A ‘Perfect Economic Storm’ For Metals, Mining Stocks

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April 2, 2009

I won’t go into all the same detail I did with the Investopedia story, but I do think this is an important enough (and potentially fruitful) idea to merit looking at breifly here. If you want the whole story, click here to read “Metals and Miners Dig Up Ideal Conditions“. Here’s the need-to-know premise…

I think we’re truly at the onset of a cyclical bull market, and an economic growth phase. The two aren’t always synchronized, though it looks like they are going to be now. Yes, this slight optimism puts me in the minority; for some reason many of the more prominent forecasters expect things to stay terrible in perpetuity. I disagree. More importantly though, an economic recovery will mean greater demand for “things”, most of which are made of metal. Last month’s increase in durable goods orders is a piece of evidence to that end.

Point being, demand for base metals and specialty metals could be cranked up.

The other dimension is wildly low interest rates rate now…. which the Fed can’t do a thing about, otherwise Bernanke & Co. risk upsetting an already-fragile economic recovery effort. Caught between a rock and a hard place, the lesser of two evils is simply letting rates stay low and dealing with - inflation. That’s right, exceedingly low interest rates and billions of dollars flooding the economic system is going to crank up inflation in a way most of us have never seen.

Guess what benefits from inflation though. You got it - commodities, basic materials, metal. Higher prices means margins are widened, but those higher prices will be supported by renewed economic strength.

Metals, Mining Index

So, that’s the fundamental side. What about the technical side? (Remember, I’m long-term oriented, but charts tell me as much useful information as the fundamentals do.)

Here’s the S&P 1500 Diversified Metals and Mining Index. I love the way these stocks got beat up last year, leaving behind some nice values. Even more than that, I love the shape of the reversal effort. This is a ‘U’ shaped transition, as opposed to a ‘V’ shaped move to a bull trend. The former is usually sustainable, especially when as well-paced as this trend is. The latter is usually not a sustainable reversal, meaning you’re getting in about the time everyone else is getting out.

In the article I mention a few companies you may want to look at. One of them is already in the BP portfolio.

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