"Thank you for your service over the past year. It is worth every penny.

"I have been listening to your comments about increasing commodity prices and the increasing risks they pose.

"Having a holding in Blackrock World Mining IT, as I think you do, I was wondering if mining shares have become an overcrowded trade, albeit temporarily in the context of a supercycle.

"According to the company's website BRWM has a net yield of some 0.6%, which might suggest that it is valued too highly as an investment and has become a fashionable speculation. On the other hand its discount to NAV is stated to be about 17%, on the lower side of a range which historically has touched 5% and earlier this year touched 12%.

"Do you think that this suggests that buyers have moderated their expectations for further gains after two years of outstanding performance?"

David Fuller's view Long may you continue to profit from the Fullermoney service and thank you for a timely question likely to be of interest to many subscribers.

The only way to answer your question objectively is to start with the charts for BRWM (LN) (monthly, weekly & daily). My short answer to your question is yes, mining shares have been a hot sector and are somewhat overextended relative to their medium-term trend mean, represented by the 200-day moving average. Therefore some corrective activity is likely within the medium term. The large discount to NAV suggests that you are not the only investor asking this question, although I regard it as preferable, in terms of risk for holders, than a premium.

At Fullermoney we have often said: The best time to consider lightening positions in favoured themes is when their trends have clearly accelerated higher - not when they have already experienced significant corrections, as every investment will from time to time.

Looking at the 20-year monthly chart above, the first thing that stands out is the Brobdingnagian base, partially shown. Activity since 2002, I maintain, is consistent with our supercycle hypothesis, including the short but very sharp credit crunch and recession-induced bear trend. Subsequent relative strength has reaffirmed the secular uptrend, in my opinion.

I most emphatically do not think that the 2008 blow-out is a realistic measure of today's risk for BRWM or shares in general, as no known factors represent comparable risks, in my opinion. Of course there are plenty of global problems if we wish to frighten ourselves, and thus it always was. The bottom line, in my opinion, is that far more things are currently improving for the global economy than deteriorating. I think it takes a myopic view not to see this.

Standard Chartered actually think the global economy is in its third super-cycle phase. I wrote about this on 15th November 2010 and it was discussed on several other occasions. I also picked up the report on the web and commend it to you if you have not already read it. Remember, metals are not just a China story. Infrastructure development remains a very important global theme and some of it is closely allied with technological development.


Returning to BRWM, my guess is that the extent of the next correction will depend on market sentiment generally. In particular, a steady Wall Street would suggest a narrow trading range pause, similar to what we have seen with ASEAN stock market indices such as Indonesia over the last three months, to date. However a global reaction would presumably exert more downward pressure.

I have mentioned frequently that commodity price inflation probably represented the next big risk and an increasing number of other commentators have expressed this view more recently. Commodity price inflation would be a logical consequence of synchronised GDP growth among the world's more important economies, although we do not know in advance how quickly this would become a problem. Interestingly, many commodities checked their advances with sharp downward reactions today. You may wish to have a look at the charts.