They say a comedian is only as good as their last joke.
In that vein, a newsletter writer is only as good as his or her last article!
Luckily, my last few pieces have hit the mark.
Back in August I suggested that the bearish narrative on China’s economy was overblown.
I said the China bears would be proven wrong (again)!
It was a bold call at the time. In fact, commodity sentiment was at its worst since 2016.
But that shifted on a dime last week when China pulled the trigger on its stimulus ‘bazooka.’
The largest package since emerging from Covid lockdowns over two years ago.
I won’t discuss all the aspects here, but the key takeaways include a 50 basis point rate cut.
Plus, a reduction in down payments for new home purchases from 25% to just 15%.
This could open the liquidity floodgates and a sustained transition back to resource stocks.
Already, the SPDR S&P/ASX 200 Resources ETF [ASX:OZR] has surged 18% from its September lows.
And Australia’s $62 billion iron ore miner, Fortescue Metals [ASX:FMG], has recovered almost a third of its value in just two weeks!
I hope my article from last August, ‘Iron Ore Stumbles…China Bears Return! ’ alerted you to this possibility.
If you did, I’d love to hear your story; feel free to add it to the comments section below.
Of course, I’m not some secret confidant of Chinese President Xi Jinping. Nor do I have an ‘in’ with the Communist Party’s Politburo.
I had no idea China was about to do any of this.
And yet, I rushed out two new BUY ALERTS in copper stocks to members of my paid subscription service – Mining Phase One – a few weeks back(both stocks are up sharply this week!).
So why was I so confident about commodities when everyone else was bearish?
It all comes down to my understanding of commodity cycles…
Your edge comes from understanding the commodity cycle
I monitor commodity cycles very closely.
For one, as an ex-geologist, it would tell me how secure my current job was!
But these days, I do it firmly from an investing point of view.
Simply put, know where you are in the cycle, and you’ll know what to buy (or sell), and when.
One way to track this is to monitor spending on new mine developments and exploration.
As the cycle peaks, capex and exploration expenditures tend to reach a major high.
Check it out:
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| Source: Department of Industry, Science and Resources |
Conversely, underinvestment points to a cycle low (or bottom) in the resource market.
Right now, I believe we’re sitting somewhere in the middle.
As you can see, exploration (light blue) and mining capex (dark blue) are well below their cyclical highs in inflation-adjusted terms.
But importantly, activity is beginning to trend higher.
To understand why that’s important, let’s quickly recap how commodity cycles operate:
First, it begins with an underinvestment in new supply.
In terms of the graph above, we could approximate the period from 2016 to 2024.
With limited exploration or capex over the past decade output remains sufficient whilst demand is modest.
However, any uptick in commodity demand will start to expose vulnerabilities.
Put another way…
The foundation for higher prices is born from not replacing old mines with new ones.
This can take years to play out.
But once demand does start to tick higher, and output fails to keep pace, commodity prices can rise rapidly.
So, will this latest China stimulus announcement expose vulnerabilities in the commodity supply chain?
On its own, perhaps not.
But it’s important to remember that this could be the first of many stimulus announcements from China.
And steadily adding to your commodity portfolio as this situation plays out could be the best course of action.
Not right now, but when the ‘stimulus premium’ begins to fade and the dust settles on this latest announcement.
Given this cycle shows no sign of abating, I suggest capitalising on any pullbacks like we saw over August and September.
That’s what I’m doing with my paid readership group.
Keep Your Eye on the Commodity Cycle
This is an underappreciated point…
Minerals tend to ebb and flow throughout the upward leg of a cycle.
As one metal hits a major high, others could be hitting multi-year lows… The performance of gold versus iron ore in 2024 is a good example.
That’s why assessing Capex and exploration trends (like the graph above) offers a useful guide to understanding the overall position in the current cycle.
Individual commodities can throw up some mixed messages for investors.
Based on that, you could also look at a diversified resource index or ETF to understand the cycle’s positioning.
Now, another aspect to consider…
Secular bull markets seldom rise in a straight line.
But they do trend higher.
This is where you could start analysing specific commodities to understand the overall picture.
Take copper…
You can clearly see the futures price trending higher over its 5-year chart, despite numerous setbacks to global growth over that time:
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| Source: Trading View |
Climbing the great wall of worry
You might recall earlier in the year, authorities in China revised their GDP figures BELOW their 5% growth target.
That drove panic across the resource market.
To make matters worse, China’s largest steel producers announced production cuts, which caused iron ore prices to tumble.
By September, several of Australia’s largest mining firms hit multi-year lows.
The China collapse narrative went viral!
But as I explained in my article in August, this was not a reason to panic.
I reminded readers that the key metric to watch was still intact…
China’s imports of raw materials.
A data point that’s difficult for Chinese authorities to manipulate.
And despite deep pessimism throughout August and September, imports of key commodities like iron ore remained robust.
In fact, iron ore imports jumped 6.7% in H1 2024 compared to the same period in 2023!
That’s according to the latest data from the Chinese Steel Association (CISA).
It’s one of the key reasons we increased our copper exposure despite the apparent dire situation taking place in resource markets.
And from what I can see, it’s business as usual for at least the next 12 months.
This cycle continues to turn (upward).
Given China’s announcement also follows the US Federal Reserve’s half-percentage rate cut, investors have every reason to be bullish as we head into 2025.
From East to West, a new wave of liquidity is set to swamp global markets.
Down-trodden resource stocks could be an excellent way to leverage your exposure to this bullish set-up.
A scenario that could see stock prices rise well into 2025 and perhaps beyond.
Just time your entry carefully and be sure to use any pull-back from here as an opportunity to build a long-term position.
Now one final note…
Resource stocks won’t be the only market set to benefit.
As liquidity surges on the back of rate cuts, several other speculative sectors could surge with it.
My colleague Ryan Dinse has uncovered an intriguing strategy for benefitting from this vast pool of liquidity set to flood global markets.
It’s one that could work perfectly well alongside exposure your commodity portfolio!
I suggest checking out Ryan’s latest presentation here to learn more.
Enjoy!
Regards,
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James Cooper,
Editor, Mining: Phase One and Diggers and Drillers
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