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Iron ore price rising: Is it too late to buy mining shares like South 32 Ltd?

As reported in the Fairfax Press on Monday, the S&P/ASX 200 Index’s (ASX: XJO) bull market run is being led by the likes of BHP Billiton Limited (ASX: BHP), Fortescue Metals Group Limited (ASX: FMG), Rio Tinto Limited (ASX: RIO), South32 Ltd (ASX: S32) and the big four banks.

Though each company’s contribution to the index has differed (because of individual weightings on the index), with the exceptions of Australia and New Zealand Banking Group (ASX: ANZ) and Origin Energy Ltd (ASX: ORG), no other stock in the S&P/ASX 20 Index (ASX: XTL) has gained as much as BHP, Fortescue, Rio and South32 in percentage terms.

Accordingly, with mining stocks enjoying another bounce on the ASX on Wednesday, the big question is whether it’s too late to buy mining stocks at current prices. Here’s why I think it might be.

Macroeconomics

The explosive rally in mining stocks has been led by three pivotal macroeconomics trends – China, Trump and OPEC.

China

Following months of sanguine commentary, statistics from China finally revealed a return to growth for the world’s largest importing nation. Key data in recent weeks showed demand from the world’s second-largest economy increased. This raises hopes of higher consumption and inflation.

The benefits of this flowed to raw materials, causing investors to pile into mining stocks in the hope of heady commodity prices (as speculative demand outweighs supply).

Trump

Another factor boosting commodity prices is prospects of higher inflation in the U.S. under a Donald Trump Presidency. Following Trump’s shock election victory, global markets have rallied on hopes that the pro-business policies of Trump will support growth in the U.S.

This, in turn, has pushed commodity prices (and mining stocks) even higher.

OPEC

Finally, the trifecta of macroeconomic events was completed by OPEC members agreeing to its first production cut in eight years at its December meeting.

Although the long-term viability of this deal remains in question, crude oil prices have surged on short-term respite to the supply glut.

These three events have sent mining stocks gangbusters.

Should you buy?

Given the uptick in commodity prices appears to be a result of one-off macroeconomic events, further gains in miners seem unsustainable in my opinion. Though continued growth and inflation (if it eventuates) could support the share prices of each of BHP, Rio Tinto, Fortescue and South32 at current levels, I daresay investors should not hope to emulate their respective 2016 gains from here on out.

Accordingly, I think investors should look to other sectors to invest new money.

Foolish takeaway

Whilst the recommendation to avoid buying more mining stocks is not me turning negative on the sector, I am inclined to hold my position in the current environment.

Although macroeconomic trends could continue to support stocks like BHP, Rio Tinto, Fortescue and South32 further, catalysts for gains appear few and far between in my opinion.

As such, given the volatile nature of mining stocks, I believe investors should look for safer high yielding investments like our #1 dividend pick for 2017.

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Motley Fool contributor Rachit Dudhwala owns shares of Fortescue Metals Group Limited and South32 Ltd. 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.

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