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Sometimes everything comes together beautifully.
And when that happens in the markets, incredible gains are possible.
Here’s what I mean…
Organization for Economic Cooperation and Development (OECD) data indicates that, for the first time since 2008, none of the G7 economies are in recession right now. Indeed, as of Q3 2017, “no major economy is in contraction mode.”
And much more importantly, the emerging economies, especially China and India, which routinely lead the world in economic growth, are seeing robust, convincing expansion, too.
This is the real deal: synchronized global growth. It’s happening right now.
Global manufacturing data hit at its highest level in six years. The Global Manufacturing Purchasing Managers Index (PMI) is above its 90-day moving average. At last read, it was at 54.4 and has been effectively “stuck” above the important 50-point mark since mid-2016.
All of this growth means demand for resources is rocketing right now. The crushing, five-year bear market that ravaged the Commodity Research Bureau (CRB) Commodity Index and vaporized 60% of its value is a distant memory. The CRB has already recovered close to 25% of those losses – and the fact of synchronized global growth means lots more gains are in store.
What’s more, the relative costliness of just about every other investing segment means the resource market just might be the last great untapped value out there.
To show us how to take advantage of this incredibly rare confluence of conditions, Money Morning Director of Research Matt Warder – a veteran of resource investing – sat down with me to talk about the things any investor can do to take full advantage of what’s happening out there right now…
This Is the Best Time in 10 Years to Own Resources
Greg Madison: Hi, Matt. Thanks for taking the time to talk with us today.
Matt Warder: Sure – my pleasure!
GM: Given that the resource bear actually coincided with all these fears of slowing growth back around 2011… what kinds of opportunities does this particular moment of “synchronized global growth” present? I mean, as far as every major economy is concerned, the picture is… pretty good. How will the really fast-growing economies like China factor in this?
MW: First off, I’d probably say that “slumps” are actually good for the resource sector. Of course, they’re miserable – really miserable – while you’re in the middle of one, but usually what emerges is much healthier.
As my colleague Rick Rule often says, there are, in fact, two paths that markets can take to higher prices: Either existing supply must be destroyed, or new demand must be created. During the slump, mining companies cut back heavily on uneconomical production and slashed exploration budgets, which mostly took care of the first part. And now we have a nice bump in demand, which is taking care of the second.
So at the moment, like you said, things look pretty good. While I certainly think demand growth in China – which has driven most of this commodity rebound over the past two years – will slow over time, it’s not stopping any time soon, and that’s important.
But more than that, the biggest shift I’ve seen in the market has been China’s government-driven resolve to reduce pollution by closing down its own uneconomic, inefficient mining operations. That has forced end users there to reach out to the rest of the global market to fill that supply gap, and that in turn has helped to push up global prices. We’ve seen it in steel raw materials (metallurgical coal and iron ore), we’ve seen it in base metals (copper and zinc), and I think we’ll see that carry over to the precious metals sector as well through the end of the decade.
GM: What are some of the easiest ways for investors to participate in what looks to be a multi-year boom in resource investing?
MW: On a physical basis, investors can buy gold, silver, and platinum, of course.
But beyond that, investors really do have to look to the equity markets – be it ETFs/ETNs that focus on the commodity markets and producers themselves, or via shares of individual producers, refiners, traders, logistics companies, and the like.
As we discussed in the recent Gold Summit, the best opportunities that I think exist in the market, though, are typically within the junior mining/exploration sector, because while share prices for those companies absolutely trade along with their underlying commodities, they tend to be more leveraged to those commodities than their larger peers, strictly due to their comparatively smaller market caps.
As such, if an investor can really do their homework – and importantly, withstand the added inherent risk – and buy in at a low point in a company’s price cycle, then the returns they stand to make from a junior miner far outweigh what they could glean from investing directly in the underlying commodities themselves.
Of course, they can always read more about the Rick Rule Alliance and let us do the heavy lifting.
GM: We’ll get a link to that Gold Summit when we publish this. (Note: click here to access the summit video).
What are some of the biggest resource opportunities you see out there?
MW: I obviously think the precious metals sector – particularly gold and silver – is set up for a solid 2018, given that this is the first year in a good long while that we know what the monetary policy landscape looks like… three interest rate hikes, likely to come in March, June, and December.
But Zinc is coming out of a multi-year supply crunch, and stocks are at multi-year lows, so it’s fundamentally in a good position to keep rising.
Copper demand also looks good for 2018 – perhaps enough to put that market into supply deficit as well – which should be very positive for prices.
And I also think this year will absolutely be the turning point for uranium – a market that has been in the doldrums for years following the Fukushima Daiichi disaster in Japan back in 2011 – as demand finally outstrips available supply.
GM: Relative to the United States, a lot of these resource booms are in faraway places – Australia, South Africa, Brazil, and so on. What can Americans do about this?
MW: Well, despite how widely dispersed these deposits are, the executive teams that run them have an obligation to attract investors, and that means they have to be as accessible as possible to Western markets. As such, most of these companies at the very least have listings in Canada, Australia, London – or even here in the United States – so they should be mostly accessible to the average American investor.
GM: You’ve been pretty bullish on gold for the past few months and into the future, tracking some catalysts that your research indicates should drive prices up for the year. What are your gold targets for 2018 – assuming no big crises anywhere, which would obviously change the question?
MW: I see gold reaching $1,400 as a near certainty in 2018 – that’s barely 6% up from current prices – and most likely to occur over the summer.
When we look back at the last couple of years, the gold market has sold off a bit when it knows an interest rate hike is coming, and then it will typically rebound after it actually hits. So since we know that the Fed has basically dictated to markets that they’re going to raise interest rates three times – in March, in June, and not again until December – we also know that prices will likely rise in January and early February, then fall in late February and March… rise again in April or early May, then fall in late May and June. And once prices bottom during that particular cycle, there’s nothing but blue sky for gold until December.
GM: So based on these smaller up-and-down cycles at specific times this year, it seems to me that options on funds like, say, SPDR Gold Shares (NYSE Arca: GLD) could be a way for investors to juice their overall gold returns?
MW: Absolutely. Investing in gold stocks, the companies that pull the metal out of the ground – especially the junior miners, like the ones Rick Rule likes.
GM: I know I said “assuming no big crises anywhere,” a minute ago… but what happens to gold if there’s a big crisis somewhere?
MW: Any significant destabilizing geopolitical events – North Korean saber-rattling or protests in Iran, for example – have the potential to move gold prices up by 5% to 10%, depending on their severity. And if a number of those events happen in succession, we could see gold prices that make $1,400 look really conservative.
GM: It’s great to own gold, it’s good to own silver – what other precious metal do you think people should own?
MW: At the beginning of 2017, I would have said palladium, but now that it’s up over $1,000 per ounce, it doesn’t look as attractive to me.
By default, therefore, I’d have to say platinum, which is now historically cheap versus not only gold, but palladium as well. And I suspect – given its relative scarcity, its higher melting point, and greater number of industrial applications – that we will begin to see some industrial users begin to switch over from palladium to platinum in early 2018, which should give overall consumption a much-needed boost.
Now, I’m not yet convinced that will ultimately translate into investment demand (which would really drive the price up), but that possibility certainly remains. And if I had to speculate, I’d much rather do so at the bottom of platinum’s price cycle than at the top of palladium’s.
GM: This is great, Matt. In a year that looks to be pretty well jam-packed with opportunities for investors all over the place, resource investing really stands out as the way to go.
Like I said, we’ll get a link up for folks to check out that Gold Summit with Rick. In the meantime, thanks for joining us. We’ll talk again soon.
MW: Yes indeed. I think no investor can afford to overlook what’s happening in this sector and the kinds of ideas we’re looking at in our resource-focused research service, the Rick Rule Alliance. Come back and talk to me anytime!
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