After several days of declines, the iron ore price has bounced back with a bang. Overnight the iron ore price closed 5.7% higher at US$73.80 a tonne according to the Metal Bulletin.
This sent the UK-listed shares of BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) rocketing higher, with the mining giants posting gains of 5% and 3% respectively.
Despite a surge in port stockpiles, The Australian Financial Review reports that Chinese speculators have returned and are the drivers of this latest rally. This in my opinion strikes me as a recipe for disaster.
Without there being demand to back up the price increase, I feel it is quite likely that we will see prices plunge once again. Especially with supply continuing to increase.
The shares of iron ore miners such as Fortescue Metals Group Limited (ASX: FMG), BC Iron Limited (ASX: BCI), and Atlas Iron Limited (ASX: AGO) are likely to get a temporary lift, but I don't believe it will be long until they are right back where they started.
As a result I think this makes the iron ore miners suitable only for traders at the moment and not for investors.
I would recommend investors resist the temptation for quick gains and instead focus on building wealth slowly. After all, I wouldn't want my money to be in the proxy hands of Chinese speculators.
When prices normalise and supply and demand level off I think Fortescue Metals could prove to be a good investment.
But for now the risks are far too high for my liking and I believe investors would be better served outside the resources sector. At present I believe there is value to be found in both the information technology and healthcare sectors.
