If Ringo Starr walked into your office, you’d think you’d recognise him, wouldn’t you?
After all, he had one of the most distinctive voices in the Beatles, the All-Starr Band, and not to mention as narrator of Thomas the Tank Engine.
And so it was, one sunny day in 1999 in Cranleigh, England, one of my musical idols walked in…and I totally failed to recognise him.
I’d like to blame this lapse on three things: his sizeable beard, some heavy-duty sunglasses, and most importantly, the fact that Ringo Starr walking into the joint was the last thing in the world I had expected! I mean… seriously, how often does that kind of thing happen?
Anyway we got chatting away quite amicably. Firstly about Liverpool as his ‘scouse’ accent was clear as day, and I had lived there for a few years in the recent past.
Back in my Liverpool days my house had been on Greenbank Lane, which I asked Ringo if he knew. I explained helpfully that ‘…it was near Penny Lane, if you’re familiar with that’?
I wondered why he thought that was so funny, but ploughed on none the wiser. Then I asked what he did. ‘Oh you’re a musician, that’s cool’ I replied, following with ‘…are you in a band’?
He was eyeing the door by this point, so I finished off by telling Ringo that I played the guitar a bit. Then sealing my embarrassment forever, told him that ‘…I’m up for a jam if you’re free some time.’
As he left in hysterics, the whole office burst into laughter too, and finally the penny dropped for me. And as you can imagine…the fact I totally failed to recognise a major celebrity has gone down forever in family folklore.
Anyway, where am I going with this tale, you ask?
Well, today’s question is…am I about to do something similar?
Only this time am I staring into the eyes of the best opportunity in mining stocks that I’ll ever see, but just not seeing it…?
Here’s why.
Mining stocks have been falling for thirty months now, and the falls we’ve seen have been so severe, that like Ringo Starr walking into your office, a resources rally is just about the last thing you expect to see.
Since early 2011, the metals and mining index is down 50%, and the small resources index is down by more like 80%. Morale out there is the lowest I can recall.
But here’s the thing: nothing can fall forever.
In fact, the contrarian investors’ handbook tells you that this is the time to buy: when the sector is on its knees, prices are at structural lows, and no one wants to know about it. Put another way, you should buy when no-one else is buying.
After all, the lower the sector goes, the closer it is to the bottom. But spotting the bottom is the trick. And for now, institutional investors and punters alike are still throwing in the towel and heading for the door, particularly as China continues to slow.
In fact the market heard from China yesterday, with the growth rate for the second quarter. There had been some earlier panic thinking it could come in between 6.5% to 7.0%, as one Chinese official fluffed his lines in a speech to that effect.
The official figure proved this was a storm in a teacup, as it came in at 7.5%.
And when you step back at look at how China has slowed down in the last three years, the fall from 11.9% to 7.5% is hard to miss.
My old mate and colleague, Greg Canavan, Editor of Sound Money, Sound Investments, has been calling for China’s wheels to fall off for some time. The reason being that he expects the immense credit splurge to catch up with China soon.
The big spike in China’s interest rates recently is exactly the kind of warning sign he has expected. His argument is gathering momentum, and his latest report is well worth a read.
The truth is, after starting the year quite bullish on China, I have to concede the data has since gone the other way, especially over the last few months.
With falling PMI’s (Purchasing Managers Indices), the recent interbank credit scare, and some dodgy import data last week, the pieces were all in place for yesterday’s uninspiring economic growth figure. More China anxiety is part of the reason why resources could be in for another rough patch before things swing the other way.
I know this old bull is sounding bearish, but after thirty months of falls, if we see another rough patch, then it could be the last. And in the midst of all the bearishness, a few voices are starting to break rank and forecast better times for commodities.
Take for instance a recent report from JPMorgan, ‘Ten reasons to start getting bullish on commodities’.
‘In a number of commodities, prices have fallen far enough for long enough to force involuntary cuts in production and to spur fresh demand… Risk is now skewed toward demand growth surprise and production disappointment. Our analysis concludes that it is in the best interests of most commodity index investors to buy immediately.‘
In the report, JPMorgan were more bullish on energy, which makes sense when there is a new tide of trouble in the Middle East. I wrote about this bullish picture for oil in Money Morning last week. JPMorgan weren’t so hot on precious metals.
But JPMorgan aren’t the only ones. Merrill Lynch liked the look of beaten up mining stocks after this two-year bear market. Its analysts say, ‘contrarians start your engines’. And local funds like EMR Capital are getting ready for the next resources rally as well, expecting the new Chinese government to step in later this year.
However, it will take far more of these brave voices to turn the resource market around. But if they’re right, history has shown again and again that this has been the way to make life-changing gains.
Of course it takes a great deal of courage, patience, and risk capital (punting money), but if you get it right…being the earliest person in a trade that ultimately goes the right way is often a life changing experience.
Dr Alex Cowie+
Editor, Diggers & Drillers
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