A long, hot summer for commodity stocks?
There may be room for optimism in the junior resources this summer, says one expert, but the real revelation could be in “rare earth” stocks.
The big bear has been dropped, and a small bull has ambled in to take its place.
This change in visual symbols has taken place on two charts at the top of the most recent market update in Mr. John Kaiser’s Bottom-Fish Action Report.
The presence of the diminutive bull signals that it may not be such a dismal summer for junior resource stocks after all. After a monumental collapse, these stocks are starting to see sunshine.
Still, Mr. Kaiser’s first recommendation for his reader isn’t to jump into the more conventional commodities. Instead, he’s steering them toward the so-called “rare earth” stocks.
We’ll follow his reasoning, beginning with his contention that this time it could be different.
The bear-to-bull switch took place when Mr. Kaiser put two charts for the TSX Venture exchange side to side.
In the year-to-date chart, a modest uptrend could be seen. On the face of it, one could imagine that this trend “may easily peter out as we head into the proverbial summer doldrums.
“But when you look at the same chart with the scale going back to January 2003, it looks like we are just starting to rocket out of a major bottom in a manner that no ‘sell in May and go away’ nonsense is going to stop.”
Thus his impulse is to declare that the resource sector will be hot this summer, although an associate did point out to him that he had said the same thing in each of the past two years.
So what’s different now?
Two springs ago (remember, just before this mess all started?), a nervous market reacted badly to pullbacks in the overheated Shanghai market, Mr. Kaiser reminds us.
At the same time, there was weakness in the copper market, which got people nervous about the state of the Chinese economy.
Still, as summer started, resources were booming again, big financings were in place and uranium was off the charts. Then the mess started.
“The shocking news that hundreds of millions of dollars raised by juniors for high risk projects and temporarily parked in ‘safe’ commercial paper were suddenly gone put an abrupt end to the summer rally.”
A year later, after much more market misery, including the Bear Stearns collapse, commodities were crawling out of another market bottom and apparently headed for a pleasant summer.
The market’s mantra, says Mr. Kaiser, was that while bank stocks deserved to be shorted, “the real world was marching onward and their stocks deserved to be bought.”
But the rot in the system was so great that the then-U.S. Treasury Secretary, Mr. Henry Paulson, felt compelled to intervene massively. In the process, he managed to bring global demand to a screeching halt, pull the plug on the commodity sector — and demolish junior resources.
U.S. dollar vs. gold
So why should we think this summer is different? Well since the AIG bailout, the financial system has gotten off its knees. Future generations will have to pay the bill, of course, but money is moving again.
In the meantime, the U.S. dollar should resume its downard trend as the U.S. tries to figure out who will buy new long-term treasury bills yielding less than 4 per cent.
On the flip side of the coin, gold should keep going up, a move that “anticipates inflation rather than reflects it,” says this editor. This should be enough to put a tailwind, rather than a headwind, behind resources.
There’s one more reason to like the prospects for resources. Mr. Kaiser calls its “strategic logic” rather than “economic logic.”
China and the United States are both going to have to bring in certain raw materials from outside their borders. “While there are plenty of copper, nickel and zinc deposits dispersed around the world, the same cannot be said about the more obscure metals such as molybdenum, uranium, tungsten, lithium and the rare earth oxides.”
And there’s good reason to look closely at these oxides.
Tapping in
Mr. Kaiser makes a compelling case for the move to rare earth elements.
“It taps into American anxiety about its long-term security, in this case security of supply. It taps into the growing ‘clean energy’ movement and most people’s concern for the environment. And it taps into the American faith in technology and its ability to solve perplexing problems.”
Unlike uranium, adds the editor, “rare earth elements do not carry any radioactive baggage in the form of nuclear holocausts. Unlike gold, whose proponents frequently seem to be Luddites fixated on a course of failure, rare earths plug into the discourse of technological progress. And unlike copper, which everybody has heard enough about to not care about it, rare earth elements are exotic.”
They certainly fly beneath many people’s radar. And below that radar, Mr. Kaiser has three stocks he is recommending to his readers now.
At Thor Lake in the Northwest Territories, Avalon Rate Metals Inc. (TSX-AVL) is sitting on enough rare earth metals to supply the market for the next hundred years, notably a high-grade beryllium deposit.
Rare Element Resources Ltd. (TSX/V-RES) has been turning its attention to rare earth elements like neodymium (a key ingredient in super-magnets) at its properties in Wyoming.
While Quest Uranium Corp. (TSX/V-QUC), in addition to its less-clean but promising uranium deposits, has been developing rare earth oxides at its Strange Lake property in Quebec.
Rare would certainly be the word to describe good news about junior resources lately. But this observer clearly thinks this summer will be a good time to tap in to some new opportunities. The bull has made an appearance.
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