My Stock Market Analysis – Why I Believe the Best Investment Options Can Be Found in the Energy and Mining Sectors

My opinion has been formed by interpreting a great deal of data over the last few years. In order to exemplify some of my insights, I present a summarized version of my stock market analysis in this article. If you would like to know which conclusions I have drawn while executing this stock market analysis, I refer you to the notes at the bottom of this article.

Global Demographic Trends

The world's population is expected to reach 9.1 billion by 2050, with virtually all population growth occuring in less developed countries.

According to the International Monetary Fund (IMF) it is projected that the world’s population will continue to increase, reaching 9.1 billion by 2050, with virtually all population growth occurring in less developed countries.

The report also revealed that by 2050, it is projected that there will be 89 countries which have a median age above 40 years, 45 of these countries will be in the developing world.

The world’s urban population is expected to grow by 1.8 percent a year between 2000 and 2030, almost twice as fast as global population growth.

If you would like to read the IMF’s complete article about global demographic trends you can click here.

World Urbanization Prospects

According to the United Nations (UN) the world is projected to continue to urbanize, 60 percent of the global population is expected to live in cities by 2030.

If you would like to read the UN’s complete article about world urbanization prospects you can do so by clicking here.

The Urban and Rural Population of the World, 1950-2030

How Scarce Are the Earth’s Mineral Resources Really

Given that the earth’s mineral resources are becoming more and more scarce as time passes by, as they are finite by definition, I found a very interesting report created by independent researcher Chris Clugston, titled: Increasing Global Non Renewable Natural Resource (NNR) Scarcity.

In his report Chris Clugston concluded: “50 of the 57 analyzed NNRs (88%) experienced global scarcity during the 2000-2008 period; 23 of the 26 analyzed NNRs (88%) will likely experience permanent global supply shortfalls by the year 2030. At the end of the day, we are not about to “run out” of any NNR; we are about to run critically short of many.

If you can spare the time, I recommend that you read the entire report by clicking on the title link provided. However, there is one table from that report which I would like to specifically emphasize – that’s why I present it here as well:

Permanent Global Non-Renewable Natural Resource (NNR) Supply Shortfall by 2030
Probability Summary

 Nearly Certain Probability (5)  Very High Probability (8)  High Probability (10)  Low Probability (3)
 Cadmium  Cobalt  Chromium  Bauxite
 Gold  Lead  Coal  REM
 Mercury  Molybdenum  Copper  Tin
 Tellurium  PGM  Indium  
 Tungsten  Phosphate Rock  Iron Ore  
   Silver  Lithium  
   Titanium  Magnesium Compounds  
   Zinc  Natural Gas  

The Central Banking Revolution

The following graph is taken from a special report from Reuters titled: The Central Banking Revolution.

Central Bank Balance Sheets

As you can clearly see the central bank balance sheets increased tremendously since 2008, as money was created out of thin air, or as the authors mentioned it in their special report: “That financial meltdown caused a credit crunch that triggered a severe recession and, in countries such as Greece, a sovereign debt crisis. After slashing interest rates practically to zero, central banks desperate to prevent a new global depression had no choice but to expand the volume of credit, rather than its price, by reaching for the money-printing solution known as Quantitative Easing(QE). In order to read the complete report from Reuters you can click on the title link provided.

If you take a look at the graph you see data from the period 2006 till 2010. As we all (should) know: the central banks didn’t stop with printing money in 2010 – in fact they printed a whole lot more since then.

Note: By interpreting the global demographic trends and the world urbanization prospects I conclude that the long term demand for the earth’s mineral resources will remain strong. As the mineral resources are becoming more scarce as time passes by, caused by temporary or definitive factors, I predict to see a very volatile price environment related to one or more of the earth’s resources. In general, I do expect the current prices of the most scarce mineral resources from Chris Clugston’s table, to increase in the long term.

Note: Regarding the scarcity of the mineral resources, I recommend that you monitor the price development of the earth’s mineral resources mentioned in Chris Clugston’s table in the Near Certain Probability and Very High Probability columns very closely, as (temporarily) low prices of a specific mineral resource could indicate that it’s a good moment to invest in a mineral resource company involved in that specific low priced resource.

Note: To be able to react fast to a declining price of a specific mineral resource, I also recommend that you create a watchlist of companies involved in a specific mineral resource, so that you can easily find possible candidates to add to your stock portfolio, when this specific resource finds itself in a low price environment.

Note: The consequence of printing money will eventually lead to the awareness that paper assets cannot be a real store of value as they are not finite by definition. Sooner or later the actions of the central banks and or politicians will lead to a noticeable form of inflation. Therefore investors will shift more and more of their holdings to tangible assets instead of paper assets. At the end of the day you do not want to store your wealth in an asset of which the value can be manipulated by central banks and or politicians. This will lead to an extra demand for the earth’s resources. I predict that this extra demand will also help the current prices of the most scarce mineral resources to increase in the long term.

Note: It is widely accepted that the financial crisis, which started in 2008, was caused by too much debt in the world. Since then, the only solution governments and central banks offered us, was to print more and more money, i.e. the world’s debt rose even further. Therefore, I believe that the big drop in precious metals prices during 2013 gives us an enormous buying opportunity to invest in these metals at unbelievable low prices. Unfortunately, I don’t have a crystal ball with which I can predict when these prices will rise substantially, but I firmly believe they will eventually do. If you choose to invest in the precious metal market by acquiring mineral resource stocks, I advise you to only invest in producing resource companies which have a big resource, a low debt level and which are cash flow positive around the current metal prices (June 2014: approximately $1,250 gold/oz & $20/oz silver). In addition, you could invest in mineral exploration companies which already have found a big resource with brownfield exploration potential, located in a safe jurisdiction. These mineral exploration companies should also have a lot of cash on the bank, to be able to survive for at least three to five years.

You may also want to read...

  1. Mining Companies Analysis - Learn How to Invest in Mining Stocks. To execute your own mining companies analysis, I have created a lot of (sub)pages about the relevant terminology and working methods from the mining sector.
  2. Oil and Gas Companies Analysis - How to Invest in Energy Stocks. I created different pages about the relevant terminology and working methods from the energy sector to conduct your own analysis for oil and gas companies.
  3. Understanding the Stock Market - How Do Stocks Work. To help you with understanding the stock market, I have created some articles to explain how stocks work and I also reveal my own stock market analysis in this chapter.
  4. How to Invest in Shares - Learn How to Start Investing in Stocks. In this chapter I inform you how to invest in shares - the way. I also reveal which (free) resources I use to execute my due diligence.
  5. How I Invest in Stocks - My Preconditions for Selecting Undervalued Stocks. In this chapter I answer the question: how do I invest in stocks? Thus, I explain which investment rules I follow whilst selecting companies for my stock portfolio.
  6. Stock Investment Analysis - A More Detailed Elaboration on How to Buy Stocks. When a company complies with my preconditions for selecting undervalued stocks, I will elaborate my stock investment analysis to assess the quality of it's assets, management, etc.

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