Along with other commodities, the basic materials have taken something of a beating recently. The durable goods report suggest that it could be more than just a technical move as shipments, orders and backlog for primary metals all slowed while inventory growth accelerated. It is worth noting that the fundamentals aren’t bad, they are just not quite as good as they were a month ago. Most industries wish they had 15% growth in orders and 25% growth in shipments, and with both growing at a faster rate than inventories it is hard to argue there is a glut. Still, it will be interesting to watch whether the deterioration continues.

Fabricated metal products, which were never as strong as the primary metals to begin with, also show a slowing trend. Here, the fact that inventory growth was faster than order growth and nearly as fast as shipments suggests a higher degree of caution is warranted. Further, with these firms building inventory they are likely to need less of the primary inputs in future months.

Larry Kudlow sees falling commodity prices and bond yields as cause to worry about deflation.

Copper
According to a Bloomberg article, Chinese copper demand is slowing as well.

Copper demand growth in China, the world’s biggest consumer of the metal, may slow to 5.6 percent this year, as record prices prompt makers of cables, wires and air conditioners to switch to cheaper substitutes.

Consumption may be 3.8 million metric tons, Yang Changhua, senior analyst at Beijing Antaike Information Development Co., which advises the government on industry policies, said today at a conference in Nanjing in eastern China. The estimate is lower than his March prediction of consumption of 3.86 million tons and last year’s growth of 9 percent.

Meanwhile, Zambia keeps digging up more of the stuff:

Chamber of Mines of Zambia general manager Fred Bantubonse has said Zambia’s copper production for this year was likely to be at around 600,000 metric tonnes.

In an interview, Bantubonse said this year’s copper production was higher than last year’s which was pegged at 466,000 metric tonnes. “Future prospects of copper production for the year 2009 are likely to about 800,000 metric tonnes all things being equal,” he added.

Nickel
Inco has the right idea: produce less metal but earn more income.

Gold
South African gold production plummeted by 6.1 percent over the three months ended July from the previous three months, according to Statistics SA.

Newmont Sees Lower Gold Production Until 2008

Russia’s gold production down 0.4% in 8 mthsRumors of massive central bank gold selling are still just rumors.

Chemicals
In their latest Investment Survey, Value Line noted significant improvement in ranking for specialty chemicals makers such as Watch List member Sasol (SSL).

The Specialty Chemical Industry is currently ranked 32 out of 97 for year-ahead performance. This is, as noted, in the top half of all industries covered by The Value Line Investment Survey, and a considerable improvement compared with our June report.

Most companies in the specialty chemical sector reported strong bottom-line advances during the June quarter. The earnings outlook for the sector remains relatively favorable for the second half of 2006, as well. Moreover, much of the strength will probably continue into the first half of 2007. This is a disparate group, however, and prospects vary considerably by the product line and market position of each participant. We urge investors to carefully review each stock before making specific investment decisions.

Disclosure: Author is long the Streettracks Gold ETF (GLD)

Disclosure: Author is long STREETTRACKS GOLD (GLD) at time of publication.

This is considered heresy by most fans of investing in gold, but we consider the folks at Barrick gold to be fairly smart cookies. In 1987 they began to hedge their production, agreeing in advance to sell gold at then-prevailing prices. Over the next 14 years as the gold price steadily fell, the forward sales strategy increased their revenues by $2 billion over what would have been achieved at spot prices.

In June, 2001 the company announced plans to buy Homestake Mining, gaining 2.2 million ounces of annual production and 20 million ounces of reserves when gold prices were near their trough. Then, on Valentine’s Day in 2002 they renewed their affair with the metal, announcing that they would reduce their hedging activity to 50 percent of the newly-expanded production. At the time, Gold was trading just north of $300 per ounce.

By November 2003 the company had sworn off hedging, pledging not to hedge another ounce for 10 years. Since then the existing forward sales contracts have largely been fulfilled. Gold bugs believe Barrick was wrong to hedge in the first place, and are unwilling to forgive what they see as a late recognition of the changing environment. We see things a bit differently: a 14-year success story of hedging at the right time, followed by a two-to-five year transition away from the program that began more or less at the right time. The chart below shows that Barrick outperformed the Gold Bugs Index while the hedge was on, but has trailed since while the hedges unwound.
Which is a prelude for our commentary on today’s announcement that Barrick will buy NovaGold Resources to consolidate its interest in projects in Alaska and British Columbia.  We think it is a signal that the rise in gold prices is far from over.

Disclosure: Author is long STREETTRACKS GOLD (GLD) at time of publication.