{"id":26575,"date":"2012-01-13T01:09:35","date_gmt":"2012-01-13T06:09:35","guid":{"rendered":"http:\/\/countingpips.com\/fx\/2012\/01\/13\/why-fallen-commodity-prices-mean-this-sector-is-worth-a-punt\/"},"modified":"2012-01-13T01:09:35","modified_gmt":"2012-01-13T06:09:35","slug":"why-fallen-commodity-prices-mean-this-sector-is-worth-a-punt","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2012\/01\/13\/why-fallen-commodity-prices-mean-this-sector-is-worth-a-punt\/","title":{"rendered":"Why Fallen Commodity Prices Mean This Sector is Worth a Punt"},"content":{"rendered":"

By MoneyMorning.com.au<\/strong><\/p>\n

“Australia is set for a $112 billion infrastructure boom as the nation adds ports and railways to feed China and India’s appetite for coal and iron ore.” – Bloomberg News<\/em><\/p>\n

As Bloomberg<\/em> reports, this is to back-up the $232 billion going into Australian resources projects. All up, that’s $343 billion.<\/p>\n

Surely it’s possible to make a buck or two from that.<\/p>\n

There is -and funnily enough by taking advantage of fallen commodity prices<\/strong>. We’ll show you how in a moment.<\/p>\n

<\/span>
\nFirst, look at this chart:<\/p>\n

\"market<\/div>\n

<\/p>\n

Source: CMC Markets Stockbroking<\/div>\n

<\/em>
\nIt’s the S&P\/ASX 300 Metals & Mining Index.<\/p>\n

As you can see, from early 2007 to mid-2008, the Index almost doubled. Over the next six months it halved. Then it took another two years to double again as the market recovered.<\/p>\n

Yet since early last year, commodity prices have gone down again. In fact, one of Diggers & Drillers<\/a><\/em> editor Dr. Alex Cowie’s favourite commodities – tin – has slumped 42% since March 2011…<\/p>\n

Commodities Looking Cheap<\/H3><\/center>
\nBut as the Doc told your editor this morning:<\/p>\n

“The London Metal Exchange warehouse stock is down to just 11,000 tonnes. That’s unusually low. Stock piles are down 40% in just three months. So I expect tin to rally from here, and my two tin stocks to go with it.”<\/em><\/p>\n

So, with all those dollars gushing into the Australian resources industry, why the heck have resources stocks fallen?<\/p>\n

It’s all to do with investor expectations.<\/p>\n

You see, even though $343 billion is a lot of money, the market already knows about it. In fact, it’s partly why the market took off leading up to 2008 and again from 2009 to 2011.<\/p>\n

In other words, it’s old news. So these dollars are already accounted for in company valuations. Add to that falling commodity prices and it’s bad news for commodity stocks.<\/p>\n

The following chart of the CRB Commodity Index shows how commodities have done since last September:<\/p>\n

\"CRB<\/a>
Click here<\/a> to enlarge<\/div>\n

<\/p>\n

Source: crbtrader.com<\/div>\n

<\/em>
\nThe main reason the Aussie market failed to keep up with the rising U.S. market last year is due to falling commodity prices.<\/p>\n

And this has obviously meant falling resources stocks<\/a>.<\/p>\n

But that’s the past. What about the outlook for commodity-based stocks. Well, this is where it gets interesting…<\/p>\n

Another Commodity Surge Coming<\/H3><\/center>
\nOur bet is the U.S. and European central banks will print more money this year. They’re already making noises about how successful the last efforts were. So it’s only a matter of time before both central banks reveal their plans.<\/p>\n

For instance, Agence France Presse reports the following from Mario Draghi, chief of the European Central Bank<\/a>:<\/p>\n

“We have seen several… positive developments. The more time that passes since we had the first three-year, long-term refinancing operation, the more we see signs that it has been an effective policy measure.”<\/em><\/p>\n

This follows on from the comments we printed earlier this week from Federal Reserve Bank of San Francisco President, John Williams. He sees a “strong” case for the U.S. Fed to buy more bonds this year.<\/p>\n

To us that means another spurt of commodity speculation this year. Prices have dropped. And although they could fall further, they’re at a level where we believe they’re worth a punt.<\/p>\n

So, where should you stick your cash?<\/p>\n

Our preference is still energy (oil and gas stocks) and strategic metal stocks (e.g. rare earths<\/a>). These are genuine bull market stocks. And when commodity prices take off again, these stocks should move quickly.<\/p>\n

But there’s another sector we’re seriously looking at too…<\/p>\n

<\/p>\n

A Rise to Follow the Fall?<\/div>\n

<\/strong>
\nNot just because of rising commodity prices, but because of how much these stocks have fallen… and that’s the resources services stocks.<\/p>\n

Those are the companies that don’t actually dig the stuff up or drill for things. Instead, they provide the back-up… the “tools of the trade”: drill bits, temporary accommodation, rigs, power infrastructure, and so on.<\/p>\n

Stocks in this sector have taken a beating. And many are back to a level that makes them worth looking at again. Like all small-cap punts, these will be high risk.<\/p>\n

But if as we expect, central banks print more, and China stimulates its economy again<\/a>, it’s possible we’ll see another huge commodity stock boom this year. And after a big fall these are stocks that could benefit the most.<\/p>\n

You wouldn’t want to bet your house on it, because the subsequent fall will be just as big. But if you set aside a small part of your portfolio for speculative punts, this could be where you’ll get some of the biggest returns.<\/p>\n

Cheers.
\nKris<\/strong><\/p>\n

P.S.<\/strong> So, when will the European Central Bank (ECB) print more money? In today\u2019s other article “Prepare Your Portfolio for Eurozone Money Printing<\/a>,” UK Money Morning Editor John Stepek gives his view on the problems facing the ECB. And the actions investors can take to protect themselves…<\/p>\n

Related Articles<\/em><\/strong><\/p>\n

Special Report: Six Extraordinary Resource Investment Opportunities for 2012<\/a><\/strong><\/p>\n

How to Buy Gold and Silver<\/a><\/strong><\/p>\n

The Only Gold and Silver Stocks to Buy<\/a><\/strong><\/p>\n

\n<\/img><\/a> <\/img><\/a> <\/img><\/a>\n<\/div>\n


\nWhy Fallen Commodity Prices Mean This Sector is Worth a Punt <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

By MoneyMorning.com.au “Australia is set for a $112 billion infrastructure boom as the nation adds ports and railways to feed China and India’s appetite for coal and iron ore.” – Bloomberg News As Bloomberg reports, this is to back-up the $232 billion going into Australian resources projects. All up, that’s $343 billion. Surely it’s possible … <\/p>\n

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