Money: Metals: Bonanza or Strategic Mistake?


With everything but trumpet blasts, minor (excuse me, "strategic") metals have burst on the scene recently as the best investment—the "gold of the '80s," as strategic metals booster Gordon McLendon describes them. Undoubtedly there is potential among the scores of minerals that are considered "critical" or "strategic" according to various definitions. But at the risk of sounding hopelessly cynical, a dash of cold water is needed to cool the red hot zeal of the brokerage refineries.

By now the arguments for minor metals as a strategic investment are familiar enough to most. They center around the assertion that the United States and its allies are in a "resource war" with the Soviet Union at a time when Western stockpiles are low, foreign dependence is heavy, and demand is rising for military applications of various metals.

Indeed, the United States is dependent to varying degrees on foreign sources for 20 of 36 "strategic" minerals. America must import upward of 90 percent of 7 metals. The federal government's strategic stockpile is felt to be deficient by nearly 50 percent overall, and efforts are under way to bring the government hoard of things like cobalt up to snuff.

It is also true that military spending on the scale President Reagan has in mind is sure to boost demand, and hence prices, for a host of metals required in the manufacture of special steel alloys for the new weaponry. It is likely, too, that nonmilitary demand in areas like laser technology, fiber optics, and robotics will require increases in columbium, titanium, germanium, chromium, and so forth.

Fine, but the first thing that needs to be said is that the prices of metals, like anything else, do not operate in a vacuum. The law of supply and demand is notorious for foiling the bold predictions of investment propheteers. Just as silver fell from $50 per ounce in January 1980 to under $10 recently (despite the insistence of some that it was on its way to $100), so the price of cobalt returned to $18 per pound after being run up to $50 in the wake of the oft-cited 1978 invasion of Zaire's Shaba province.

Strategic metals brokers always use that allegedly Soviet-inspired escapade as an example of the West's vulnerability but neglect to tell the rest of the story—except to quote current prices as a glorious bargain-buying opportunity. The moral of the story is that—resource war or no resource war, cartel or no cartel—the market tends to adjust to the most severe shortages and price manipulations.

In the case of cobalt, just as with silver and oil, production increased and consumption fell as substitutes were found. Needless to say, if you had bought cobalt when it was at $4 per pound prior to the Shaba invasion and sold at $50, you would have done very well. Or take chromium. The engines of capitalism did not collapse when Zimbabwe went "Marxist," and the USSR halted its exports two years ago.

Other metals—titanium, for example—have had equally impressive price run ups. In fact, most of the "strategics" have had mighty gains, which gives rise to the question: How much more potential is there at a time of generally falling commodity prices and apparent disinflation? And if strategic metals are so hot, one wonders why brokers invariably urge clients to hold them for three to five years.

Among the dozens of different metals, there are sure to be some that will soar in the years ahead. How do you choose the best candidates? Chances are you'll have to rely on the expertise of a broker. But even the expertise of the most honest brokerage firms that have entered the strategic metals field in the last two years is very questionable.

The market for metals, barring the few (lead, zinc, palladium, platinum) that are traded on the London Metals Exchange and the New York Mercantile Exchange, is as disorganized and non-investor-oriented as it is complicated. Historically, the market in minor metals has been made by a score of old metals merchants, most of them in London and New York, each of them tending to specialize in a few metals. Their raison d'être has been to act as middlemen between primary producers and end users. Rarely have they wanted to bother with the "man-in-the-street."

That has begun to change somewhat. As investor interest has been whipped up, some of the more adventurous merchants have begun to do business with novice brokers (while continuing to keep their own hands clean of direct involvement with the public).

Firms like Sinclair & Co. and Bache have been doing their best to provide a new service to investors interested in strategic metals by attempting to construct a package of certification, storage, and insurance. But as Nick French, trader for the London merchant firm Wogen Resources Ltd., told me recently in reference to one leading broker, "If it takes us full time [to trade just a few metals], I don't see how they are going to be as sharp on the ball as us." French also complained that the upstart "investment dealers" are hopelessly "trying to force [minor metals] into the parameters of other investments" with their talk of spreads, commissions, unit trusts, and so on. "They are trying to impose outside laws on an industry that traditionally hasn't had them."

For their efforts, investment dealers exact a heavy price from those investors willing to entrust a conservative minimum of $50,000-$100,000 to their care for the recommended fallow period of three to five years. In addition to forgoing interest on his funds for that time and to storage and other costs of at least 2 percent per annum, investors must pay commissions that range as high as 10 percent at either end of the transaction. For the record, Sinclair & Co. works with a buy-sell spread of 5-8 percent, according to Paul Gleason of its new London office.

What's more, these costs assume that you can buy at a reasonable price in the first place. One Florida-based firm was recently quoting cobalt at $50 per pound, more than twice the going market price. Finally, even with the best of brokers or merchants, the metals investor is apt to wait a good while to get what he considers a "reasonable price" for his barrels or ingots or boxes of strategic goodies, simply because of the illiquidity of the market.

All that having been said, however, one should not overlook this alternative investment area. Just be careful, and educate yourself. Consider stock market plays related to strategic metals—not only the shares of producers like Oregon Metallurgical and US Antimony, but also the shares of end users. "What's important to remember is that you don't have to just be involved in brokering metals," says Robert Sylvester, a Washington-based strategic metals consultant. "You can get involved in mining stocks, mining equipment companies, pipeline companies, fabricators, and end users who push the material through the system. A diversified and total strategy is better than just buying cobalt."