The one word that should shock all mining investors

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Despite a horrific start to the year, a number of shares across the mining sector have managed to generate significant gains so far in 2016, which has surprised many investors (myself included).

Shares of businesses such as BHP Billiton Limited (ASX: BHP) and Santos Ltd (ASX: STO) collapsed at the beginning of the year as both iron ore and oil prices plummeted.

While many analysts expected that trend to continue, both commodities have rebounded and are trading significantly higher today. Investors in the sector have also been well rewarded for their decision (and courage) to stay put while others ran for cover.

However, those investors – and those considering buying into mining shares today – have been put on notice.

As was reported by The Australian Financial Review, Atul Lele, who is chief investment officer at Deltec, believes commodities are heading into another bear market. If he’s right, that could see shares across the sector fall dramatically from their current levels.

In fact, Lele even went so far as to say they would be “decimated” by an environment of tightening US dollar liquidity which would be similar to the sell-off at the beginning of this year.

Indeed, a higher US dollar would make commodities such as iron ore and oil more expensive for emerging economies (given that they are priced in US dollars).

He believes that the impact on demand-side growth would be greater than the positive impact on demand created by Chinese stimulus and would therefore drag prices lower.

While shares across the sector have benefited in recent months from the rise in commodity prices, it is likely that many of those shares would also experience sharp falls in the event of another downturn.

That would be bad news for the companies mentioned above, together with others including, but not limited to, Rio Tinto Limited (ASX: RIO), Fortescue Metals Group Limited (ASX: FMG) and Woodside Petroleum Limited (ASX: WPL).

So, as tempting as it may be to dip your feet in the resources sector following the incredible runs experienced by some shares, investors have been put on notice. Whether or not commodity prices are “decimated”, investors should at least be aware of that risk and take that into account before buying into the sector.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. 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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