It’s been a pretty impressive 12 months for the world’s leading miners.
The FTSE 350 mining index
156995,
— which includes diversified mining giants Rio Tinto
RIO,
BHP Group
BHP,
Anglo American
AAL,
and Glencore
GLEN,
— has returned 46% to shareholders over the last year, according to FactSet, compared with the 7% drop for the broader FTSE 350.
The sector is benefiting from a surge in the value of the metals they unearth. Front-month copper
HG00,
futures have jumped 62% over the last 12 months, silver
SI00,
has gained 51%, and platinum
PL00,
has added 32%.
And there are two big trends that should further boost the sector.
The first is the decline of the dollar
DXY,
A weak dollar environment increases the purchasing power of the key commodity-consuming markets, notably China, points out Ephrem Ravi, an analyst at Citigroup. A lower dollar also helps loosen global monetary conditions, as so much of the world’s corporate debt is denominated in the greenback.
As the chart shows, there is usually a strong correlation between mining sector stocks and the change in the dollar.
Another boost is coming from the rise in copper vs. gold. The copper-to-gold ratio has been edging up over the past year, which implies optimism over global growth, says Citi’s Ravi. Copper is needed for manufacturing and construction, whereas gold is often used as a safe haven in ties of financial duress.
Jeffrey Gundlach, the DoubleLine Capital chief executive and so-called bond king, has said the ratio of copper to gold closely tracks U.S. government bond yields, which tend to rise as the economy improves.
According to Ned Davis Research, citing data stretching back to 1995, the European metals and mining industry has outperformed the market by an average annual gain of 9.7% when the economic outlook is improving, but underperformed by 7.4% annually when the economic outlook is deteriorating.
Mark Phillips, European equity analyst at Ned Davis Research, says it makes sense for miners to go through booms and busts. “A boom will start when an increase in demand for commodities drives up prices while short-term supply remains relatively fixed. As elevated prices persist this incentivizes…
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