When the Australian share market was savaged late last month, many investors lacked the confidence in the idea it would rebound any time soon. Even fewer anticipated that it would be the resources sector that led the charge.
But that's exactly what has happened with shares in a number of Australia's miners soaring from multi-year lows and providing a much needed sense of relief for those investors exposed to the sector.
As can be seen in the chart above, BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) have risen roughly 17% each, while Fortescue Metals Group Limited (ASX: FMG) has rocketed 42% higher. Santos Ltd (ASX: STO) and Woodside Petroleum Limited (ASX: WPL) have contributed to the energy sector with gains of 34% and 13% respectively, while Newcrest Mining Limited (ASX: NCM) and South32 Ltd (ASX: S32) are up 15% and 10% elsewhere.
The gains have by no means been limited to these companies, with many others also appreciating strongly.
Indeed, although the miners have been under enormous selling pressure in recent years as a result of the commodities rout, many investors are beginning to believe the sell-off may have been overdone. They see the recent low prices as an opportunity to jump in and hopefully profit from a major turnaround.
Is it time to buy?
Until recently, most experts in the field were calling for further falls in the prices of key commodities, including iron ore and oil.
Iron ore has remained surprisingly resilient despite the recent bout of volatility through global equity markets, sparked by doubts over China's economic growth prospects, while a number of pundits have revised their pessimistic forecasts for oil, saying they no longer believe it will return to the low levels experienced earlier in the year.
Although this is certainly encouraging for investors in the sector, investors shouldn't rely too heavily on the forecasts of these experts. Indeed, it is impossible to predict, with any accuracy, where prices will go – that's why they needed to revise their forecasts in the first place.
While commodities could rebound, they could just as easily fall further, especially if fresh supplies do come to the market. That is expected to happen for iron ore from Gina Rinehart's Roy Hill operation, while countries like Iran are tipped to add further supplies to the oil market.
The point is, the miners are reliant on strong commodity prices to bolster their earnings. If that doesn't come to fruition, the recent gains experienced by the miners could easily be reversed, losing investors money in the process.
To put it another way, there could be gains to be made in the sector but, in my opinion, the risk/reward payoff still isn't attractive enough to warrant an investment. In the meantime, there are plenty of other great opportunities worth taking advantage of.