Copper, coal and iron ore are ones to watch, bank says

The Globe and Mail - By Martin Mittelstaedt

June 23,2010

The bull market in metals, after pausing during the European sovereign debt crisis, is starting to resume and investors looking for the most upside should increase their exposures to mining companies that produce copper, metallurgical coal and iron ore, says BMO Nesbitt Burns.

Those three commodities have the most potential to rise among metal-related investments, although the bank-owned investment dealer also sees buoyant prices for gold, which could rally to as much as $1,600 (U.S.) next year if U.S. dollar and euro jitters intensify.

That sky-high price for gold is one of the most aggressive predictions among mainstream investment organizations, although the bank believes the most likely scenario for the yellow metal is to trade around $1,200, if currency markets don't go haywire.

Copper also looks enticing, with prices expected to average $3.70 a pound next year, up from an average projected price for this year of $3.37 a pound.

The call to take a plunge into the metals is being made just as many investors might have been losing their nerve when it comes to these volatile industrial commodities. The prices of many materials collapsed by 25 per cent or even more since early April, although BMO is taking heart in recent trends suggesting that values have stabilized or are even in a recovery mode.

The drubbing occurred as investors fretted that Europe's debt woes would lead to a financial crisis that would undermine the global business upturn, reducing demand for commodities, but BMO says these fears have been overdone.

"The global economy is going to recover," predicts Bart Melek, the firm's global commodity strategist. "We have a fairly good 12 months ahead of us in the commodity space."

Given the efforts by the European Central Bank and the European Union to make sure Greece and other countries don't default on their debts, "I don't see this morphing into some sort of a credit crisis" that would undermine the world economy, he said.

While Mr. Melek doesn't make recommendations on individual companies, he said many large mining firms, particularly those producing precious metals, are "cheap relative to the cash that they throw off."

The bullish case for precious metals is that they are getting a boost because of investor concerns over currencies. BMO says its "base case" for gold is an average price of $1,200 an ounce next year, while the higher figure of $1, 600 depends on the greenback or euro moving materially lower.

The type of conditions that could send gold soaring include worries over governments printing money to cover their debt, or fears that the U.S. dollar's dominant position as a reserve currency is ending. Silver should also breach the $20-an-ounce level, according to the bank.

Metallurgical coal gets the nod because it is used to make steel, and along with iron ore, is a beneficiary of urbanization in China and other industrializing countries.