Beware of “The Economy”


Investors, especially those in America, tend to think of “the economy” or “the market” as if the U.S. economy and the U.S. stock market were all that mattered. At the time that most of us were at university and learning the basics of investing, the U.S. situation was representative of the world situation. It made sense at that time to think of “the economy”, because the world pretty much responded according to the health of the American economy.

That situation has changed over the past two or three decades. The changes over the past decade have been far greater than all but a minority of investors come close to comprehending. Even a year ago, there were some who argued that the world was “coupled” to the U.S. Nobody today would seriously try to make that argument.

If your investment horizon is limited to American companies whose profits depend on domestic consumers, then you have good reasons to be dismal. The United States is trying another dose of stimulus to keep “the economy” muddling forward. Europe is in a deep funk as analysts debate the adequacy of bank stress tests.

For those investors who take a global perspective, there are truly exceptional investment opportunities. In the midst of Western gloom, the copper price is close to its record high. Iron ore is so far into record territory that they would have to re-write the record books. Most of the metals have seen strong gains in price over the past year.

Metal prices are up sharply, representing strong fundamental demand. Yet, the prices of the exploration companies, for the most part, remain in the cellar as investors look at the world through their gloom-colored glasses.

Action is beginning to get underway. One of our base metal juniors has soared five-fold in less than six months, based on little more than growing investor awareness. A few of the base metal companies have been “discovered” by investors. Most of the companies are still waiting to be discovered.

In case anybody remains unclear on why metal prices are up, and why junior company share prices deserve to be up, let me review the global picture for the metal markets. China is now the second largest economy in the world. Last quarter, the Chinese economy grew at a pace of 10.3%. Headlines noted that the Chinese economy was “slowing”, as growth in the previous quarter had been over 11%.

China is by far the largest consumer of metals. As a developing economy, it uses far more metal per unit of economic activity than a mature economy. With economic growth in China (and India, Indonesia, Brazil and other developing nations) global demand for metals continues to increase, even with the West mired in a period of slow growth. And, while demand for metals continues to grow, new supplies of metals are constrained.

I am not advocating that anyone speculate on higher metal prices. However, I can say with a high degree of certainty that the mining industry will need new sources of supply. The base metal juniors are integral to the future of the mining industry. Over time, those values will be recognized. The five-fold gain in six months is a sample of the gains that investors can realize in carefully selected companies in this industry.

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