Why Metals Stocks Haven't Peaked

Is it too late to buy into the boom in metals stocks -- everything from gold to silver to copper to iron to zinc? After all, flashy gold stock Goldcorp(GG Quote) is up 130% or so in the last 52 weeks, and plodding copper stock Phelps Dodge(PD Quote) isn't far behind, with a 90% return.

Or does the current boom in metals have longer to run, making this a good time to buy despite gains like these?

Investors looking to answer such questions should take a clue from the boom in oil prices, particularly from a theory called Peak Oil. The analogy isn't perfect -- the commodity markets for metals are much smaller and much more speculative than the market for crude oil.

But applying a theory that I'm calling "Peak Metal" argues that while short-run risks have risen recently, the boom in the prices of metals and metal stocks is a long, long way from over. Over the long term, the only thing likely to derail it, in fact, is a big slowdown in the global economy -- and therefore in global demand. And that doesn't look likely in either 2006 or 2007.

Supply Squeeze at Work

Peak Oil is a controversial theory that argues that, sometime soon, global oil production is due to hit a peak. After that point, no matter how much money oil companies spend on exploring for new oil and developing new reserves, global oil production won't go up. After a period of stagnant production, global production will indeed start to decline.

Most of the controversy about Peak Oil involves shouting matches about when -- if ever -- this peak will occur. Estimates range from now to 2008 to 2020 to never.

To me, predicting the date for peak production is an interesting parlor game. Given the immense ignorance we have about the true levels of production and reserves in major oil producers such as Saudi Arabia and Russia, I simply don't think it's possible to come up with a specific year.