Another warning for investors considering resource stocks

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The commodities mini-boom is running out of steam as the US dollar surges against most other assets classes including commodities.

The US dollar has hit 13-year highs, resources stocks, whether they be iron ore, nickel, zinc, lead, coal, copper or gold, have also soared, but the two aren’t generally correlated.

Since the start of this year, several gold miners have seen their share prices triple and more. Millenium Minerals Ltd. (ASX: MOY) is up 579%, Resolute Mining Limited (ASX: RSG) is up 422% and Dacian Gold Ltd (ASX: DCN) is up 288%.

Whitehaven Coal Ltd (ASX: WHC) is up 294%, and when it comes to iron ore, Mineral Resources Limited (ASX: MIN) is up 220% and Fortescue Metals Group Limited (ASX: FMG) is up 212%.

But as the US dollar soars, commodities prices in US dollars tend to fall – and that sinks resource stock share prices.

Since the start of this year when many commodities’ prices were at record lows, they have rallied as China’s government implemented efforts to cut production from its coal mines. Seaborne imports soared, coking coal prices have quadrupled this year, thermal coal prices have doubled, and iron ore has risen more than 60% since the start of January.

Chinese domestic steel demand rose thanks to the steel-consuming real estate sector, but several countries have imposed tariffs on Chinese steel at the same time. But now the Chinese government has asked its banks to tighten lending standards to property developers. Iron ore inventory is at four-year highs according to the Financial Times, and coal supply is expected to also soar.

Take the combination of steel export tariffs and lower domestic demand, and iron ore looks set to continue falling. It’s already lost 12.3% since November 14.

Gold has tumbled from above US$1,300 an ounce to US$1,210 an ounce, but if Donald Trump does implement many of his planned strategies, including spending US$1 trillion on infrastructure and cutting tax rates for corporates and consumers, gold could fall much further.

Higher US interest rates could also be on the cards, which will help push the US dollar up – and commodities prices down.

Foolish takeaway

Resource stocks may have had their time in the sun. Commodities prices look set to tumble, and that means just one thing for resource company stocks.

Look out below.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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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