I wrote in January that it was time to look at the resource sector. Since then energy, materials and precious metals producers have provided double digit returns. And this is likely only the beginning.
Negative rates are the new normal.
Major changes are occurring in the global picture. Changes that may appear to be disorienting. Such as today’s ECB rate cut and QE extension causing a massive near 2% rally in the Euro, defying all expectations.
Or the Bank of Japan’s negative interest rate program boosting the Yen.
This may be a sign of something much more critical to resource sector stocks: a beginning of the end for the US dollar rally.
I wrote last year that the US dollar rally was stalling. Since then the dollar has stalled, moving up and down, but having a very hard time making a decisive continuation of its short term uptrend — or its long term downtrend. Instead it has been consolidating with a more downward bias as of late.
This to me is suggestive that the US dollar rally is in a phase where the next trend is being decided by the conviction of buyers and sellers and the global economic picture as it changes. And it is changing — rapidly.
There is no doubt that the US economy has made some progress since the depths of the crisis in 2008-2009, but it is not the level of progress that the stock market would suggest or that the unemployment rate seems to portend.
Instead we’ve enjoyed a very slow, very weak recovery that has mostly created part time, low paying jobs. And this is not as much of a political issue as it is a monetary policy issue.
This actually hurts the economy. Slowing consumption, reducing confidence and shrinking the job market. Reality is setting in. Federal Reserve policy makers seem to be realizing that their hawkish hopes of hiking interest rates may be just that. We may even see negative interest rates before we see a 1% Federal Reserve interest rate again.
Such a development is very positive for those traditional inflation hedges. Which is why I will continue to circle various components of the resource sector in pursuit of misunderstood or undervalued companies which could be valuable investments for the long term.