The one word that should shock all mining investors

One analyst is extremely bearish on commodity prices…

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Despite a horrific start to the year, a number of shares across the mining sector have managed to generate significant gains so far in 2016, which has surprised many investors (myself included).

Shares of businesses such as BHP Billiton Limited (ASX: BHP) and Santos Ltd (ASX: STO) collapsed at the beginning of the year as both iron ore and oil prices plummeted.

While many analysts expected that trend to continue, both commodities have rebounded and are trading significantly higher today. Investors in the sector have also been well rewarded for their decision (and courage) to stay put while others ran for cover.

However, those investors – and those considering buying into mining shares today – have been put on notice.

As was reported by The Australian Financial Review, Atul Lele, who is chief investment officer at Deltec, believes commodities are heading into another bear market. If he's right, that could see shares across the sector fall dramatically from their current levels.

In fact, Lele even went so far as to say they would be "decimated" by an environment of tightening US dollar liquidity which would be similar to the sell-off at the beginning of this year.

Indeed, a higher US dollar would make commodities such as iron ore and oil more expensive for emerging economies (given that they are priced in US dollars).

He believes that the impact on demand-side growth would be greater than the positive impact on demand created by Chinese stimulus and would therefore drag prices lower.

While shares across the sector have benefited in recent months from the rise in commodity prices, it is likely that many of those shares would also experience sharp falls in the event of another downturn.

That would be bad news for the companies mentioned above, together with others including, but not limited to, Rio Tinto Limited (ASX: RIO), Fortescue Metals Group Limited (ASX: FMG) and Woodside Petroleum Limited (ASX: WPL).

So, as tempting as it may be to dip your feet in the resources sector following the incredible runs experienced by some shares, investors have been put on notice. Whether or not commodity prices are "decimated", investors should at least be aware of that risk and take that into account before buying into the sector.

Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »