PDAC 2016 reveals investors are slow to get on board with rising commodity prices

March 9, 2016

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Well, it’s apparent that the rising mineral commodity prices have yet to pique the global investment community’s risk appetite. The core shack, once a proud standout section unto itself at the PDAC convention, now shares space in the Investor’s Exchange to replace the public mining companies who have not been able to add a PDAC trip to the marketing budget this year. There are aisles where none previously existed. More free beer is being distributed as a way to adhere the audience to the floor for a little bit longer. It has been, by all measures, a relatively quiet year at PDAC. There were 22,000 attendees this year, down from 2012’s record-setting 30,369 attendees.

That was back when copper was trading closer to US$4 a pound than US$2, and gold was still trading above US$1,700 an ounce. Oil was trading in US$100 — $110 range, and even iron ore was trading at US$144 per tonne.



Stockcharts.comHealthy PDAC numbers are commensurate with robust commodities prices.

But the vast majority of investors are reactive, as opposed to proactive, in positioning themselves in price trend waves. Thus, they find themselves chasing rainbows instead of shooting fish in a barrel.

In the current commodity price cycle, we are poised at the lower end of the rebound. As the credit cycle begins to collapse, historically, that is when commodities swing higher.

This year’s price action in iron ore could be a signal of just such a shift in the macro economy occurring. Surging 20 per cent Monday alone, the price of iron ore has increased by 46 per cent year to date. 

This transformation is just getting started. The precious metals complex leading the way is historically the first signal that such an asset replacement cycle is underway.

I ran into Don Coxe on the floor of the PDAC yesterday, and he posited a very interesting theory, which we are going to explore in-depth during an upcoming podcast interview. The essence of his theory is that in the Capital Asset Pricing Model, used by risk managers worldwide, the benchmark reference asset has traditionally been the U.S. 10-year Treasury. Coxe says that Negative Interest Rate Policy has undermined, or is undermining, that position, and he thinks that the best reference benchmark may now be gold.

If that is the case, Coxe says, “You’ll see gold move like you’ve never seen it move before.” Coxe is adviser to the Coxe Commodity Strategy Fund and the Coxe Global Agribusiness Income Fund in Canada, and was formerly Strategy Adviser for BMO Financial Group until 2012.

That shift, if it does occur, further enforces the concept of latency in capital markets, or the period of time between when a shift has occurred and when investors capitalize on it. The sooner we as investors deploy capital ahead of the completion of such a cyclic shift, the better, theoretically, shall be our performance.

Going back to the Capital Asset Pricing Model, its foundation is the idea that there two types of risk: systemic, and specific. Specific risks are those that can be mitigated by diversification. Systemic risk is that which cannot be diversified away from, and so investors concern themselves primarily with that.

The shift described here is systemic in nature. The latency is the opportunity for early investors to outperform later investors.

The experienced investor should already be thinking about how that shift will affect, or should affect, the Capital Asset Pricing Model, and be preparing to capitalize on it before the current cycle is even mature.

Category: Oil & Gas