Investing in metals and miners

As the global economy emerges from the pandemic, a greener future awaits. Governments around the world have committed to ‘building back better’, with plans in place to accelerate the adoption of electric vehicles, the transition to cleaner energy and more energy-efficient homes and offices.

Ironically, however, we are going to need the earth’s metal resources to get us there. In the move from fossil fuels to renewable energy, we need iron ore for wind turbines, and silver for solar panels, for example. The move to electric vehicles requires a new charging grid, which itself requires copper, and more batteries to store energy require lithium. The list goes on and it could be that the green supply chain is more profitable for investors than the end products themselves.

As Zed Osmani, manager of Legg Mason IF Martin Currie European Unconstrained Equity, pointed out: “In the 1840s gold rush, it was the sellers of picks and shovels, not the miners that made the best returns. It could be a similar story for investors seeking the best returns from this monumental shift to EV.”

Precious or industrial metals?

For those who daydreamed their way through science GSCEs like me, here’s a quick lesson: not only do metals react differently to physical stimuli, but they also react differently to various economic conditions.

"There are two types of metal – industrial and precious - and they do different things at different times of the market cycle,” explains Darius McDermott, managing director of Chelsea Financial Services.

“The other thing to know about them is that industrial metals and the companies involved in them are very correlated - they move together when the spot price of the metal goes up and down. This doesn’t always happen with gold and silver companies as they can lag the spot price of the precious metals.

"Because they do different things in different phases of the economy, they work best in a portfolio when you can have different balances of each at different times.”

Precious metals include gold, silver, palladium and platinum. They tend to hold their value even when stock markets fall. That is because they have diverse uses, including for jewellery and as a store of wealth.

Base metals include copper, lead, nickel and zinc. They are more plentiful than precious metals and are used primarily in industry. Their value tends to move in line with economic cycles.

Investing in metals and miners

The easiest way to invest in metals is via a specialist fund like Jupiter Gold & Silver or Ninety One Global Gold. But there are a number of more generalist funds that invest in this area. RWC Global Emerging Markets has a whole section of the portfolio dedicated to the theme, for example, from copper to lithium, to the technology.

And then there’s the mining companies themselves. “The mining companies did very well during the commodities 'super cycle boom' of the 2000s, when huge demand from China and other emerging markets caused a sustained increase in prices,” continued Darius.

“This all came to a grinding halt in 2011 when China's economy started to slow down. But during the lean years, mining companies stopped investing in new projects and instead focused on preserving cash. This has resulted in less supply coming into the market. Add in the easy monetary policy and huge fiscal stimulus post the coronavirus and it's not hard to see why prices are currently rising.

"There are a couple of caveats though - other considerations for investors. The first is that metals can be subject to speculative trading - like copper, for example. So they can be volatile at times. And all metals are currently trading above their long-term average - so as an asset class it is not cheap.”

Steven Andrew, manager of M&G Episode Income, added: “In the initial phase of Covid 19, mining equities have performed in line with commodities. Investors with a more medium term outlook could pick-up mining stocks at very interesting valuations with the view that the immediate shutdown of the economy would be only temporary and that a reopening in combination with generous financial stimulus could ultimately lead to a strong economic recovery.

“Mining stocks did perform strongly in the initial phases of the recovery but for the last months have fallen behind the strong rally in commodities. According to Citigroup, a revenue-weighted commodity basket was up 37% in H2 2020, while mining stocks were up on 14%. This disconnect has accelerated in the first two months of 2021 with the revenue-weighted commodity basket rallying another 15%, while the mining index up only 4%.

“Commodity prices are currently at an all-time high and investors might therefore expect some softening. But based on these above observations mining stocks could be interesting for investors who are still looking for exposure to the recovery trade. Another aspect that could make miners interesting is that fact they should work as a good inflation hedge if this is something an investor is worried about. As inflation should lead to rising commodity prices, the mining sector would be a direct beneficiary.”

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The view expressed are those of the commentators and do not constitute financial advice.

Published on 26/03/2021