If you’re like me, you’ve been invested in mining companies or oil producers the last couple of months because you expected a return to the strong commodity prices of early 2011.
But if that’s the case, like me, you’re hurting. Commodity prices are well below the high levels we saw in early May – in fact, they’ve dropped more than the rest of the market.
The temptation to sell out before things get worse is very strong.
But don’t do it …
The preconditions for strong commodity prices are still in place. And at present levels, a number of commodity and energy-producing shares are stone-cold bargains.
Let me tell you why …
Don’t Be Fooled by the Price Declines
Against a backdrop of strong commodity prices, these companies had an excellent 2010.
I’m sure you were surprised to see that these same companies didn’t do all that well in the first few months of the New Year – even though oil, gold, silver and copper prices were climbing and rare earth prices were going though the roof. The market seems to have believed that these strong commodity prices were actually peak commodity prices – and that producers wouldn’t get much benefit from those peaks because they would receive the high revenue for only a short period.
Then when commodities prices dropped from their peaks – oil by about 20%, silver by about 35%, but gold by only 8%, even at the bottom – share prices of commodity producers fell even more. The investor sentiment was very clear: Commodity producers hadn’t benefited all that much from peak prices, and now that prices were likely headed down, producers were looking at a stretch in which they would be much less profitable.
But here’s what I want you to know: This bearish theory on commodity producers becomes flawed if, in fact, we have not yet seen the peaks that commodities will actually achieve. If that’s the case, the benefit to producers from high prices would become much greater, as we would expect the prices to rise further and the high-price period to last longer.
And I would argue that this is precisely where we are today.
To read on, please click HERE (scroll down to the next headline “A Recipe for Strong Commodity Prices“