Can You Stick It Out?

Written by Gerardo Del Real
Posted December 17, 2018 at 10:40AM

One of my favorite movies is The Big Short. If you haven’t watched it, you should. Without spoiling it for you, we’re just past the part where, after his due diligence, Steve Carell’s character is told by a dancer how many mortgages she has.

He rushes to place his bet, seeing this is not sustainable. The bet has been made, the trend is clear, the trade is a no-brainer, everything starts playing out exactly the way it was supposed to, and yet the market keeps knocking it down.

We all know how it ends, the question is can you stick it out until the market acknowledges you made the right bet?

I rarely agree with Goldman Sachs, but for the first time in a while we are completely aligned in our views of the commodity sector.

Goldman Sachs Group recently published a note forecasting returns of 17% in the raw materials sector.

The note goes on to say what I’ve been explaining for months: that the current commodity prices — and related equities — relative to fundamentals are not sustainable.

Jeffrey Currie explained:

“Given the size of dislocations in commodity pricing relative to fundamentals — with oil now having joined metals in pricing below cost support — we believe commodities offer an extremely attractive entry point for longs in oil, gold and base.”

There are many reasons to be optimistic.

One reason why I’m optimistic that the base metals have bottomed is that I believe the U.S. and China will come to an agreement that allows tariffs to be set aside so both sides can get back to business as usual.

Mostly because, like it or not, Trump has backed China into a corner that it can’t afford to stay in for very long.

China is feeling the sting of worsening trade tensions, which has translated to a gloomy economic outlook.

So much so that China has tried being more flexible with aggressive emission curbs put in place last year.

Mother nature couldn’t care less and Beijing’s air quality has responded by seeing the worst PM reading in 18 months.

Bloomberg recently reported that the concentration of PM 2.5 particles — the most hazardous, tiny particulate matter — soared to 328, according to data published by the U.S. Embassy.

The measure’s five-day average was 149, compared with 26 last year when the government’s environmental cleanup was at its peak.

The loosening of environmental standards — an effort to aid Northern China’s industrial hub — offers insight into how much trade tensions have affected the commodity elephant in the room.

Looser environmental standards — like trade wars — are not sustainable for China and a deal where both sides compromise would be a significant catalyst for the base metals.

Also, keep in mind that 2018 has been an unusually cordial year when it comes to mine disruptions in the copper space.

There haven’t really been any that have been consequential and I anticipate that to change in 2019.

All that bodes well for the typical post-tax-loss sell-off rally that tends to kick off in early January.

In the meantime, get out there and buy your favorite junior resource stock because it’s likely as cheap as it’s going to get.

To your wealth,

gerardo-sig

Gerardo Del Real
Editor, Junior Mining Monthly and Junior Mining Trader.

For the past decade, Gerardo Del Real has worked behind-the-scenes providing research, due diligence and advice to large institutional players, fund managers, newsletter writers and some of the most active high net worth investors in the resource space. Now, he is bringing his extensive experience to the public through Outsider Club, Junior Mining Monthly, and Junior Mining Trader. For more about Gerardo, check out his editor page.

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