When metal buyers seek market intelligence, they like seeing lengthy reports that include everything. The larger number of variables analyzed, and the more complex they are, the better. At the end of the day, it’s about looking smart when making purchasing decisions, right?
However, the opposite is what works best.
Buyers will make better decisions by focusing on the few variables that really matter and not by considering what’s irrelevant. Here are three things that won’t help you better gauge of price trends. (Still, we continuously see analysts talking about them.)
Useless Thing #1: Inventory Levels
Only a small portion of the metal traded in the exchanges actually represents physical demand, as only few industrial buyers buy directly from the exchanges. The volume traded on the exchange exceeds by far what’s held in inventories. Traders are what make prices move, not industrial buyers.
There is no study that proves a strong correlation between metal prices and their inventory levels. Still, analysts keep talking about their inverse relationship.
Here is a four-year historical chart comparing nickel prices and inventory levels, showing no inverse relationship at all:
Useless Thing #2: ETF Inflows/Outflows
Exchange-traded fund (ETF) inflow alerts make for nice headlines. However, they don’t tell the whole story. You might think that an increase in ETF inflows is a bullish indicator. After all, it represents investor interest, right?
However, new shares can be created for shorting (betting that prices will go down). Therefore, you never know if the inflows represent higher buying or selling interest. As an example, in 2008, inflows in the SPY more than doubled while the index took a 53% hit.
Useless Thing #3: Production Costs
“Production costs will limit any substantial downside moves from this point.” Does that sound familiar? Over the past few years some argued that nickel, copper or aluminum prices couldn’t fall any more, as many producers were underwater.
The cost of production doesn’t determine the value of a metal. It’s what people are willing to pay that determines the price. History has shown that producers can go out of business due to price declines. Prices are never too low or too high; they can remain at overbought or oversold levels for long periods of time.
What This Means For Metal Buyers
Don’t be overly impressed by lengthy and complex price analysis. Think twice before following anyone’s advice when facts show a different story.