In recent years, many people have been shunning stocks and investing in gold, usually thought to be a safe play for troubled times. But gold is looking somewhat tarnished lately. From its high of around $1,920 an ounce in September, it has lost almost 18% as of June 11. Other metals have followed a similar downward trend.
Yet there's a shiny glimmer amidst the investment dross, a metal that for the moment appears to be a winning alternative to the favorite of King Midas: Behold titanium, whose outlook is robust thanks to a big uptick in the aerospace industry.
The Deflating Gold Bubble
Right now, gold is falling so steadily even alchemists must be getting disgruntled. Certainly investors in it are groaning. Gold futures dropped another 6% in May to continue a four-month streak of losses.
"Gold is a bubble, and I think the bubble continues to unwind," said John Mothersole, the lead nonferrous metals analyst with IHS Global Insight's Pricing and Purchasing Service. "Unless you believe in the Mayan calendar cycle, gold is a bad decision."
The tumble that gold prices have taken can be traced in part to a decline in the rupee-dollar exchange rate that began in the third quarter of 2011. India is the largest consumer market for gold in the world, and the drop in the purchasing power of the rupee has big effects.
"The price of gold has just shot up dramatically for someone in India, and in the consumption market basket, that means a big decline in demand," Mothersole explained.
Aerospace Is Looking Up
On the other side of the coin, though, you have the projections for titanium. Aerospace manufacturing is in a healthy growth phase, and that means a rapidly rising demand for the strong, lightweight metal.
The Boeing (BA) 787 Dreamliner is in production with a delivery goal of 10 planes a month. Over at rival Airbus, the troubles and delays plaguing the A350 have been resolved, and that widebody aircraft will go into commercial production by 2014.
Both planes use loads of titanium, which gives the market for the metal significant buoyancy. After the typically volatile titanium market hit bottom in 2010, it rallied, with U.S. mill product shipments clearing 100 million pounds for the first time ever. That figure is projected to reach 110 million pounds this year, according to the IHS Global Insights April titanium report. And there could be double-digit price gains to boot.
"You're got record backlogs at Boeing and Airbus, so unless you get cancellations -- but that's inconceivable -- there will be real product shipments of titanium sheets, tubes and pipe product, such that shipments look to set records over the next two to three years," Mothersole said.
Meanwhile, China is looking to hop on the large plane bandwagon too: It hopes to have its first Comac C919s ready for delivery in 2016. And Beijing is directing significant investments into commercial space exploration.
Coupled with those civilian uses, there's a big military industrial need for titanium. Over the next few years, Lockheed Martin (LMT) will be building hundreds of F-35 fighter jets for the U.S. and a host of friendly foreign powers.
Getting In on the Action
So how can the average investor tap into this perfect storm for a rare and useful metal?
The easiest way is by investing in either of two publicly traded companies -- Timet Titanium Metals (TIE) or RTI International Metals (RTI). It's otherwise difficult to isolate an investment in titanium: You can't buy a titanium futures contract, and a general metals exchange-traded fund would also include flagging gold and temperamental copper. Timet closed Monday at $10.96 a share, and RTI ended the day at $20.46.
While the prices for those stocks have trended downward recently, Goldman Sachs (GS) has endorsed RTI as a good bet come 2013 based mostly on the outlook of aerospace.
"RTI remains bullish on the medium- to long-term trends in the aerospace sector, in line with our expectations," wrote Sal Tharani, a Goldman research analyst, in May.
The Additional Advantages Of Titanium
Thanks to the slowdown in aircraft production caused by the Great Recession, the titanium industry has had time to catch its collective breath and lay in a supply to meet newly rising demand. The previous pattern for titanium had been demand growing rapidly on the wings of a cyclical aerospace industry until it exceeded the supply: In those scenarios, prices shot skyward, then crashed.
This time around, with inventory stashed away and 2 billion tons of titanium available worldwide, there's less concern over supply, and the versatility of the metal will protect its position in the marketplace.
"Titanium is very corrosion resistant and you have a good strength-to-weight ratio," said Kuni Chen, a U.S. metals and mining industry analyst at CRT Capital Group. "It's used not only in high-end applications aerospace, but also nuclear power plants and oil and gas drilling."
And it will continue to play an ever increasing role in intricate industries such as the medical devices field.
"For medical devices, titanium plays an important role because it's biologically inert," Mothersole said. "It's strong and light. you can fashion all things with it like catheters and artificial knees and joints."
Finally, in terms of pricing, it's not as sensitive to exchange rates as copper or gold. That's because titanium is already used in expensive projects from the get-go.
"You have to look at the cost of the raw material in terms of the end-market application," Chen said. "There could be a $200 million aircraft, and so if there's $10 million of titanium [in it], it's a relatively small amount -- a drop in the ocean -- and small changes [in price] won't sway buyers either way."
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