By MoneyMorning.com.au

The resources sector is bruised, battered and beaten.

Almost every mining company in Australia is sporting a black eye or two.

And with iron ore down near US$80 per tonne, many of them are spitting teeth onto the canvas…or have gone down for the count.

As an Aussie investor, you can’t ignore this.

But not all is lost.

Commodity prices can’t fall forever.

And if you take the right steps before the market realises this…you could be in for huge gains.

Unless you’ve just emerged from a cave or a coma, you’ll know the Aussie resources sector has endured more than three years of unprecedented pain.

This four-year chart of the S&P/ASX 200 Resources Index [ASX:XJR] tells the story.

It shows how badly the share prices of Australia’s largest energy, mining and metals producers and explorers have languished. Since October 2010, the resources index has lost more than 30% of its value.

Source: nabtrade
Click to enlarge

That chart doesn’t show the rich, valuable veins of minerals that flow from coast to coast. They should be a source of national pride.

But gyrating global markets, stricter access to capital and rising cost pressures have turned the miners into a source of fear and loathing.

Shareholders don’t want to own them.

Lenders don’t want to fund them.

And workers have wrung every drop out of their union-bargained agreements.

None of that bothers me.

Because those factors are transient. They’re cyclical.

And a far-sighted investor can always look through short-term pain.

Of pendulums and coils

You can think of investor sentiment towards the Aussie resource sector as a giant pendulum.

It’s free to swing in any direction…but right now, the factors conspiring against resources have pushed this pendulum almost as far as it will go.

All it will take is for investors to hate this sector just a little less. Then the ‘resources pendulum’ will swing back into the green…and it could bring fast, outsized gains to nimble profit-hunters.

Here’s the powerful thing about how this kind of influence works.

I learned this in pursuit of my university physics degree. But it applies just as much to the forces driving stock markets as it does to the natural world.

When a pendulum has swung far away from normal, it takes much less force to get it swinging back in the opposite direction than it would to get it moving from a standstill.

The same principle drives the financial markets.

Right now, when I look at the Aussie resources sector, I don’t see a victim.

I certainly don’t see a basket case, as most of the mainstream press cast it.

Rather, I see a coiled spring.

And this spring is just waiting for a reason to uncoil…

Stronger forces

When investors see that reason, this spring will go off.

And if the market does as I expect, it will be a quick move when the spring uncoils. When this market moves it will move fast.

So what kind of forces could entice the market to set resource stocks back on a positive path?

There are several potential canaries in the coalmine.

One is the seasonal lift that tends to come when Chinese steel mills restock their ore inventory into year-end.

Right now, the average Chinese steel mill has just 24 days of inventory. In recent years, this seasonal lift has nearly doubled that inventory level.

The arm wrestle between resource buyers and sellers will tip back in favour of the sellers. That means higher prices down the track.

Investors will see that momentum shifting. When it does, they’ll pile back into mining stocks. They’ll start with the highest-cost producers, who were at the most risk of failure.

If you act quickly and you’re willing to take a risk, you could scoop double-digit percentage gains in a matter of days.

But to be frank, the restocking bounce can only drive resource prices so far.

For coal, iron ore, crude oil and the other building blocks of the global economy to come back into vogue, it will take much stronger forces.

You don’t have to look too far to find a potential culprit.

Just switch on the nightly news.

Radical Islamists are fighting a bloody war in Syria. Meanwhile, fierce zealots are approaching the gates of Baghdad. And Ukraine seems no less war-torn now than when MH17 went down. It’s a mess.

I won’t pretend to know exactly how all of this will play out.

But I do know that every crisis — whether it’s real or perceived — brings opportunity.

It just depends on which side of the trade you take.

Our Resources Analyst, Jason Stevenson, has strong views on this topic. You can read some of those in today’s second Money Morning article.

Jason sees things getting much worse before they get better. And his views on the iron ore market will certainly open your eyes.

But if Jason is right, the price of one commodity will boom more than any other.

That commodity is crude oil.

That makes now a rare short-term chance to invest in the oil stocks best placed to benefit.

It’s a resource investor’s dream.

Jason has picked four of the best and most underappreciated energy stocks on the Aussie market for his Diggers & Drillers readers.

The resources bloodbath has shaken out the losers. Now the winners are set to scoop the spoils.

Cheers,

Tim Dohrmann+
Editor, Money Morning

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The post Could This Be Rock Bottom For Resources? appeared first on Stock Market News, Finance and Investments | Money Morning Australia.

By MoneyMorning.com.au