Commodities are hot when stock market is shaky

Some of the hard and soft commodities in the resource universe are printing endless new highs, enriching producers. Analysts continue to deliver rosy forecasts and raise target prices on the commodities themselves and most of their related equities.

Despite this fact, companies lower down in the food chain than the production level are not responding at all, suggesting that equity market participants do not have long-term faith in rising prices even though most economic measures point firmly in the other direction.

Gold/Silver

Precious metals prices are soaring, with silver having broken the $20/oz mark and gold looking ready to challenge the psychological $1,000/oz mark. Quality gold equities that are not at the production stage already are getting absolutely no traction out of this run. We hope this situation will change, perhaps once we breach $1,000/oz but are having trouble getting comfortable with this view based on the action of the past few months.

Oil

Oil at $110 would have been unthinkable not so long ago and perhaps there is some speculation in the price as traders have been going long -- but nevertheless companies are cash flowing huge dollars at these prices. This is not reflected at all in the share prices of oil and gas producers and one wonders what it is going to take for these stories to be revalued properly -- including the oil sands companies which have been absolutely beaten down.

Copper

Despite the concerns over a slowing US economy copper prices remain near their all time highs -- sitting today at $3.84

per pound. Copper producers and developers are actually faring quite well relative to similar players in other commodities. Analysts are now sharply raising their forecasts from previous levels and it appears that takeovers of developers with pounds in the ground will begin to occur at a higher acquisition cost per pound.

Potash/Phosphate

UBS analysts recently boosted their long-term potash price to $550 a tonne from $500 and their 2008 forecast for phosphate to $950 a tonne from $800. The analysts said there was no supply relief in sight for sulphur so prices will continue to increase. A recent deal for supply between the Belarussians and India priced the product at $600 per tonne.

We feel that the few listed plays in this space are taking a breather before another major leg up, and current market pricing presents an excellent buying opportunity with prices likely to continue to increase. Because of the scarcity of listed product in this area we believe that all players will participate in upside, not just the producers.

Conclusion

Logic dictates that with the strong cash flows being generated across the commodity universe, these stories are going to have to get another turn. If the market rolls over for 1,000 points however, they may get beaten up further before they run.s