There is a widespread notion among investors, analysts and pundits that
the escalating trade conflict between the U.S. and its trading partners is
bad for the global economy. This is no stretch. The leap from there to it
being bad for commodities is understandable, but less certain. Still, people
who should know, like those running the world's largest mining company, are saying it's so.
Is it any wonder, then, that we've seen the rally in commodities that
started in 2016 start to peter out?
The chart sure looks like a wave cresting—but how do we know it's the
trade conflict that's causing it?
In truth, we don't. But the recent downturn includes commodities facing
structural supply deficits, like copper and nickel. That clearly isn't being
driven by fundamentals. This leaves "investor sentiment" as the
likely cause—and that's often driven by perception more than reality. Have a
look at this chart, which zooms in on the GSCI Commodities Index since the
start of the current trade conflict.
There's no smoking gun on this chart. In fact, commodities rose after the
U.S. fired the first salvos in the conflict. On the other hand, the blows
kept coming, and their cumulative impact does seem to be weighing on
commodities prices.
This much is largely understood. What seems to get left out of this
discussion, however, is that the U.S., the EU, China, India and many emerging
economies are still reporting economic growth. Problems in Turkey and Argentina
do not cancel out the massive growth in so much of the rest of the world.
There's a problem with believing that the global economy is growing and at
the same time believing that there should be lower demand for the raw
materials that make that growth possible. One might argue that investors are
reacting now to lower demand in the future. Fine. But then why aren't
investors bailing on equities and other assets that would be hurt by the same
global economic downturn?
Perhaps the answer is simply that Mr. Market is bipolar, as legendary
investor Benjamin Graham once wrote. If so, there's no use moaning about
commodities being down when they shouldn't be, or equities being up when they
shouldn't be. They are. We play with the cards we're dealt.
But there's another, much more fundamental and solid reality here that's
relevant: the world's population isn't getting any smaller. Even if global
DGP growth stalls, as long as the number of people in the world keeps
increasing, that's bullish for metals, industrial minerals, agricultural
commodities and everything else all those people will need. There will always
be cycles in commodities markets, of course, but this underlying trend will
keep pushing general demand for decades to come.
So What?
What does all this mean, in practical terms, for resource investors?
- It means we should be cautious about speculating in
commodities, just because they "should" go up.
- Until the general upward trend for all commodities is
reestablished, we invest only in the ones that are already going up.
- For metals investors, that's uranium and vanadium this
year. Vanadium has doubled this year, but it's a tiny, more speculative
market. Uranium is up about 37% this year, but that's a stellar
performance compared to other metals. This makes uranium as the best
driver of value in resource stocks at present.
That said, I'm not just arguing for uranium just because it's up. Its
price remains well below the cost of production at a time when demand is
increasing. China is building scores of nuclear power plants, and even Japan
has plans to re-start 30 of its reactors. The world may someday abandon
nuclear fission for power, but that day is decades away. This is why I have
had no doubt for years that uranium must rise. What's different now is that
it's actually happening.
Of course, a rising tide does not lift all ships equally—especially not
the ones with holes in their hulls. Picking the right uranium stocks is
essential at this time.
Caveat emptor.
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Lobo Tiggre, aka Louis James, is the founder and CEO of
Louis James LLC, and the principal analyst and editor of IndependentSpeculator.com.
He researched and recommended speculative opportunities in Casey Research
publications from 2004 to 2018, writing under the name "Louis
James." While with Casey Research, he learned the ins and outs of
resource speculation from the legendary speculator Doug Casey. A fully
transparent, documented, and verifiable track record is a central feature of IndependentSpeculator.com
services going forward. Another key feature is that Mr. Tiggre will put his
own money into the speculations he writes about, so his readers will always
know he has "skin in the game" with them.
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Charts courtesy of the author.