The state of mining stocks so far
Written by Michael Vass
The question in recent days has become, will another fall. Will another major investment bank in America become so unstable due to exposure to sub-prime loans that it will either fold or, if big enough, be bought at a fire-sale price.
Of course this instability has been wonderful for crude oil and gold. Gold in particular has had a huge increase in it’s spot price throughout the year since the first trading day of 2008. The run up is a reaction to the questions of recession, losses, and speculation. But the bigger questions for those involved in mining stocks is will this rush to commodities help and be a sustained process.
There is no one answer, especially as we are just in the wake of Bear Stearns. Lehman and Goldman Sachs have announced earnings, that pleased analysts while still taking massive losses versus year before figures. So you would have to ask, are they positive and are they signaling the end of the crisis.
One outlook can be taken like this, mining stocks must go higher. That is not because of the sub-prime scenario but because of the less prominent factors of the world.
While everyone is focused on America and it’s slowdown in this recession, most are not looking at the fundamentals in the world. Demand for all mined metals, precious or not, have increased because of the growth in India and China. That demand, which could wane to an extent from the record pace in the recent past, will not be going away. Those economies will not stop their growth, as some fear, just because America will slow it’s growth.
Add to that the conditions found in South Africa. Massive power outages have reduced supply, and there is no expectation that in this year stable power supplies will be guaranteed. Thus lowered levels of production should mean higher prices, and likely profit, though not to the biggest names (who may lose due to volume).
With higher prices of the underlying commodity, increased demand, and reduced supply in an arena of economic instability the most probable result is increases for the mining stocks. And while the U.S. may recover by 2009, the fundamentals only get stronger with that result.
So I would think, regardless of rate cuts (that will spur inflation), economic slowdowns (that will not significantly prevent growth in emerging markets), reduced supply, political unrest, and unknown factors the mining stocks will continue to show strength throughout 2008. Investors should not be emotional, nor should they be traders. Taking that thought in mind, potentials exist, and this blog will discuss them in more detail as we go forward.
