Heightened global tensions sent the spot price of gold up nearly US$20 overnight on Thursday to around US$1319 per ounce. On the local bourse gold mining stocks including Newcrest Mining Ltd (ASX: NCM) and Northern Star Resources Ltd (ASX: NST) were both up around 3% on Friday in response to the tensions and higher gold price; in contrast the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) traded lower.
The bounce in volatility is a stark reminder to investors that many stocks are now priced for perfection; this leaves them vulnerable to swift declines. At the same time, major economies such as China and the USA continue to report solid growth rates.
Given the circumstances that investors are faced with, a case for selectively buying commodities amid mining services companies can be made.
The commodity sector is one of the few industries currently experiencing cyclically low levels. This should mean there is less downside risk for resource stocks if a broad sell off in over-priced industrial stocks occurred. At the same time, the potential upside for resource stocks is improving the further along the commodity cycle we travel.
Wesfarmers Ltd's (ASX: WES) announcement last week that price negotiations for its metallurgical coal exports over the current September quarter would remain unchanged compared with the prior June quarter is a potential signal for investors as to just where we are in the cycle. It's good news for shareholders and could likewise be a positive for investors in other coal-exposed companies such as Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), WHITEHAVEN COAL LIMITED (ASX: WHC) and Mastermyne Group Limited (ASX: MYE).
Think for yourself!
With stock markets hitting new highs and many individual stocks at stretched levels, it's time investors gave serious thought to the risk of holding overpriced stocks. It's never easy or comfortable to be contrarian, however undervalued stocks aren't popular for a reason. Sectors such as commodities and mining services are not popular right now and are arguably in a cyclical trough. While timing is difficult, its amongst unpopular stocks where investors may have the most luck identifying bargains.
