Take Advantage of Weakness in Metals and Mining

Today's market is seeing a sell-off in equities because of alignment of expectations which had outpaced the true improvement in world economy. However, I believe that the long term growth story for metal and mining sector is still intact. The reason is that these companies are sitting on real assets which have long term value. So while fools rush in to buy Bank of America (BAC), savvy investors should rush in to buy metal and mining stocks whenever they are unreasonably discounted on a day like today.

First reason is: While BAC is a solely US based company, the economy which is in the deepest trouble and will stay so for any foreseeable future, mining and metal companies are the true global plays. In fact these days most of the demand for their products is coming from emerging economies rather than already developed ones. And by definition, emerging means that's where the growth lies.

Secondly: I believe that after this competition for printing money is over, true value for any currency will be determined based on the real growth in that country and its ability to buy hard assets in natural resources. I know it sounds somewhat like reverting to gold standard, but governments will have to devise a fair mechanism to value the GDP and benchmark it with a common denominator. Because if not, then every nation will try to print unlimited amount of its currency to keep the GDP high and create bubbles in its own economy as well as its effects on other economies also.

However, by commodities I don't mean all commodities. That excludes crude oil and natural gas. Most of the demand for crude oil (around 25% of it) currently comes from United States. And with current changes in US auto markets and the economy as well, that demand is going to decline in the future. While emerging economies will be compensating for it for some time, as they develop their own mass transit system (read it as demand for other commodities again) and introduce stricter fuel economy standards, their oil demands will start declining soon. Natural gas is a different story from the demand side equation. It is a supply side phenomenon. There is just so much supply of Natural Gas available that I don't see any pricing pressure developing in its favor in the foreseeable future.

But rest of the commodities are the best long term plays out there. So metal and mining stocks are the real gems out there which will shine even with the slightest amount of growth in world economy. Because that is where most of the spending from governments (infrastructure spending) is going to be concentrated on. I would recommend buying FCX, BHP, RTP and AUY. I think RTP and AUY are the strongest with a P/E ratio of 15. FCX is a great buy because of its huge market dominance in copper.

Disclosure: Creating position in RTP and AUY at attractive entry points. No position in FCX and BHP at the time of writing. I don't hold any position in BAC as I consider it a sole speculative play.

Comments

[whidbey:]

You are early in metals, this sell off will affect all world markets including those buying gold and silver.

The demand for gold in the USA looks to be declining for a time, but with fall seasonality I hope the global buying will occur including the US market.

Aug 17 02:26 PM

[AndrewBaker:]

Commodities are the bets to be placed right now: as long as we are going to continue making things and eating, commodities will be needed, and with the dollar being devalued by quantititive easing and debt, you need to buy something that will retain its value and hopefully increase it; and commodities are that something.

Precious and industrial/base metals, agricultural, and energy are all necessary and no government, regardless of the politicians, who collectively are a drain on resources, can alter out need for these items. So, buy commodiites if you want to preserve your wealth.

Aug 17 03:50 PM

[Fighting Yoda:]

Recession and Deflation is never good for commodities. We have both. China will stop supporting commodity prices (likely already has), producers will stop cutting production - price declines will accelarate.

Aug 17 04:09 PM

[Bruce Pile:]

You may be right about natural gas not being in short supply for awhile. About the only way that will happen is if America starts aggressively building LNG facilities to export gas and/or aggressively starts building nat gas refueling stations to convert our cars and trucks away from oil. Both those things would take time even if there was the money and backing to do it.

Aug 17 11:47 PM

[Mad Hedge F...:]

bvb. Now that the stock market is rolling over like a cheap date, use the weakness, not to buy stocks, but silver. The US Treasury is relentlessly soaking the bond markets with ever rising amounts of borrowing, and loading up on inflation hedges during periods of weakness has to be a great idea. The American silver eagle $1 coin offers investors one ounce of .999 fine silver with a walking liberty design for $15, or 7% over the spot price. The premium on these coins has varied from $1-$4.50 over the past year, depending on the Treasury’s production rate, which is running at near double 2008 levels. Interestingly, an ever present flight to safety bid made sure that the premium never got below a dollar during last year’s liquidity driven crash in prices. If you had to pick a precious metal to buy on decline it would be this one, since it is already 34% off its year ago high, compared to only 9% for gold. If you need the size, liquidity, and low fees silver futures contracts offer, email me at madhedgefundtrader@yah... and I’ll tell you how to get set up. If you want to take physical delivery to hold it in your hot little hand, will it to your grandkids, hide it from a predatory ex-spouse, or bury it in your backyard, go to Millennium Metals at millenniummetals.net

Aug 18 12:48 AM

[HChang:]

Everything comes down in a recession or deflation, including commodities prices.So if you are afraid of a big correction in the stock market, keep your money in the bank. So buy BAC, because they got cheap money and earn good interest for lending money out.

Aug 18 09:57 AM

[rick12345:]

Couldn't have said it better myself. Still, Wall street will manipulate the price in its favour, thus masking the true value of many stocks.

Aug 19 05:42 AM

[buybigtires:]

Mining is experiencing a huge amount of consolidation and volatility right now. Unless you have great confidence in the management of Rio Tinto, BHP Billiton, and Vale, I would suggest sticking solely with metals that have already been mined and refined.

Sep 02 10:32 AM