletion of stocks also limits further stock liquidations. As stock liquidations abate, supply falls and prices rise. The financial crisis in South East Asia has been especially severe. The rate of stock liquidation must have been correspondingly intense. It is Simon Hunt's belief that inventories of base metals and of products containing base metals have now been liquidated. As interest rates fall and demand in Asia stabilizes, such stock liquidation should surely abate. The US economy reduced its rate of inventory build in the second quarter as it worked off excessive imports that built up in the first quarter as a result of the trade shock from Asia. Globally, stock liquidations of base metals should soon be over, if they have not already ended. This should lift base metal prices. Despite the Asian recession, global base metal stocks are actually fairly low relative to consumption. In the past there has been a tendency for base metal prices to move inversely to the stock to consumption ratio. This year base metal prices have plummeted despite stable to falling stock to consumption ratios. This can be attributed in part to large hedge fund short positions in these metals arising from their belief in a more general global deflation. If the Asian economies stabilize and recover and stock liquidation in the region ends, stock to consumption ratios in base metals will fall to levels consistent with very high prices. Eventually hedge funds with deflation bets in base metals should become frustrated and cover, leading to a sharp rally in these metal prices. Some of the recent bounce in base metals prices probably reflects the beginning of this process. Comex silver stocks have fallen to a new low. The high silver lease rates earlier this year drew metal "out of the woodwork". Apparently, the market's ongoing deficit has absorbed most of these supplies. There are no doubt large speculative short positions in silver as there are in base metals and gold. The silver price could readily rebound if base metal prices recover. For more information on this topic contact: Simon Hunt Simon Hunt Strategic Services Quadrant House 7-9 Heath Road Weybridge Surrey KT13 8SX England Phone: 011 44 1932 859 111 Fax: 011 44 1932 859 222