The game is not over for metals
What has happened to the mining sector?
In past sharemarket rallies, the mining sector stood like Usain Bolt as the fourth runner in the world record-breaking Jamaican relay team. It would grab the baton and power towards the finish line at a pace no other sector could match.
The current rally has seen the defensives lead out, pass the baton to the financials which are in the process of handing over to the industrials. In theory, the industrials should be preparing to transfer the baton to the miners but the market's Usain Bolt seems to be missing in action.
Since June 4 last year, the S&P/ASX 200 index has gained a stunning 28 per cent.
In that time, the healthcare index has powered 41 per cent higher, the financials are up 37 per cent and the industrials have gained a modest 15 per cent. In comparison, the materials index that contains most of Australia's leading mining companies has managed to eke out a meagre 7 per cent gain. Similarly, the energy index has posted an 8 per cent gain.
Mining stocks are traditionally late cycle plays for investors. Intuitively this makes sense because demand for copper, nickel, iron ore, metallurgical coal and even oil only picks up when industrial companies around the globe are experiencing sturdy revenue growth.
Today, with US growth gathering momentum, China recovering from a slowdown and Japan showing signs of life, the ducks are lining up for mining companies to take off.
This favourable backdrop is only enhanced by a flood of central bank liquidity emanating from the US, Britain and shortly Japan.
Strangely, instead of starting to fire, commodity-related investments have struggled over the last five weeks.
The first concern for investors rests with China.
The emergence of China onto the world economic stage in 2000 was the catalyst for the first mining boom since the 1970s. Since the new millennium started, copper prices have climbed 350 per cent, oil 200 per cent, while gold and silver have careened up 450 per cent.
The ruling Communist Party put the economic handbrake on in April 2011, causing commodities and mining stocks to fall for more than 12 months.
The world's second-largest economy experienced seven consecutive quarters of declining economic growth. This ended in the final quarter of 2012, and growth seems to have stabilised around 8 per cent a year.
For a brief period the market became extremely excited and started to aggressively buy anything commodity related.
Since the beginning of February 2013, however, this exhilaration has abated and money is moving away from the sector.
It is always an opaque time of year in China, given the New Year celebrations, but exacerbating investor concerns this time around is the handover to a new leadership team in the Communist Party.
Negative comments about imbalances in the Chinese economy have flowed during the hand-over period, despite confirming a growth target of 7.5 per cent.
Mining companies including Xstrata and Rio Tinto have openly talked down the demand for resources coming out of China, resulting in most analysts downgrading longer-term price forecasts.
Will China come to the commodity rescue again?
We will have to wait for a few months to see how the new-look Communist Party behave but no one in China has the stomach for slower economic growth. The desire to spend money on capital intensive projects could resurface. In other words it is far too early close the door on China.
If the China bears are right, and the game is up for metals, it would register as the shortest commodity boom in history. Previous commodity up cycles in the 1930s and 1970s lasted between 15 and 20 years, while the current one is young at only 12 years old.
The second issue affecting current commodity prices is the recent strengthening of the US dollar.
Since the global financial crisis, the US dollar has got progressively weaker due to its outrageously loose monetary policy. The only times the greenback appreciated in the last five years is when fear struck investors, forcing them to scamper to the safe haven of the dollar.
In recent weeks, though, fear has not been a factor. The threat of money printing in Japan and an improving US economy seem to have been the main influences.
In theory, a more robust US economy should underpin commodity prices. At the moment though, investors are selling commodities and buying US denominated assets. This may not be a long-term phenomenon.
A third explanation for the recent demise in commodity prices is the fixation by investors on yield. Mining stocks and metals don't deliver great yields; this is seen as a negative in a low-interest-rate world.
Not only are Australian retail investors scouring the market for yield but institutional and hedge fund managers in the northern hemisphere are also desperate for income. This trend will change direction when interest rates rise, but that should coincide with stronger economic growth around the globe and spiking demand for resources.
The message from all of this is don't give up on the mining stocks just yet. They might not be ready to take the baton today but the next few months may well be telling.