Another warning for investors considering resource stocks

Resources stocks could see their share prices tumble from here

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published November 22, 2016 1:36 pm AEDT

The commodities mini-boom is running out of steam as the US dollar surges against most other assets classes including commodities.

The US dollar has hit 13-year highs, resources stocks, whether they be iron ore, nickel, zinc, lead, coal, copper or gold, have also soared, but the two aren't generally correlated.

Since the start of this year, several gold miners have seen their share prices triple and more. Millenium Minerals Ltd. (ASX: MOY) is up 579%, Resolute Mining Limited (ASX: RSG) is up 422% and Dacian Gold Ltd (ASX: DCN) is up 288%.

Whitehaven Coal Ltd (ASX: WHC) is up 294%, and when it comes to iron ore, Mineral Resources Limited (ASX: MIN) is up 220% and Fortescue Metals Group Limited (ASX: FMG) is up 212%.

But as the US dollar soars, commodities prices in US dollars tend to fall – and that sinks resource stock share prices.

Since the start of this year when many commodities' prices were at record lows, they have rallied as China's government implemented efforts to cut production from its coal mines. Seaborne imports soared, coking coal prices have quadrupled this year, thermal coal prices have doubled, and iron ore has risen more than 60% since the start of January.

Chinese domestic steel demand rose thanks to the steel-consuming real estate sector, but several countries have imposed tariffs on Chinese steel at the same time. But now the Chinese government has asked its banks to tighten lending standards to property developers. Iron ore inventory is at four-year highs according to the Financial Times, and coal supply is expected to also soar.

Take the combination of steel export tariffs and lower domestic demand, and iron ore looks set to continue falling. It's already lost 12.3% since November 14.

Gold has tumbled from above US$1,300 an ounce to US$1,210 an ounce, but if Donald Trump does implement many of his planned strategies, including spending US$1 trillion on infrastructure and cutting tax rates for corporates and consumers, gold could fall much further.

Higher US interest rates could also be on the cards, which will help push the US dollar up – and commodities prices down.

Foolish takeaway

Resource stocks may have had their time in the sun. Commodities prices look set to tumble, and that means just one thing for resource company stocks.

Look out below.

Automatic Renewal

By taking up this offer, you will also be enrolled in our auto-renewal program, which is our way of making your ongoing subscription easier by ensuring uninterrupted service. Don't worry, though – you're not locked in, and can cancel your auto-renewal at any time before each 'anniversary' date without question or penalty.