‘Where all men think alike,’ wrote Walter Lippmann, ‘no one thinks very much.’
And in times of confusion, fear, and panic, thinking tends to coalesce into herd mentality.
In these times, independent thinking — contrarian thinking — stands out.
In markets, this independence can also offer opportunities for the intrepid thinker.
As our Editorial Director Greg Canavan recently wrote in a piece for The Insider:
‘To survive in these markets, you need to think like a contrarian. That could be difficult because not everyone is a contrarian. As humans, we prefer to seek safety in the herd rather than standing alone, exposed.
‘But what promotes survival in humans risks extinction — or at least a slow death — in financial markets. Following the herd mindlessly can end up being very costly.
‘So it’s important to stay rational while others are losing their minds. In times of heightened uncertainty, like you’re seeing now, being rational is the same as thinking like a contrarian.’
And the commodities sector is shaping up to be an arena where the contrarian investor can apply themselves.
Commodities fizzle
Commodities were an easy trade last year.
Snarled supply chains and Russia’s invasion of Ukraine upended the supply equation and sent prices higher.
Everyone was saying supply wouldn’t keep up with demand. Commodities became a hot, crowded trade.
What about now?
Not so much. And unsurprisingly so.
As Greg pointed out in his piece yesterday, commodity prices are down across the board.
US crude is down 38% over the past 12 months.
Nickel is down 34%.
Tin is down 42%.
Aluminium is down 35%.
Zinc is down 30%.
Key rare earths element neodymium is down 46%.
And lithium, the hottest commodity of them all in recent years, tumbled in recent months:
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Commodities a contrarian opportunity?
Confronted with waning prices and markets betting the US will enter a recession, commodities are no longer a hot trade.
Who’s daring to label commodities a buy now?
Contrarian investors.
Greg made that clear in yesterday’s piece (emphasis added):
‘Who is telling you to buy commodities? No one. Or certainly not too many people out there.
‘This is a great sign. You want to be getting interested when the enthusiasm for a sector wanes.’
Enthusiasm for the commodities sector is certainly waning in line with falling prices.
But ask yourself: Has the longer-term thesis for commodities changed?
What were we hearing throughout 2022?
One: perennial underinvestment in traditional commodities like oil, gas, and coal will lead to supply shortages in the medium term as the switch to green energy still requires these commodities to smooth the transition.
Two: green energy itself will require a whole lot more commodities like copper, nickel, graphite, and lithium.
Have things really changed since?
Our resident geologist James Cooper doesn’t think so.
I leaned on his expertise last week and I will do so again here.
For James, the structural supply challenges persist. They persist even in the face of any short-term recessionary hit to demand.
The long-term outlook for commodities has convinced James that the ‘stage is set for unprecedented growth in the mining sector’.
James summed up his thoughts in a great piece last week:
‘The wider markets continue to grapple with a potential banking crisis…
‘And yet…at the same time…battery makers and car manufacturers continue to grapple with a looming shortage in critical metals.
‘In my opinion, a massive supply crunch in copper, nickel, lithium, and a bunch of other rare earths is now unavoidable.
‘Spending in mining exploration is going up as a result.
‘However, many mining stocks have been hit hard by the wider uncertainty.
‘The selling in February and the first weeks of March extended across juniors and majors.
‘You can either take this as a sign to steer clear of miners for the rest of the year…or…you can see it as a giant opportunity.’
Obviously, James sees it as a giant opportunity, especially in the mining juniors.
Hunting value in the juniors
Mining juniors are notoriously risky.
Fortunes are made and lost on a scale not seen elsewhere.
That’s both the risk and the attraction.
For James, there are ‘few greater gains to be had from the stock market’ than a junior mining stock hitting it big.
So he’s turning his attention — and extensive experience — to what he calls the phase one miners via his new premium trading service, Mining: Phase One.
Mining: Phase One will hunt small explorers set to ‘graduate’ up the development ladder, stocks with potential for big reratings based on drill results.
He’s well-placed to do this. James is a trained geologist who’s worked for exploration stocks before.
And this Thursday, he’ll reveal his process for selecting promising juniors in a must-watch presentation.
As part of his presentation, James will use an ASX junior as an example, delving into its backstory and potential.
You can secure your spot for Thursday’s presentation here.
Regards,
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Kiryll Prakapenka,
Editor, Money Morning
