Did you hear the bell?

The Treasurer Peter Costello has warned that the boom in commodity prices that Australia is enjoying will not last more than a couple of years. I agree – there has been a massive surge in commodity prices articulated here and here and, as the RBA have already suggested if we retain a flexible approach to exchange rate management the price crunch when it comes should not be too harmful.

The Australian share-market is not acting in this way. While heavyweight mining stocks have soared in recent times (BHP-Billiton and Rio Tinto have about doubled over the past year), the speculative end of the market has in some cases performed much better than even this. The most enjoyable book I have read on such booms was Trevor Sykes, The Money Miners (now out of print) which described the mining boom of the 1970s and the huge share price gains of firms like Poseidon and Tasminex. ‘Did you hear that bell’ Sykes asked. He was talking about the bell that rang yesterday telling you to sell out because the market was about to crash.

The big mining companies in Australia should have sound long-term prospects given growth in Asia though the inevitable supply response will decrease their profitability medium term. Most of the small explorers will never mine let alone make profits. There will be much wailing and gnashing of teeth. And I will regret not being one of the few smarties who made a fortune speculating on rubbish stocks and thereby successfully playing the game of pass-the-parcel.