Near-Term Risk in Resources Increases

Adrian Day's Global Analyst (06/08/2009)
"Make no mistake: the long-term resource story remains firmly intact, based on tremendous growth in demand from China and other emerging countries, and the difficulty in boosting supply in any meaningful way to meet that demand. This is true across the board, especially perhaps in copper and oil.

Nonetheless, we feel there is a significant near-term risk.
  • Prices have moved too far too fast, and much of the recent move, particularly in base metals for example, has come from restocking of depleted inventories, necessarily a one-off effect.
  • The dollar could see an upward correction. Though the move in resources is based on much more than simple dollar weakness, in recent weeks many, including gold, seem to be following the dollar. A correction in the dollar from its ongoing weakness would see the resource prices drop.
  • Though resource stocks are not expensive relative to the underlying commodities, they have also seen strong moves; valuation multiples have gone from the lowest in 20 years to about average. A pullback in resource prices, particularly if the broad stock market falls back at the same time, would see stock prices drop meaningfully.
  • Summer is traditionally a weak period, particularly for gold and gold stocks.
To be clear: the medium- and long-term story for higher prices remains; any correction is only that, a correction in the long-term move up. And it may last only for the next couple of months."

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