Resources Sector Outcomes Remain Tied to Monetary Conditions

With declining productivity and adverse demographics hobbling an improvement in global growth momentum, resource sector prices have become increasingly bound to global monetary conditions. Monetary policies have helped pull the sector from the worst of its depression but face limits on what more they can achieve. The inflation adjusted growth rate in OECD money supply is already moving in the 8-8.5% range and in the vicinity of the strongest growth rates over the past 50 years. This would have been enough historically to support stronger metal prices, with a lag, as the combination of inflation impetus, currency depreciation, liquidity flows funding speculation and lagged growth effects had an impact. US dollar weakness now depends uncertainly on how aggressively central banks outside the USA use monetary policy to pursue improvements in industry competitiveness. Rising demand for higher yielding corporate bonds has helped resource equity prices but further gains will be increasingly constrained by government bond yields near their lower bounds and an ongoing threat of defaults, particularly within the energy sector. See (VIEW LINK) for more on sector cyclical positioning.