Jewellery or precious metal shares

[miningmx.com] — TWIN confessions are needed upfront: I don’t know resources companies well – far more able colleagues cover the sectors; and in the current climate I’m a commodities bear.

Too fast, too far, and way too long. But just because I’m scared of going underground doesn’t mean I don’t look at resources stocks and take the odd stab at a couple of investments. I don’t want to make my phobias yours. So where are resources going and what should investors be doing?

My interest is tweaked because some readers are clearly interested. One question I’ve had recently is: “Following the recent general downturn in resources share prices that started towards year-end 2007, should investors be looking at buying such counters now?”

The other came from a reader who’s already sold on resources stocks. He wanted to know what percentage of his equities portfolio they should make up? I shudder at the thought and wouldn’t even try and answer that question.

But I have views on the first. Apart from other factors, resources have been running hard due to the commodities boom. Gold, platinum and oil prices are at or near record highs, China and India can’t seem to get enough iron ore and coal and even more sluggish Western economies are playing catch-up for earlier neglecting spending on infrastructure.

Click Here to subscribe to our daily newsletter

Many economists believe GDP growth in South Africa for the next five years or so will come mainly from infrastructure project development, so the local market also looks good for resources.

But we can’t ignore history; and the history of resources shares shows how cyclical the sectors are. The current run has been extended beyond the norm, but that’s mainly due to China and the energy crisis. I can’t believe the cycle has been broken, that there’s been (dreaded words) a “structural change”. It’s been a long up cycle but it will turn down.

Maybe the down cycle will be as long. That, I think, is when investors should start looking at resources shares. The recent blip isn’t good enough reason to ply into them.

Why? Well, I think demand for commodities will start to moderate. Not stop, but slow down. Developed countries have bigger problems to deal with than tardy infrastructure (but in South Africa’s case it’s a necessity). Big projects can be deferred or put on hold – and probably will be until commodity prices come back.

There could also be some price manipulation if prices remain unrealistically high. China and India are sharp operators, and that’s meant as a compliment. They won’t endure what they see as unrealistically high prices even if they need the basic stuff. We’ve seen that happen before, when China became a net exporter of steel overnight and knocked the steel price down.

Like commodity prices, resources share prices are too high. They’ll start to come down. They may currently still be pretty near the top of the cycle. That’s not to say the large blue chip counters – Anglo American, BHP Billiton, Sasol – aren’t good investments. Those stocks are worth much more than the commodities boom. But hang around a bit and you could get them cheaper.

Two years ago I would have told anybody who’d cared to listen to rather buy his partner shares in gold or platinum than jewellery. Now I’d say buy gold or platinum jewellery. As an investment the reward won’t last as long – but it will be a lot more fun.