Why You Should Ignore the ‘Crisis’ in Italy

Why You Should Ignore the ‘Crisis’ in Italy

You’d be forgiven for thinking we’ve travelled back in time.

I thought we’d left the days of worrying about European debt and the breakup of the euro behind. Not so.

Italy is spooking everyone. Yields on Italian bonds are surging.

US markets took a hit in Tuesday’s trade.

Oil retreated, and so did US bond yields. That took US bank stocks down a peg.

Meanwhile, commodities are down across the board.

Markets are a rocky road to travel. But I don’t feel any great panic over this Italian kerfuffle.

Have I become too immune to danger signals?

I’ve been writing for The Daily Reckoning Australia for six years. After a while, you lose count of the ‘crises’ that happen and then blow over and are forgotten.

Of course, it depends on what type of investor you are and the timeline you’re working with. If you’re trading for short-term results, today’s market could be a punch on the nose. Most likely the ASX will sell off in sympathy with the US.

But will anyone remember this moment in six months’ time? I’ll remind you in November in any case.

Either way, you could avoid getting whipsawed in the market by playing a longer game.

I’m currently at the Resources Rising Stars conference on the Gold Coast.

The mood is positive. Apparently there are a record number of attendees this year.

I sat down for lunch yesterday with some of the delegates.

One of them told me the vibe last year was depressed. Now things are looking up for junior exploration companies.

The major resource companies slashed exploration in the mining downturn that ran roughly from 2011–2016. They disbanded their teams and cut costs.

Now the cycle has turned again. Higher commodity prices have put cash back in their bank accounts. And miners are always depleting their reserves.

That puts a constant pressure on them to find more.

This makes it much likelier for a junior company to be able to cut a deal with a major if they’re on to something compelling.

And make no mistake: Investors won’t give a damn about Italian bond yields if a junior hits a rich vein of gold, copper or cobalt.

For example, two of the standout presenters yesterday came from Northern Star Resources Ltd [ASX:NST] and Sandfire Resources NL [ASX:SFR].

These are big companies now. But they were once small explorers with not much to show for except some dirt and drilling results.

SFR and NST soared over the last decade, despite the endless negative headlines about Greece, Italy, Trump, China and interest rates.

It’s nice to see the people behind these companies. You can sense who has a bit of oomph about them. You don’t get that from slides showing drilling results.

It takes a patient and persistent team to make things happen in this space.

Resources are going to be very interesting to watch from here.

Over the next decade, a lot of mines are going to go from open-pit to underground operations.

Grades are declining in general, and miners have to go deeper to access commercially-viable deposits. This makes drilling and mining more expensive.

However, there’s potential for automation to come in a big way.

One of the presenters mentioned that the number of suitable graduates for work in the field is falling away. The young would rather work in other industries.

This could be part of the setup for another boom in resource prices. Demand isn’t going away anytime soon. But supply? I worry about that.

The theme of day one of the conference was heavily centred on gold and battery minerals. Electric cars give every company a compelling story to sell.

I first issued a report on lithium in early 2016. The stocks covered in that report went on to do very well.

But that was a long time ago now.

I still think there’s opportunity in lithium, but it’s probably time to look at other metals more closely now for the ‘fat pitch’.

The electric car story is common knowledge — and comforting in its familiarity. But that doesn’t sound like a setup for a major boom because it’s already built into prices and expectations everywhere.

Mr Market never makes it so easy. It’s the things that seemingly come out of nowhere where the highest profit potential — or danger — always lies. These ideas are always obscure and misunderstood.

After all, who at the start of the year gave a damn about Italian politics?


Callum Newman Signature

Callum Newman,
Editor, The Daily Reckoning Australia