COMMENTARY — North America limps toward recovery

For investors in metals, the 1990s has been a treacherous time. First, North America dipped deeply into recession and, now that the U.S. and Canada are limping toward recovery, Europe and Japan are slowing the global economy.

With few exceptions, precious and industrial metals have responded poorly. Silver is still more than 90% below its peak levels of early 1980; aluminum, copper, nickel and lead have dropped 30-40% just in the past two years. The highest real rates of interest since the Great Depression have not only held the economy in check, they have also fuelled deflationary pressures. As we enter the mid-1990s, producer prices in most industrialized nations are either stable or falling, while inflation at the consumer level is declining toward the lowest levels seen in decades. This development, along with a battered world economy and a massive repayment of debt at the corporate and household levels, is finally giving central banks the opportunity to cut back interest rates.

If we were dealing with a “normal” economic cycle, this would soon provide the stimulus for a global recovery. In turn, an increase in consumption would encourage producers and retailers to build larger inventories and eventually inflation would start to rise.

The world economy will respond to a more accommodative monetary policy, but even so, the coming recovery may still differ from recent historical patterns. Growth in consumer demand in the G-10 industrialized nations is gradually waning.

Another reason for our economic underperformance is the fact that enormous manufacturing capacity is being exported to nations with low labor costs. Initially, this will add to the distress of the world’s richest economies, since expensive social restructuring will be necessary to accommodate the support and retraining of our unemployed. Later on, we hope the G-10 economies will reap a sizable benefit, as hundreds of millions of new consumers will spend and invest part of their disposable incomes. In addition to these economic pressures, the fact that we are still caught in a deflationary spiral will also alter the pattern of the recovery. Under these circumstances, metals investors will not be able to hope for the type of explosive gain which was the norm during the recovery and boom phases of previous economic cycles. On the other hand, investment opportunities and returns elsewhere will be less intriguing, as well.

— From a recent issue of Market Report, published by Cavelti Capital Management Ltd., Toronto.