Why Metals Stocks Haven't Peaked

Twin Peaks?

Now look at the three similarities between Peak Oil and Peak Metal:

• It's becoming harder and harder to find significant new deposits of everything from gold to copper. Gold production in South Africa, historically the world's biggest gold producer, is now just one-third of its peak, because the country's deep underground mines are exhausted, and mining companies haven't been able to find enough new gold deposits to make up the difference. Global gold production has actually tumbled as gold prices have spiked. After peaking in 2001 at 2,621 metric tons when gold sold for less than $260 an ounce, gold production fell in 2005 to under 2,500 tons.
• When new deposits are discovered, they are in politically riskier countries. In gold and copper, that has meant replacing production from South Africa and the U.S. with production from Peru and Indonesia, for example.
• Production costs are higher in newly discovered deposits. Part of that is a result of location: It's more expensive to produce copper if you have to build roads, railroads and ports from scratch in remote Indonesia than it is to produce copper from Arizona. And part of that is a result of the poorer quality of newly discovered deposits. Costs are rising at many gold-mining companies because the grade of ore -- the amount of gold per ton of rock -- is lower in newly discovered deposits than in older mines.

To those, I'd add these factors that could produce even sharper and more sustained price increases for Peak Metal than for Peak Oil.

• Mining companies are even more conservative about adding new production than oil companies. Oil companies, initially hesitant to invest when oil hit $30 because they were worried that oil prices would fall back to $20 or less, have started to factor $30- or even $40-a-barrel oil into their long-term capital-spending plans. Mining companies, scarred by the boom-and-bust cycle of an industry that is even more cyclical than oil, are so far sticking by their pre-boom projections for the prices of their commodities.

  Freeport-McMoRan Copper and Gold(FCX Quote), for example, recently reaffirmed its intention to use projected copper prices of 80 cents to 90 cents a pound in making its decisions on capital spending to increase production. "Metal prices, like all commodities ... are cyclical," CEO Richard Adkerson told the Financial Times this month, "and I don't see any reason to change the long-term planning price because prices are higher." Copper now trades at $2.70 a pound.

• Oil producers have been able to exploit new technology to drill deeper, to force oil and gas out of stubborn geologic formations, and then bring vast new types of reserves -- oil sands and oil shale, for example -- into production. Nothing comparable has occurred in the metals sector. The last big technology shift -- from deep, underground shaft mining to vast, open-air pit mining -- is decades old. (The next big things -- genetically engineered bacteria and viruses that excrete metals from even the lowest-grade deposits -- are now just smears on laboratory Petri dishes.)

All these Peak Metal factors make me want to rush out and add more metals stocks to my portfolio.

But one difference between the markets for oil and metals gives me pause: The commodity markets for metals are so much smaller than the commodity market for oil that it is much, much easier for speculative demand to drive up the price of gold, silver, copper, etc., than it is to drive up the price of oil.