Palladium and copper best diversity plays - BasInvest

LONDON (Reuters) - Now is the time to diversify into metals such as palladium and copper as the global economy is not faring as badly as many expect and as China is likely to ease credit conditions early next year, Ronald Wildmann of BasInvest said on Thursday

"The world is running much better than people think. All the fear factor will go away: The U.S. will not go into a recession, China will go into a soft landing and the debt crisis will probably go away," he said on the sidelines of the Commodity Week Conference in London.

"If this is going to happen, you should diversify."

The case for commodities investment has grown colder since September on fears that Europe's debt crisis could erode demand from one of China's major markets, stalling the world's global growth engine.

Benchmark copper on the London Metal Exchange lost a third of its value to reach its lowest in more than a year in early October at $6,635 a tonne. It has since rebounded, and was $8,025 at 11:44 a.m.

Investors who have been heavily exposed to gold, which is exhibiting bubble-like qualities, should spread their risk into industrial metals, Wildmann said.

Such a move would allow for capital preservation in today's inflationary environment and would enable investors to ride the emerging market growth picture. At a time of lean inventory levels, with many metals close to the cost curve, this could provide a better method to extract value, he said.

"It could be that in a 12-month time horizon, copper will outperform gold, and platinum and palladium will also with a high probability outperform gold," Wildmann added.

Basinvest AG, a Zurich-based asset manager with $200 million in assets under management, including one of a handful of listed funds that invest in physical metals. On its board it counts Paul Wyler, formerly a top executive at Glencore (GLEN.L).

Its BI Physical Commodity Fund which buys metals and stores them in warehouses or vaults, has shed a third of its value since January, mostly due to redemptions during September's sovereign debt-led drop in metals markets. Its assets are now just shy of $50 million, down from $74 million at the start of the year.

The fund is split into copper 21 percent, nickel and lead each 15 percent and palladium and aluminium each 14 percent, with other holdings including zinc, platinum and cash. It reallocates quarterly.

CHINA VIEW

Wildmann said he doesn't buy the bearish view on China -- that the collapse of a real estate bubble and the off-balance-sheet debt burden on its local governments could derail economic growth -- at least not yet.

China accounts for about 40 percent of global refined copper consumption of around 20 million tonnes.

"History shows you that all the countries growing between 8 and 15 percent per year, one day they collapse to 5 percent. It's happened to Korea, to Taiwan to Japan. This will happen in China -- but probably in 2020, not 2012."

Economic indicators are pointing to a soft landing, he said.

Support for the metals market also comes because prices levels for many have sunk near the cost of production.

"When you look to nickel, zinc, aluminium but also platinum and palladium, they are at the marginal cost level. The last time that happened was 2008," Wildmann said.

"To get out of that situation, only three things can happen. Production costs can decrease ... or you can get a shutdown of production ... the third is prices go up. We believe this point is a very, very good entry point."

Given today's environment of quantitative easing and rising input costs, it's unlikely production costs will fall, while shuttering production -- especially in countries sensitive to social unrest such as China -- is problematic due to high costs.

Palladium is set to be 2012's top performer, he said.

The metal is a important input in the manufacture of gasoline-powered cars, which are favoured by the growing middle classes in emerging economies, while stockpiles in Russia, which have been at state secret, are believed to be close to used up.

"There is no reason that palladium is trading below the platinum price. There is a gap of $1,000. This gap is going to be closed," he said.

Copper, one of the few metals priced above the cost of production, is facing a supply squeeze that could force prices as high as $15,000 a tonne, he said.

A lack of new accessible major deposits in the world and declining ore grades, as well as power and water shortages in top producer Chile, keep risks firmly to the upside.

"On the supply side (if) copper goes to $15,000, in Chile you don't produce more," he said.

The market needs two huge projects every year to keep up as demand rises by 500,000 tonnes and old mines produce 200,000 tonnes less, he said. "I think it's just not possible."

(Reporting by Melanie Burton, editing by Jane Baird)