Metals: Nickel's Shining Hour

If you are nervous about inflation, you want to buy gold, right? Actually, you might be better off with another, far less glamorous metal: nickel.

As the economy has perked up, nickel prices have risen from below $5 a pound in April to above $7 now. Of course, the industrial mineral has a long way to go to get anywhere close to the nearly $25 a pound it commanded in the spring of 2007. But the surge is still encouraging to metal-watchers.

Indeed, some analysts expect the price to continue climbing as investors become convinced the economic free-fall is over and recovery is approaching, if not under way already. The price of the base mineral, used in producing stainless steel, has been helped by the hoarding of Chinese producers who figure they won't see such low prices again for a while, analyst Bart Melek of BMO Capital Markets (BMO) says. "Chinese importers have doubled the average of their purchases in the last couple months," he says.

While nickel's star has been rising, gold's appears to have set. Gold prices have slipped from about $1,000 an ounce in February to about $938 now. And some analysts, such as those as Deutsche Bank (DB), expect gold prices to continue to struggle. Historically, the Deutsche Bank experts say, gold prices tend to underperform those of industrial metals when general price levels reinflate after bad times.

Why the divergence? Sentiment for gold is being weakened by expectations that the Federal Reserve will move against inflation by raising interest rates. Already, inflation-adjusted rates on longer-term bonds have been climbing, making it costly for investors to keep their money parked in gold. "As yields rise, the relative cost of holding gold rises," says Melek. "Gold doesn't yield anything."

Higher inflation-adjusted yields tend to boost the dollar, too, which is not good for gold bugs. Melek says concerns over the dollar, as well as inflation fears, typically are what drive investors to gold in the first place.

Longer term, nickel's upswing may endure because of its trendy applications. Phil Flynn, a market analyst with Alaron Trading in Chicago, says it plays a role in rechargeable batteries and may prove important in the move to fuel-efficient cars. Says Flynn: "It's a very hot industrial metal."

For investors, the best way to take advantage of the rise of nickel may be through mining-company stocks. Vale S.A. (VALE), for instance, has already seen its shares leap above $18 each, more than double the price of last winter. BHP Billiton's (BHP) stock has also doubled, and now fetches over $55 a share.

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