Bah humbug!
Now I enjoy Christmas as much as the next bloke.
But isn’t it a bit early for the shops to have all their Christmas stuff out already?
And do we really have to listen to Christmas jingles for the next five weeks?!
Of course this also means you can expect the annual end-of-year market reflection – and the big market forecasts for 2013.
Most of this will be entertaining…but totally delusional. The cold fact is that no one has any idea what will happen next year.
Last century, the famous American author, Peter Drucker, explained the limitations of market forecasting better than anyone I’ve heard since:
‘Trying to predict the future is like trying to drive down a country road at night, with no lights…while looking out the back window.’
But we’re simple mammals, with instincts honed by evolution to take risks.
And we just can’t help ‘having a crack’ at predicting the future…
After all this is the reason the global gambling industry is half a trillion dollars in size. Though of course it’s multiples bigger than that if you include investment markets as gambling!
And the reason our risk taking instincts have brought us this far as a species, is that risk taking can pay off.
A perennial market trend in the resource sector that can see this risk pay off, is betting on the ‘hot commodity’ for the following year.
Each year there is a ‘hot commodity‘ that tends to emerge at the start of the year. By picking it early, investors can make huge gains over the following twelve months as all stocks in that sector have a manic run up.
This year it was graphite.
As is the way with hot commodities, the fundamentals were already in place for the commodity. The idea just needed to cross over and reach critical mass amongst investors.
Then suddenly… *BANG* – graphite stocks took off in late January, and rallied hard for four months.
Graphite stocks like Lincoln (LML), Archer (AXE), Talga (TLG), and Syrah (SYR) gained 102%, 163%, 306%, and 660% respectively in just months.
Graphite Stocks Gained up to 660% in Under Five Months
The trick of course was to predict this in advance, and profit from this whole rally. It also means picking the best in the pack to get the best performance.
Now I’ll admit I was a few months later than I would have liked in tipping the graphite story to Diggers and Drillers readers. Though we tipped the ‘best-in-class’ – and have seen this trade almost triple in just six months.
This is of course high risk investing, and is definitely not for everyone!
With all the market volatility in the markets today and risks on all sides – punting on small caps is a ‘hard way to make an easy living’.
Unless you’re OK with insomnia, you might prefer to keep you cash in dividend payers and term deposits (or if you want better capital growth, gold). Finding the best way to earn passively while avoiding risk is a project my colleague and mate Nick Hubble has worked on for three years. You can find out what he’s come up with here…
A functional portfolio has some funds allocated to less risky assets, but also some with risk too. Personally I have about half precious metals, and half small cap resources stocks.
Hot Commodities to Watch in 2013
So what’s my bet for the hot commodity of 2013? I’ll explain in a moment. First, a recap of previous ‘hot commodities’…
In 2011 it was potash.
In 2010 is was rare earths.
And in 2009 it was lithium.
In each case there was a trigger factor that pushed the simmering fundamentals to boiling point, triggering a mania phase in the stocks exposed to that commodity.
For example, BHP made a bid for the world’s biggest potash company, and the Chinese reduced exports quotas for rare earths to set the cascade off.
These type of events are unpredictable, so we just have to keep our ears to the ground (or let google alerts do the work for us).
A good starting point to research candidates for next years’ ‘hot commodity’ is in the Royal Geological Society’s risk list.
I’ll keep my final conclusions for Diggers and Drillers readers. But I can give you some insight into my thinking. For a start, my short list would firstly include anything relying on South African mining production. Its mining sector is badly hamstrung by union activity, violence and protests that look set to fester.
So as the leading source of the metals, platinum group metals are right up there on the list. My pal, Dan Denning of The Denning Report, was an early mover on this trade, as he was with Aussie shale gas.
South Africa is also a big producer of vanadium, and a dominant producer of manganese, and fluorine. So I’ll keep a watch on those too.
For hot commodities, the market loves to run with something really exotic sounding, and fluorine would fit the bill. It’s a $2-3 billion market used for fluorocarbons to go into coolants, brakes, and non-stick surfaces.
Another one on the risk list that fits the bill is tungsten. Supply of tungsten is dominated by China, and it looks like another ‘Rare Earths’ type story in the making. A flick of the switch from them to restrain exports, and every stock with a sniff of tungsten will take off.
Tungsten is used for drill bits, and military applications such as bullets. The price has moved with conflicts in the past, so an escalation of violence in the Middle East could be a trigger factor here.
Antimony and Molybdenum are also possible hot commodities. Though for my money, they’re less likely until they change their names to something catchier. Branding is everything, and ‘Tungsten’ sounds much better!
But in the end, this trade is just that: a trade. It comes with a list of risks as long as your arm.
But as anyone who bought Syrah Resources in January will tell you, a 1500% gain may justify a certain amount of risk, and time invested in researching the next year’s hot commodity…
Dr Alex Cowie
Editor, Diggers & Drillers
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