Metals and Mining Registers Final Lows (Re-Posted from 2016)
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Keep in mind the index is up 25% from $15.25 (XME) at the time of our writing, and currently trading $18.96 on it’s way to $35 – $40
When one looks at the past 10 years in these combined resources, Mining and Metals juxtapose each other in what they represent. Metals have long been a flight to quality for investors and gold bugs who know that global unrest and volatility should bring higher pricing. Conversely, natural resources represent a change in global demand and a shrinking planet with exploding population, which need these precious resources as the world becomes one big FaceBook (FB) page.
For this exercise, we will use a widely followed index S&P Metals &Mining (XME) to track our musings and will act as a referable benchmark to see behind and ahead. In order to see where we are going we need to carefully and expeditiously look back at where we have been.
The first thing to look at is how this combined index acted during the massive devaluation of all assets during the housing crisis of 2008. It was swift and damaging, and like most asset classes, left few prisoners. The velocity of this fall is evident when you look in late 2008, when these two representative assets (Metals + Mining) dropped from an excitable peak and gave back 40% of a move it took 5 years to build. So, let me say this again: it took 5 years to build and it took 30 days to give this back.
This selloff scared the living shit out of everyone, and most were not able to keep any eye on the ball, because the world was coming unglued, only to be saved by TARP. During this time, all assets were getting smashed, it didn’t matter what you held: bonds, real estate, or equities. These were the most uncertain times for any investor, and for many portfolio managers, were the most trying of everyone’s career.
Bear Stearns and Lehman were gone and the term “short selling” was not only for stocks, but for your house.Greed had turned to fear so quickly that we went from a liquidity glut to a liquidity stoppage. Banks just simply stopped lending money, because they greedily lent it to everyone to make a buck. In hindsight, it was a screamingly poor reflection of the faults of our free markets and capitalism itself. I guess greed and fear are the critical axioms of capitalism.
But the real insult was still ahead for Mining and Metals as business chugged forward in 2009 and followed with a solid 2010 getting investors to invest and re-enter the market. Many were subtly lured back into these markets on the back of the logic that the Chinese would pay any price for these natural resources and for these metals. They had already bought nearly all US based investments, including treasuries, stocks, and real estate – certainly they would swallow up all of the lithium, coal, and oil shale, right? It would all be sold in an upward spiraling price inflation frenzy that would leave every North American rich. The benefit of the mass of land where we all sit would be our ticket to riches and the freedom that comes with it. The world had finally figured out what we had, and now they wanted it. The world wanted our metals and resources, and they were willing to pay top dollar as commodities globally were in acquisition mode.
This was only the start of the problem, and if you jumped in the water thinking these August prices were nothing more than a value, you were terribly wrong. The market fell 70% from here, harder and faster than the first leaving many broke, out of business, or out of the market.
The 3 Year Head Fake
So by the end of 2008, you had in Metals and Mining what you had in each asset class, you had a volatile bottom followed by a 3 year bounce. This bounce convinced everyone that good times were here forever, and I hear many Canadians talk about the great years of prosperity in cities like Vancouver and tech-driven Toronto. Everyone had a surprising 2009, a better 2010, and a great start to 2011. In fact, the sense was that those shaken out of the market either in job turnover, failed investment, or failed business were removed from the market (in the second half of 2008), and had now concluded that M&M was returning to safe investment status.
Look around you, they said – business is booming!
The start of 2011 looked to be another great year. All the footholds were there, so back came the investors and the workers, the salesman, the customer support staff, the technologists, and the human resources staff. They all returned to work in January 2011. Over the next five years, it would all go away and end up lower than the horrible selloff, and all the salesman, customer support and human resources staff would be gone again. The only ones who remained were the technologists, who since 2011 were the only ones really at the forefront of an industry with demand. Technology and social media were the new resources in this young century, and so juxtaposed are mining and metals that one wonders why no one saw this. Why few said, ‘what happens if this demand is just a short term thing, after all once depleted what do we intend to do?’ Shouldn’t we be looking for a trend with wind in it’s sails, versus bleeding our legacy resources to the highest bidder? Most didn’t see these forest through the trees, it had been a volatile confusing 5 years when you look at the 2008 to 2012.
Dollar Peak and Lower Oil Make this Bottom Eminent
Metals and Mining Index (XME) is registering its final lows, and it becomes more conspicuous. When you look back at the pricing you had a massive (2008) dump, a stair-step recovery (2009 to 2011) followed by a grinding and painful 5 year decline (2011 -2016), which is finishing and here we sit in 2016 walking the last steps of a market bottom.
2016 is the year you will look back on as critical, because this is when the pain and confusion stopped and the 3-year rally started. This will take us now into 2020. We have a few more weak hands to be squeezed out this year, but the metals and mining stocks are registering their final lows. This bottom in 2016 is not as clear as the 2009 conclusion, where all assets had nowhere to go but up because the decline was so swift and a solution was offered. The unique coincidence in 2009 was that a global commodity rally was starting and would coincide with the selloff in nearly all other asset classes. You will not have a global commodity rally like 2009, but you will have a selloff in the U.S. dollar, which is the thesis of my conclusion associated with owning metals and mining.
I believe this index (XME) currently trading a lowly $15.25 has at least a 100% upside from these levels, and we should see $35.00 in the next 12 months. This index real value (the XME) is in the $35 to $40 range where it spent much of its time, and if you see the big picture we see the return to true valuation after painful declines and constant exhausted exits.
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