Why Metals Stocks Haven't Peaked

Not that the price of oil hasn't moved up and down as speculative cash has flooded in and out of the oil market. The price of a barrel of West Texas Intermediate hit an intraday high of $70.85 on Aug. 30, 2005, as traders bid up the price of oil on speculation that Hurricane Katrina -- which made landfall on Aug. 29 -- would shut down a significant part of oil production and refining in the Gulf of Mexico.

On Nov. 1, the price was down to $58.30, despite Hurricane Rita's landfall on Sept. 24 and the damage it caused, as traders sold the storms. Despite crude inventories at high levels, oil prices have bounced back in the last two months, on speculation that something in Nigeria or Iran or Venezuela would disrupt supply. Crude oil in New York closed at $70.40 a barrel on Monday, its first close ever above $70.

But it took the anticipation of two huge hurricanes -- and then the passing of those storms -- plus the prospects of major geopolitical upheaval to produce a 10% to 15% swing in oil this year and last. In the much smaller gold and silver markets, all it takes is the launching of an ETF or two.

Gold and silver have been driven higher on the projected launch of funds that let retail investors buy the commodities. The launch of gold ETFs pushed gold prices up 12% in the 90 days before the ETFs were actually launched. (Prices fell 10% in the 90 days after trading in the ETFs began.) Silver is now going through the same process. Not surprising since Barclays Global Investors, the backer of the silver ETF, estimates that demand for its ETF will require it to buy 12% -- 130 million ounces -- of global silver demand.

Waiting for the Metals to Cool

So where do I come down?

Yes, in the long term I believe the metals boom will run for the rest of the decade -- or until a downturn in the global economy puts the kibosh on demand for all commodities. So, for the long term (or until the day of economic reckoning), I'd like to own shares of metals producers.

And, yes, in the short term, I believe that flows of speculative cash have pushed the prices of all the metals, but especially silver and copper, to heights where they've become unglued from the positive long-term fundamentals. (Gold, the first choice of investors in any crisis, is, as always, a special case.) In the jargon of Wall Street, they're ahead of themselves. I wouldn't sell positions in this sector that I own -- the froth will get frothier over the next few months in the aftermath of copper strikes in Mexico and the election in Peru -- but I wouldn't add new positions just yet.

For that I'd wait for a sharp little correction. Nothing too big, mind you. But enough to take gold and silver off the front page of The Wall Street Journal for a while.