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China Slowdown Tests Investors’ Metals

Worries over China’s growth pushed down U.S. stocks today, and analysts say a continued slowdown there could soon spill over to high-flying commodities.

The Dow fell 52 points today, after BHP Billiton Ltd., an Australian mining company, said it expects demand for iron ore from China to weaken to single digits as the country’s economy slows. That set off worries that commodities, particularly industrial metals, were vulnerable to losses. “We think China is going to slow from its breakneck pace and that will impact commodity demand,” says Frank Trotter, president of EverBank Direct.

Commodities soared over the last decade along with economic growth, but at a much faster — and some say unsustainable– pace. For example, while the world economy grew by roughly 4% in the 10 years ending in 2011, industrial metal prices grew almost four times as fast, says John Lonski, chief economist for Moody’s Analytics. Normally, the two keep pace, says Lonski, which means much of the recent price increases may have been speculative. “It’s a clear warning to investors that base metal prices are very vulnerable to lower than expected demand,” says Lonski.

Of course, any drop in commodity prices would be modest in the short-term, some experts say. Even with the expected slowdown in China and other emerging market countries, growth could still be robust enough to support agriculture and precious metals. The threat of rising oil prices could also keep inflation concerns and commodity prices high, he says.  “I think it will be a moderation more than a substantial slowdown,” Trotter says of China’s growth.

Still, advisers say investors should be prepared for possibly lower commodity prices, a shift that could also impact stocks. Ethan Anderson, chief investment strategist with Rehmann Financial in Grand Rapids, Mich., recommends mutual funds that invest in a basket of commodities such as precious metals and agriculture as well as industrial metals, so that they are less vulnerable to big price shifts in any one sector. Investors should also shy away from equity sectors that are particularly tied  to commodity prices, such as energy and materials, he says.


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