Tim Treadgold: The game of dot-plots says better commodity prices are coming
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Connecting the dots sounds like a child’s game, but it’s also a useful tool to aid investment decisions – and right now the economic dots are forming a pattern which points to better-than-expected commodity prices.
China’s growth rate in the face of US trade sanctions is the key to understanding why the good news about commodities outweighs the bad despite an outbreak of recession fever in the US, a slowdown in Europe, and a modest slip by the Australian market.
What happens in the US and Europe is important but for Australian mining companies it’s the health of the Chinese economy which is of immediate interest and it’s in China that the worst of last year’s trade-war induced collapse of confidence is passing. In its place, demand for raw materials is rising to satisfy a fresh burst of infrastructure investment.
Bumping into a stronger Chinese economy is the issue of shortages and outages which have drained stockpiles of key metals such as copper, zinc and nickel, and boosted the price of iron ore.
Those outages, such as Brazil’s iron ore disasters, and supply shortfalls caused by seven years of under-investment in exploration and mine development, are some of the positive dots on the commodity landscape.
And it’s those “dots” which need plotting in a process which might not sound terribly sophisticated but is the same as a quarterly “dot-plot” conducted by the world’s most powerful bankers, the members of the US central bank, the Federal Reserve.
Last week’s $US18 an ounce jump in the gold price which took the metal back to around $US1318/oz, before easing to around $US1325/oz, is an example of how dot-plotting works because it was a game of dots which delivered the gold-price boost.
What happens at the Fed is that every three months the members privately make four marks (dots) on a graph to show where they think the Federal Funds interest rate will be at the end of the year, as well as over the next two years, plus a long-term dot.
When the dot-plot from last week’s meet of the Federal Open Markets Committee (FOMC) was released it showed that none of the 17 committee members expect an increase in the Fed Funds Rate this year.
In other words, interest rate rises are on hold, which is a green light for gold, and it could be seen immediately after the release of the FOMC dot points report.
Now for a broader game of dot-plot which might help investors see that there is less gloom in the system than they might have been imagining.
In the year 2000 Mincor, under different management, was an early mover in the re-development of the Australian nickel industry. Buying old mines from WMC Resources, and enjoying a stellar ride on the first flush of the Chinese manufacturing and infrastructure building boom.
Whether Mincor’s revitalised nickel mining plan should be included as a dot-point in the overall recovery theme is an interesting discussion point – but it’s certainly a familiar blast from the past and perhaps a pointer to an improved future.