When it comes to developing and creating a long-term investment strategy for your portfolio, one of the more difficult aspects is maintaining a focus on the horizon. What this means is that sometimes one needs to look past the short-term aberrations and focus on where the economy and stocks will be in the future.
The topic of mining stocks has come up quite often lately. Initially, when one talks about mining stocks, many people automatically gravitate toward gold and silver companies.
I would suggest that there are data showing that other commodity mining stocks might offer strong long-term potential capital appreciation.
Professionals know that the market price of a stock offers far more information than any one data point. If the price of a stock or commodity is moving, this is certainly an indication of where people are placing their funds through their own investment strategy.
While some might have an investment strategy primarily in mining stocks, I would urge diversifying away from any one commodity in this sector, creating a more diversified portfolio in general.
Getting ahead of the curve over the retail public is a difficult but attainable investment strategy. I would suggest that, in addition to looking at economic data in forming one’s own analysis, one should look to the price charts and see what’s happening on the ground.
Recently, we’ve seen a recent breakout in one commodity that might surprise a lot of people: copper.
“Doctor Copper,” as the commodity is often called due to its ability to predict economic growth, has just broken out of its downtrend. While many are focusing on the recent negative gross domestic product (GDP) data point, those whose investment strategy is accumulating copper believe economic growth might be stronger over the next 12–16 months—even more than the mass public believes.
Chart courtesy of www.StockCharts.com
Considering this strong breakout in copper, looking for mining stocks in this sector certainly seems prudent.
Does this investment strategy in copper and related mining stocks make sense given the latest economic data? To answer this question, one needs to dig into the data and form an educated hypothesis.
The headline report by the Bureau of Economic Analysis on GDP growth showed that for the fourth quarter 2012, the U.S. economy declined 0.1% compared to third-quarter data. That is certainly negative; however, for full-year 2012, the U.S. economy increased GDP growth by 2.2%, compared to an increase of 1.8% in 2011. (Source: “GDP Declines Slightly in Fourth Quarter: Advance Estimate of GDP,” Bureau of Economic Analysis web site, January 30, 2013.)
What had the biggest impact on the decline of U.S. GDP for the fourth quarter was not a decline in consumer spending, but a massive decline in defense spending. National defense spending dropped 22.2% for the fourth quarter, the largest decline since 1972.
When it comes to data related to the American public, real personal consumption spending increased by 2.2% in the fourth quarter, compared to a 1.6% increase in the third quarter. Durable goods purchased increased by 13.9% in the fourth quarter, compared with an increase of 8.9% in the third quarter. Personal income in current dollars increased a whopping 7.9% in the fourth quarter, up from 2.2% in the third quarter.
What do all of these numbers indicate? While the headline GDP number looks bad, it appears that there is some strength in consumers, who had an increased both in income and spending. Clearly, those who are making an investment strategy in copper are expecting a stronger economy in the second half of 2013 through to 2014.
Mining stocks involved in copper should also benefit if the commodity’s spot price continues to increase. Once the first half of 2013 is over and the impact of these defense cuts stabilizes, if personal income and spending continue to grow at their current rates, it is highly likely that we will see a stronger second half in 2013.
It is quite obvious from the price of copper that many are calculating this thesis into their investment strategy. Looking at copper-related mining stocks, many copper mining stocks have outperformed many other mining stocks in sectors that are not economically sensitive.
I would always look to the market price in conjunction with economic data to confirm any investment strategy. If one believes there will be a strong or weak economy in the future, yet commodity prices are not acting appropriately, I would certainly close these positions and reevaluate my strategy.
Regardless of what one believes the future holds for economic growth, this breakout in copper appears to be significant.
An extremely accurate and simple trading belief, going back decades (perhaps longer), says that if a market goes up on bad news, it is a sign of significant underlying strength. Conversely, if a market goes down on strong news, it is a sign of underlying weakness.
On this release of a headline GDP data point that initially indicated a weak economy, the natural reaction for copper should have been to sell off, but it didn’t; in fact, copper broke out of a key downtrend.
As an investment strategy, I always look to buy companies—in this case, copper-related mining stocks—on strength, not weakness. The real test will be whether copper and the related mining stocks can hold this upward move. If copper falls below support, then this would be a sign that the economy is slowing once again.
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