There's good news for mining

Summary: Keep a watch on mineral and metal prices. Stronger growth means higher demand.

Key take-out: Investors in resources companies should emerge as winners as economic conditions improve, despite the rising rates.

Blowing the froth off overheated share prices has revealed a trend, which is good news for Australian mining companies.

Markets have reacted to fears around the pace of interest rate rises in the US, and globally, because stronger economic growth will likely drive inflation and warrant quicker rate hikes. But stronger growth has a positive side effect for resources, because it means there will be greater demand for minerals and metals, not less.

A glimpse of this correlation could be seen on spot metals markets early on Tuesday morning. As share prices were crashing in New York, the prices of copper, nickel, zinc, aluminium and gold were rising in US dollar terms, and even faster in Australian dollar terms, thanks to a fall in the exchange rate.

Copper, the bellwether metal which is sometimes used as a pointer to future industrial production, added 1.8 per cent to close at $US3.23 a pound. Nickel rose by 2.2 per cent to $US6.22 a pound and zinc gained 1.2 per cent to $US1.63 a pound.

Gold, a haven for investors in times of crisis, benefited from a shift to safety and from the fall in the exchange rate to US78.8 cents, down 1c on the day, and 2c below the US80.9c reached last week.

In US dollar terms, gold rose by $US10 an ounce to $US1340/oz. In Australian dollars it rose by $16 an ounce to a latest price of $1700 an ounce, the first time the local gold price has been above $1700 an ounce in three months.

Oil went the other way on Monday, with Brent-quality crude shedding $US1.67 a barrel to $US67.91 in London.

The perverse effect of falling prices on equity markets and rising prices on commodity markets can be confusing, but that's because what's happening is not the result of a weakening economy, it's the result of a strengthening economy. Not that Australian mining stocks seem likely to escape a chilly blast from overseas equity-market events.

Interest rates, the weapon wielded by central banks, were used to rescue the global economy from the 2008 crash and the threat of a widespread recession. They are now being used to cool investor enthusiasm, which has become overheated because of the ultra-low rates.

Having worked one way, to stimulate growth, the aim now is to slow growth, which on a global level is heading for an overall economic expansion this year of around 3.9 per cent. China is heading for a near-boom level of 6.8 per cent and India is on track for economic growth of 7.5 per cent, rising to 7.8 per cent in 2019, according to forecasts from the International Monetary Fund.

An early indication of the difference between mining stocks and the overall downward trend on international markets could be seen in London on Monday where the main market indicator, the FTSE 100, fell by 1.5 per cent while major mining companies were flat or rose marginally.

All mining companies are enjoying the best trading conditions in three years, thanks to a combination of supply constraints after a five-year downturn which ended in early 2016, and rising prices as commodity demand accelerates.

This combination of limited supply growth is being boosted by reduced costs that were imposed on the mining industry during the downturn and the boost now coming from higher prices.

The high level of confidence in the outlook for the mining sector was reflected in an optimistic report released late last week by US investment bank Goldman Sachs.

After noting that an index of global manufacturing had reached its highest level since February 2011, Goldman Sachs described the environment for investing in commodities as the best since the period between 2004 and 2008 – years that cover the last Australian mining boom.

Copper, according to the bank, is on track to reach $US3.63 a pound over the next 12 months, up 12.5 per cent on the current price.

Markets never sit still. On Wednesday morning, as the US stock market rebounded slightly, metals prices gave up some of their gains from earlier in the week. Expect volatility to continue, but there is one certainty. Rising interest rates are a direct outcome of rising economic growth, and that's good news for metals demand.