The Trend in Base Metals based on Capacity Utilization and China Manufacturing PMI

To forecast the trend in the price of base metals we have a lot of indicators to look at. Two of the most important indicators to look at in my perspective are capacity utilization and the China manufacturing PMI.

Previously, I noticed that capacity utilization for mining in the U.S. was improving in November 2012, with the rate growing to 91.1%. Though, the problem is that the U.S. isn't that important anymore when talking about commodities. For example, in 2012 the emerging markets account for 75% of global iron ore consumption (Chart 1), while Asia, South America and Oceania account for more than 70% of global iron ore production (Chart 2). The same trend can be found in gold and silver production/consumption.

Chart 1: Iron Ore Consumption by Continent

Chart 2: Iron Ore Production by Continent

It would be wrong to only look at the capacity utilization of the U.S. to draw any conclusions on the prospects in the commodity market. It's essential to include China, South America and Australia/Canada into the equation.

To read the analysis, go here.

Correlation: Australian Dollar Vs. Iron Ore

Another correlation to add to our list:

Positive correlation between AUD/USD Vs. Iron Ore price.

=> http://brazilianbubble.com/chart-the-correlation-between-iron-ore-price-and-the-australian-dollar/

Very important correlation to trade on. If you see a disparity like this:

You can bet that either iron ore prices will go up, or the Australian dollar will go down. So you can just put your money in both bets, you always win.

Reasoning? If you bet the iron ore price goes up and you bet the Australian dollar goes down you will at least get it right for one of the two. It can't be that the gap widens in the correlation, the gap always narrows to the equilibrium point. If iron ore prices do go down, you will at least make money on the Australian dollar plunging.

I call this the power of trading on correlation disparity.