A recent study by the International Monetary Fund determined that a 10% increase in the price of oil boosts domestic inflation by 0.4%. So a rising oil price only adds to the inflation argument.
That’s a host of reasons for commodities to perform in 2018. Then there are simple valuations.
Last week I published that chart showing how commodity prices are at all-time lows relative to stock prices. Ebullience is high and the bull market in stocks is not going to end tomorrow…but it’s high enough and has gone on long enough that money is looking to diversify.
Commodities are an obvious option: they reliably perform late in economic cycles, they benefit from inflation, they thrive on growth, and they are incredibly undervalued. If 2018 is going to have a theme, it will be money rotating into commodities for diversification and profit.
I’m seeing more and more evidence of this. From Bloomberg headlines aboutmanufacturing booms sending commodity prices soaring to noted fund manager Jeff Gundlach of DoubleLine Capital telling clients “commodities will outperform in 2018… Commodities always rally sharply – much more sharply than they have so far – late in the business cycle...” to Goldman Sachs advising clients to overweight commodities this year for their greater returns over other asset classes – the broad market is starting to rotate our way.
And – this is important – the mining sector is tiny compared to the broad market, so only a little bit of diversification from the bull market into metals would be very significant, generating a big boost for metals, miners, and explorers.
And that will feed momentum, which is a self-fulfilling prophecy. The fact that a select few exploration stocks went absolutely nuts last year (Novo, Garibaldi, GT Gold, and New Nadina, to name a few) shows that there was already some money chasing the commodities opportunity in 2017. And some of that money did very well. In general, if fundamentals – metal prices – are strengthening, money invested in mining should do reasonably well, which creates new capital available to invest in other commodity stocks and simply encourages more money to rotate into the sector.