Last week the market sounded the latest in a recent series of warning signals for a new bull market in resources.
You probably don’t realise it, but the Australian resource sector just put in its best week in more than four years.
Over the week the Metals and Mining index gained 9.4%.
Major moves like this aren’t common. You have to go back to March 2009 to find a bigger weekly gain. This is important. Moves of this size are often typical of violent changes in trend.
Sure enough, that move in March 2009 was the week that the mining sector began a two-year bull market in earnest.
So with a similar sized move last week, the evidence is now really mounting that investors should plan for the next resource rally…
This chart puts last week’s jump in context:
Australian Resource Sector – Pump Primed for Action
Source: BigCharts
It’s an impressive move. No two ways about it.
I wouldn’t necessarily expect the resource sector to rally to the moon tomorrow. It can take a few months to confirm a turn. My point is that this may be the first part of that process, and it will pay to be ready for it.
A Breath of Fresh Air for the Resources and Mining Industry
It’s no coincidence that this big move happened in the same week that the Australian dollar finally cracked.
Over the week, the Aussie fell by 3% to hit parity with the US dollar. That’s a huge move in a short time.
Any Aussie business owner that exports goods for a living will be breathing a sigh of relief. In recent years, our strong dollar has made exporters less competitive. That goes for farmers, manufacturers…and miners alike.
When goods trade on the global market, to keep an edge you need lower production costs than your competitor. If you have a low currency, you can set wider margins.
The high Aussie has been as much of a hindrance for miners as it has been for the rest of the economy. So the prospect of a lower dollar is a breath of fresh air for the sector.
The rate cut to 2.75% last week marked the tipping point for the Australian dollar. Suddenly it looks like it’s about to free-fall. Accelerating the process, a line-up of high profile hedge fund managers are now getting excited about short-selling the Aussie. By this I mean they’re making billion dollar bets on it falling.
Stanley Druckenmiller, a hedge fund trader famous for making an average of 30% a year over a few decades for his funds reckons: ‘…the Australian dollar will come down, and will come down hard‘.
A fall in the Aussie could be the catalyst the resource sector has been waiting for to turn around.
Even after the 9.4% jump in resources last week, the sector is still painfully cheap. It’s still priced as though the world is in the grips of the GFC, when this isn’t the case. There is a fundamental disconnect between the valuation of the resource sector, and the economies of its main customers.
To me, this reeks of opportunity.
It’s a big old sector though…
So What to Buy?
Last Friday I wrote to you about why small-caps can be FAR more profitable than large-caps.
But don’t go too small! Out of 1,000 or so ASX-listed mining companies, about half of them are under $20 million in size, and are very low on cash. So approach with caution.
The less risky bet, while still getting some leverage, is to go for mid-cap producers.
These are the up-and-coming stocks that have done all the hard yards of exploring, getting funding, and building the mine; and are now in the initial stages of production – and cash flow. Pick the right one, and your risks are low, and the potential gain high.
There are a few stocks like this, tucked away amongst the flotsam and jetsam. And after 25 months of falling resource stock prices, these have been sold off with the market indiscriminately. They are quality goods going on the cheap.
That makes NOW a good time to look at these stocks. With the resource market turning up, and looking set to continue rising on the falling Aussie, these will be the stocks to rise fastest.
For example, a cashed up oil producer I’ve tipped has rallied 15% already in a week, to put it up by 75% overall. A highly profitable, early-stage copper tip has soared 28.9% in the same period.
It’s not just the conventional commodities I like. Lithium is used for lithium ion batteries, and is a strategic mineral that has a very bright future. Often these niche areas of the market offer the best rewards. For example my lithium stock-tip has bounced 55% in just a few weeks.
Another commodity I still really like is graphite. This is another strategic commodity that I think investors can make some big profits from in a resource rally. Graphite is one of the most interesting commodities in the sector too. The growth area for graphite is in the lithium ion battery market. But the really cool applications are in cutting edge use in graphene tech.
In the last week alone, the graphite stock I’ve tipped has rebounded by 20%, to put it back to a 100% gain.
It’s a big sector. But hidden between the boring large-caps and the sketchy small-caps there are some that I like to call ‘better-stocks’. And after a two-year selloff, from the current smashed up prices these stand to make investors some great returns.
We’ve been waiting for the right market conditions to be able to do this…and that time has now arrived.
Dr Alex Cowie
Editor, Diggers & Drillers
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Ed Note: Aussie resource stocks have had their best week in four years. Doc Cowie says that now is the time to buy as the rally takes off. In today’s Money Morning Premium, Kris reveals the eight-point checklist that helps the Doc determine which stocks are good and which stocks are better. Click here to upgrade now.
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