Latest / Merryn Talks Money / Why the Commodity Bull Market Is Just Beginning

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Why the Commodity Bull Market Is Just Beginning · Merryn Talks Money

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  Speaker 1: Bloomberg Audio Studios.
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  Speaker 2: Podcasts. Radio.
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  Speaker 1: News.
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  Speaker 3: So why are commodities cyclical? I think a lot of
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  Speaker 3: investors and listeners will appreciate that they are. But what
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  Speaker 3: drives that cycle? And most importantly for us today, of course,
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  Speaker 3: is where do we sit in that cycle? And I
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  Speaker 3: think that's what's so exciting. Because the commodity cycle, although
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  Speaker 3: it can be very abrupt and it can be very,
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  Speaker 3: very large in magnitude and duration, it does follow some
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  Speaker 3: rules when you start to really look at the history.
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  Speaker 3: And when you follow those rules and apply them today,
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  Speaker 3: they tell you that today, unlike 2012, we very much
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  Speaker 3: are in the early stages of a strong bull run.
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  Speaker 1: Welcome to Merrin Talks Money, the podcast in which people
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  Speaker 1: who know the markets explain the markets. I'm Merrin Somerset Webb,
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  Speaker 1: and this week I'm speaking with Adam Rosenzweig, co-founder and
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  Speaker 1: portfolio manager at Goering & Rosenzweig, an investment firm focused
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  Speaker 1: on researching and investing in the natural resources sector. Now,
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  Speaker 1: both gold and silver have done well this year. We
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  Speaker 1: have been watching them. Gold reaching record highs before falling
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  Speaker 1: back quite significantly, actually, and natural resources in turn outperforming
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  Speaker 1: over the last five years. However, I wanted to bring
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  Speaker 1: on Adam to talk about all this because we wonder,
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  Speaker 1: are we at the beginning of a commodity super cycle
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  Speaker 1: or is the actual cycle kind of over? And what
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  Speaker 1: happens to gold? It's gone up a lot. Now it's
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  Speaker 1: gone down a lot.
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  Speaker 2: What next?
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  Speaker 1: So we talk about how he sees the gold price
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  Speaker 1: performing for the next 10 years. We talk about how
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  Speaker 1: his firm are thinking about oil in the wake of
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  Speaker 1: the Iran war, why he believes commodities could still be
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  Speaker 1: near the beginning of a major bull cycle. Adam, welcome
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  Speaker 1: to Meron Talks Money.
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  Speaker 2: Wonderful to be here. Thank you.
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  Speaker 1: Now, listen, I think what I would like to do,
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  Speaker 1: if you don't mind, is set us up a little here,
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  Speaker 1: because you have an idea about how the commodity cycle
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  Speaker 1: works and how you invest through that cycle. So can
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  Speaker 1: we just start by you giving us a run through
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  Speaker 1: of how your ideas about commodity cycles really work?
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  Speaker 3: So to give you a little bit of background, we
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  Speaker 3: run a natural resource equities strategy, and I've been doing
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  Speaker 3: this for about 20 years. And My business partner, Lee,
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  Speaker 3: has been doing it for 35 years. And the process
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  Speaker 3: has evolved a little bit over time, but really we
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  Speaker 3: try to keep it as consistent as possible because it's
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  Speaker 3: shown to work fairly well over the cycles. But there
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  Speaker 3: was one big thing that we missed, and this goes
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  Speaker 3: back about 15 years or so. And I think it
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  Speaker 3: informs a lot of the work that we've done since,
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  Speaker 3: and I think it informs the way that we think
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  Speaker 3: about commodity cycles. And what that is, was that in 2012,
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  Speaker 3: We'd had a nice, good, strong bull market in resources.
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  Speaker 3: We'd seen commodity prices move up quite a bit. And
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  Speaker 3: the stocks had done quite well. And some people were
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  Speaker 3: saying maybe we're getting close to the end. And we
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  Speaker 3: really didn't feel that. And the reason we didn't is
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  Speaker 3: because in our core, we're value investors. And although the
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  Speaker 3: commodity price had moved up and the stocks had as well,
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  Speaker 3: they were printing so much money and doing so well.
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  Speaker 2: That they were actually relatively cheap.
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  Speaker 3: And so I think I wrote with the hubris of
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  Speaker 3: a 20-something back then that perhaps this is the end
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  Speaker 3: of a bubble, but I've never seen a bubble burst
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  Speaker 3: at 10 times earnings. And of course, that was entirely
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  Speaker 3: wrong because the commodity market was about to roll over
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  Speaker 3: and enter into essentially an eight-year bubble. protracted extreme bear
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  Speaker 3: market that saw commodity prices fall.
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  Speaker 2: But the stocks were cheap at the time. So what
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  Speaker 2: did we get wrong?
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  Speaker 1: But weren't there any old hands around at the time, Adam,
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  Speaker 1: to tell you that this is just like the chip
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  Speaker 1: cycle that you sell when stuff looks cheap because that's
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  Speaker 1: when supply is about to turn or has turned?
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  Speaker 2: The cycle did seem a little bit different.
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  Speaker 3: We'd had such a bad underinvestment period in the 90s
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  Speaker 3: that we were in a bit of a shortage of
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  Speaker 3: a lot of things. China was in its period of strong,
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  Speaker 3: robust growth. And so it did really seem as though
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  Speaker 3: we were going to have good times for some time
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  Speaker 3: to come. And again, when you looked at those valuations,
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  Speaker 3: they seemed to be relatively modest and certainly.
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  Speaker 2: Not cause for alarm. But you're right, we did all
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  Speaker 2: miss something.
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  Speaker 3: And I think a lot of the old hands did,
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  Speaker 3: and I did as well, and Lee did as well.
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  Speaker 3: And what we missed was the capital cycle piece of it.
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  Speaker 3: We had had a huge capital investment cycle that really
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  Speaker 3: started in the early 2000s and probably hit its crescendo
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  Speaker 3: sometime around 2010 or 2011. And that was about to
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  Speaker 3: bring online a tremendous amount of new supply. That was
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  Speaker 3: true in Australia with iron ore, in Indonesia with coal,
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  Speaker 3: and most notably of all, I think, in the United
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  Speaker 3: States with shale oil and shale gas.
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  Speaker 2: And so the commodity price was about to fall.
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  Speaker 3: And what looked like nine times earnings was about to
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  Speaker 3: become 30 and 40 times earnings in Except, of course,
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  Speaker 3: the stocks collapsed and spent the next several years in
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  Speaker 3: a bear market. So we actually navigated that fairly well.
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  Speaker 3: We were sort of down in line with our peers,
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  Speaker 3: in line with the indexes. But it really informed this
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  Speaker 3: capital cycle view that we've come to appreciate. So why
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  Speaker 3: are commodities cyclical? I think a lot of investors and
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  Speaker 3: listeners will appreciate that they are. But what drives that cycle?
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  Speaker 3: And most importantly for us today, of course, is where
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  Speaker 3: do we sit in that cycle? And I think that's
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  Speaker 3: what's so exciting. Because the commodity cycle, although it can
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  Speaker 3: be very abrupt and it can be very, very large
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  Speaker 3: in magnitude and duration, it does follow some rules when
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  Speaker 3: you start to really look at the history. And when
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  Speaker 3: you follow those rules and apply them today, they tell
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  Speaker 3: you that today, unlike 2012, we very much are in
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  Speaker 3: the early stages of a strong bull run.
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  Speaker 1: So we need to talk about what those rules are.
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  Speaker 1: And what we always say on this pod when we
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  Speaker 1: talk about commodities is we always say the solution to
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  Speaker 1: high commodity prices is high commodity prices. That's the way
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  Speaker 1: it works. Prices goes up, supply ramps up again, prices
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  Speaker 1: go down again. And that's just straightforward and simple. And
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  Speaker 1: you just have to figure out where you are in
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  Speaker 1: the supply chain. demand cycle and you're kind of good.
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  Speaker 1: But it sounds like you think it's a bit more
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  Speaker 1: complicated than that.
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  Speaker 2: I don't actually. I think that's about 95% of it.
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  Speaker 3: The one piece that you've missed, however, and that's what's crucial,
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  Speaker 3: particularly for investors, is that there's a lag. There's a
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  Speaker 3: 10-year lag from when the market gives you the commodity
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  Speaker 3: price signal, meaning when the market's in deficit and prices
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  Speaker 3: start to scream higher, and eventually that attracts capital into
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  Speaker 3: the stocks. Either the companies generate enough cash flow and
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  Speaker 3: their multiples are up high enough that you've incentivized them
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  Speaker 3: for growth, or they actually do equity offerings and bond
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  Speaker 3: offerings and attract new money, and they usually do both.
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  Speaker 3: And then they start to invest in new projects. And
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  Speaker 3: if that supply came online instantly, then indeed the cure
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  Speaker 3: for high prices would be high prices and you'd have
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  Speaker 3: no volatility or commodity cycles whatsoever. You'd be stuck forever
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  Speaker 3: at the essentially incentive price to bring on new supply.
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  Speaker 3: But it takes 10 to 15 years. And unfortunately, that
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  Speaker 3: number is getting longer. That duration is not shrinking.
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  Speaker 2: It's expanding. It's expanding for, I think, two reasons.
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  Speaker 3: First, We've explored and developed a lot of the easy-to-find
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  Speaker 3: resource bases in the world. You know, if you look
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  Speaker 3: in the 20th century, now the 21st century, we've produced
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  Speaker 3: and consumed more in the last 15 years than in
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  Speaker 3: all of human history before that. And so, you know,
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  Speaker 3: we've found a lot of the easy-to-find stuff. So what
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  Speaker 3: we find now is offshore, it's deep porphyries a kilometer underground,
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  Speaker 3: it's in remote locations. It takes longer. The second thing
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  Speaker 3: is that the environmental concerns have really ratcheted up. And
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  Speaker 3: so you now in places, really a lot of places
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  Speaker 3: in the world, but certainly Canada, Australia, United States, you
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  Speaker 3: have to do a five-year environmental survey just to get
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  Speaker 3: baseline readings before you can think about developing a project.
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  Speaker 3: And people ask me, well, can we compress that? And
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  Speaker 3: I said, I'm not sure how you can compress a
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  Speaker 3: five-year baseline study. So we do have this long lag
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  Speaker 3: between that price signal and when the supply comes on.
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  Speaker 3: And in those interim years, Commodity prices move up and
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  Speaker 3: they up and up longer and farther than anyone expects
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  Speaker 3: because the market's now seeking out the price to squeeze
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  Speaker 3: out the marginal unit of demand.
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  Speaker 2: And we're all very, very, very.
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  Speaker 3: Price inelastic when it comes to the things that we consume,
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  Speaker 3: particularly energy. Eventually, though, you'll hit a point somewhere mid-cycle
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  Speaker 3: where you've invested just enough to eventually bring on enough
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  Speaker 3: supply to rectify everything. And what happens after that? Well,
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  Speaker 3: we're still waiting in the wings for the supply to come.
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  Speaker 3: And so prices keep going up. And everything from that
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  Speaker 3: mid-cycle on, by definition, is excess capital.
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  Speaker 2: It's too much investment.
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  Speaker 3: And what that means is that just as the new
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  Speaker 3: supply is coming online, just as the deficit gives way
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  Speaker 3: to a balanced market, you look behind you and you
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  Speaker 3: have a tsunami of new projects still about to come online.
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  Speaker 3: And that's what ruins the party for everybody.
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  Speaker 2: Then, of course.
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  Speaker 3: We have too much supply. Prices collapse. Everyone writes off
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  Speaker 3: the industry. Money flows out. It's a very manic industry.
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  Speaker 3: People either think it's the cure for all of their
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  Speaker 3: ills or they say, I swear it off forever. And
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  Speaker 3: eventually depletion takes hold and the market ratchets a little
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  Speaker 3: bit tighter. Everyone extrapolates the negative trends that have been
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  Speaker 3: going on and they miss the turn. And that's where
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  Speaker 3: we like to focus is right in that turn when
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  Speaker 3: things seem bad but are actually getting better.
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  Speaker 1: And then occasionally you get what you call a super cycle.
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  Speaker 3: Right.
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  Speaker 1: And that's, for example, the great super cycle in our
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  Speaker 1: investing lifetimes was the one with China's urbanization, when suddenly
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  Speaker 1: the amount of copper and steel, the amount of energy
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  Speaker 1: being used in China went beyond all expectations. And that
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  Speaker 1: was a really fun super cycle to be invested through. Right. Yeah.
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  Speaker 2: Look, I do take issue.
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  Speaker 3: And I've said this in the past with the term
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  Speaker 3: super cycle, because on some level, what it's trying to
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  Speaker 3: do is suggest that something other than a cycle, you
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  Speaker 3: can have a big cycle.
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  Speaker 1: What's wrong with super cycle? Why is super cycle worse
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  Speaker 1: than very big cycle?
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  Speaker 3: Well, I think that the problem is when people hear
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  Speaker 3: the word super cycle, they feel that this will go
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  Speaker 3: on forever. It's somehow a new paradigm and a new regime.
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  Speaker 3: And like you said, eventually, high prices do cure high prices.
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  Speaker 3: But the problem is all that time in the middle
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  Speaker 3: where investors can create a huge amount of value by
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  Speaker 3: appreciating where they are in the capital cycle. and appreciating
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  Speaker 3: how big and long it can last. Because we're all
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  Speaker 3: long-term investors or claim to be. But even a long-term investor,
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  Speaker 3: a 10 to 15-year cycle, that's investable. That's not a trade.
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  Speaker 1: Okay. So then that sets up the scene for us gorgeously.
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  Speaker 1: Where are we now?
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  Speaker 3: Well, as you might expect, since I'm vocal about this
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  Speaker 3: type of work, we are at the bottom of this
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  Speaker 3: super cycle, if you will.
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  Speaker 2: Your words, not mine. This very large cycle, in my words.
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  Speaker 1: I just know that you're going to keep saying the
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  Speaker 1: phrase super cycle over and over again for the remainder
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  Speaker 1: of this pod and then desperately correcting yourself. I think
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  Speaker 1: I've won the super cycle. I've won that argument.
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  Speaker 2: I think you might have. I'll concede.
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  Speaker 3: We're at the very, very beginning. And what we use
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  Speaker 3: to measure that, I mean, we use a couple of things, really.
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  Speaker 3: You know, you can look at CapEx trends across the industry.
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  Speaker 3: In many cases, like you take oil, for example, and
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  Speaker 3: we're spending about $ 500 billion a year upstream. First of all,
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  Speaker 3: I don't think that's anywhere near enough. But in real dollars,
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  Speaker 3: I mean, you're far off peaks. You're certainly not making
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  Speaker 3: new highs by any stretch, and you're not at the
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  Speaker 3: same level as you were in the last peak of
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  Speaker 3: the last cycle. However, the one metric that we think
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  Speaker 3: is incredibly, incredibly helpful is simply to look at the
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  Speaker 3: ratio of between commodity prices and stock prices. Now, on
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  Speaker 3: the surface, that sounds like just a straight valuation call.
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  Speaker 3: But actually, it tells a little bit more. So the
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  Speaker 3: ratio is low and falling. What that's telling you, not
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  Speaker 3: only does it mean that stocks are doing better than commodities,
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  Speaker 3: but it likely means that capital is being sucked out
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  Speaker 3: of the extractive sectors. and obviously going to the broad indices,
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  Speaker 3: which we know today is dominated by tech. And vice versa,
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  Speaker 3: when commodities are far outpacing stocks, it's probably not a
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  Speaker 3: great time for stocks. It's certainly a good time to
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  Speaker 3: be a real asset investor, and it means that money's
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  Speaker 3: flowing in. So it's actually a good proxy for the
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  Speaker 3: capital cycle as well. And what's nice about that ratio
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  Speaker 3: is that it moves in a very predictable band. The
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  Speaker 3: highs are always around the same level, give or take,
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  Speaker 3: and the lows are around the same level. And it
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  Speaker 3: paints this picture of And I have to admit, we
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  Speaker 3: stole the chart. We stole it from Jeffrey Gundlach, who
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  Speaker 3: in turn stole it from Tony Beck at BCA Research,
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  Speaker 3: we later found out. And Tony is a friend of
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  Speaker 3: ours and a friend of the firm. So we feel
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  Speaker 3: at least we're, now we're just borrowing it. We haven't
• 12:53
  Speaker 3: really stolen it, borrowing it from a friend. But what
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  Speaker 3: we did that was a little bit different is most
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  Speaker 3: of those charts went back to 1970 and they showed
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  Speaker 3: a cycle and a half. And we extended it back
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  Speaker 3: to 1900, which was fairly easy to do actually, because
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  Speaker 3: commodity data goes backwards. in some cases, thousands of years,
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  Speaker 3: longer than stocks and bonds, that's for sure. And we
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  Speaker 3: were able to see that the cycle repeats several times.
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  Speaker 3: And it has a very, very large amplitude, and its
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  Speaker 3: duration is always about 10 or 15 years. And based
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  Speaker 3: on that measure, the only time we've ever been cheaper
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  Speaker 3: was when commodities bottomed in 2020. But if you take
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  Speaker 3: that out, you still are not at the lowest low
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  Speaker 3: from any other cycle. And that's what's so exciting here,
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  Speaker 3: because this is very, very early.
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  Speaker 1: So when... You talk about commodities. What are you talking about?
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  Speaker 1: You're talking about obviously precious metals. You're talking about industrial metals.
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  Speaker 1: You're talking about energy. Are we including agricultural commodities in
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  Speaker 1: there or do we look at those as a separate sector?
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  Speaker 3: So if we think about our remit and our mandate,
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  Speaker 3: we include all of those. If you talk about the
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  Speaker 3: chart that I just described to you and your listeners,
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  Speaker 3: that ends up taking it's based on the GSCI commodity
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  Speaker 3: blended commodity index, which takes a essentially their version of
• 14:09
  Speaker 3: a market cap weighted. So, of course, commodities don't have
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  Speaker 3: market caps, but they do have a size of the
• 14:13
  Speaker 3: traded market. how much volume times the price and so
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  Speaker 3: they set that weight at a fixed level and they
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  Speaker 3: let that be the weights of the individual commodities so
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  Speaker 3: that's what's really really cheap and of course you're right
• 14:25
  Speaker 3: every commodity within the commodity complex really has its own
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  Speaker 3: capital cycle and if you have a big investment boom
• 14:32
  Speaker 3: in lithium that has nothing to do with how much
• 14:34
  Speaker 3: copper you're going to bring on or how much uranium
• 14:36
  Speaker 3: you're going to bring on so you do have to
• 14:38
  Speaker 3: look at it commodity by commodity now i will say
• 14:41
  Speaker 3: that oftentimes what intrigues investors about commodities or what turns
• 14:46
  Speaker 3: them off about commodities tends to be the fact that
• 14:49
  Speaker 3: they benefit in volatile environments, the fact that they're perceived
• 14:53
  Speaker 3: to be good inflation hedges, and they tend to work
• 14:56
  Speaker 3: when other things don't. So we do see similarities across
• 15:00
  Speaker 3: capital cycles. And what I mean by that is what's
• 15:03
  Speaker 3: going to attract people to copper, iron ore, and oil,
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  Speaker 3: there's some similarity there. People want that real asset component.
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  Speaker 3: And so there's a similarity to those cycles. But there's
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  Speaker 3: many times where you get sort of offsets or delays
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  Speaker 3: of one cycle versus another. And lithium, I think, was
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  Speaker 3: a great example in the bear market and commodities when
• 15:24
  Speaker 3: everyone sold all their commodity exposure down to extremely low levels.
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  Speaker 3: There was a view because of ESG that lithium would
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  Speaker 3: be a growth area within commodities and it could be green.
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  Speaker 3: So we saw people devote all their time and attention
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  Speaker 3: to lithium and lithium had a capex boom while everything
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  Speaker 3: else had a capex bust. And that's, I think, why
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  Speaker 3: lithium is performing so poorly now in what should be
• 15:49
  Speaker 3: the beginnings of a good commodity cycle, because it had
• 15:52
  Speaker 3: it several years ago.
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  Speaker 2: All right.
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  Speaker 1: Well, let's try and break it all down a little
• 15:55
  Speaker 1: bit then. And I want to start, although I know
• 15:57
  Speaker 1: you're not going to say what I want you to say,
• 15:59
  Speaker 1: I want to start with precious metals, because a lot
• 16:02
  Speaker 1: of our listeners are very keen precious metals investors, and
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  Speaker 1: we talk a lot about gold, and we talk a
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  Speaker 1: lot about silver. And obviously gold had that fantastic bull
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  Speaker 1: run and now things aren't going so well. In fact,
• 16:12
  Speaker 1: down quite a lot year to date. Where are you
• 16:15
  Speaker 1: on gold and silver?
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  Speaker 3: I don't think that the gold bull market is over.
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  Speaker 3: I think that we're going to make new highs this cycle.
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  Speaker 3: And if you think that the commodity cycle started in
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  Speaker 3: 2020 and that it's been a little bit slow to
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  Speaker 3: take off with CapEx trends. So let's say it's 10
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  Speaker 3: or 12 years from now, 15 or so years from
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  Speaker 3: the beginning. By 2035, if your listeners would like to
• 16:41
  Speaker 3: hold their gold, I suspect they'll be very happy that
• 16:45
  Speaker 3: they did so. But I do think that there'll be
• 16:48
  Speaker 3: a better market. entry point before then. I think gold
• 16:52
  Speaker 3: will move lower before it moves higher. And why do
• 16:55
  Speaker 3: we think that? Well, a couple of things happened earlier
• 16:58
  Speaker 3: this year that made us a little bit concerned. So
• 17:02
  Speaker 3: when we talk about gold and we say, is gold
• 17:04
  Speaker 3: expensive or is gold cheap? The question, of course, is
• 17:07
  Speaker 3: relative to what things you have to compare it to
• 17:10
  Speaker 3: other asset classes relative to things. Gold looks expensive and
• 17:14
  Speaker 3: relative to financial measures. Gold looks really cheap. So, okay,
• 17:18
  Speaker 3: that's great. What on earth do you do with that? Well,
• 17:21
  Speaker 3: if you're investing in a portfolio that can do, to
• 17:24
  Speaker 3: simplify things a great deal, gold or oil, it means
• 17:28
  Speaker 3: that oil will probably outperform. Indeed, the gold to oil
• 17:30
  Speaker 3: ratio reached an all-time high back in January, where a
• 17:34
  Speaker 3: single ounce of gold could buy 90 barrels of oil.
• 17:38
  Speaker 3: And historically, if it could buy as much as 30
• 17:40
  Speaker 3: barrels of oil, you wanted to move from gold into oil.
• 17:43
  Speaker 3: Now it got bought in the 90s. It's unprecedented except
• 17:46
  Speaker 3: for COVID when oil went negative and the ratio went
• 17:49
  Speaker 3: to infinity.
• 17:49
  Speaker 2: That was one thing.
• 17:51
  Speaker 3: The second thing that concerned us a little bit was
• 17:54
  Speaker 3: that we did start to see speculative accumulation of gold
• 17:57
  Speaker 3: last year, particularly in the West, not so much in
• 18:01
  Speaker 3: the gold stocks. You didn't see big inflows. They were
• 18:04
  Speaker 3: strong performers, but not because lots of people rushed out
• 18:07
  Speaker 3: to buy them. But gold bullion in the form of
• 18:10
  Speaker 3: the GLD and these other ETFs, we did see quite
• 18:13
  Speaker 3: a bit actually of investor interest.
• 18:16
  Speaker 2: And money flow into that.
• 18:17
  Speaker 3: And of course, Western investors are very often trend followers.
• 18:21
  Speaker 3: And we said, well, that's a bit concerning because if
• 18:24
  Speaker 3: gold falls, we could see massive liquidation. There could be
• 18:26
  Speaker 3: a lot of gold for sale on the markets if
• 18:28
  Speaker 3: the gold price falls. Because clearly, if the price falls,
• 18:31
  Speaker 3: people want to sell. And if it rises, they want
• 18:33
  Speaker 3: to buy, counter to what they might claim in private.
• 18:37
  Speaker 3: So that worried us. And then the third thing that really,
• 18:41
  Speaker 3: really was our impetus, I think, for selling down a
• 18:44
  Speaker 3: lot of our gold, because we had close to 30%
• 18:47
  Speaker 3: of the portfolio in gold last year. And we took
• 18:50
  Speaker 3: that down to 5%.
• 18:51
  Speaker 1: When you say in gold, you mean in gold mining stocks?
• 18:54
  Speaker 2: Gold mining stocks, yeah. That's what we focus on.
• 18:58
  Speaker 3: And the big kind of catalyst and trigger for us
• 19:01
  Speaker 3: was the silver, what we call the silver catch-up ratio.
• 19:05
  Speaker 3: And this was work done by my partner, Lee, which
• 19:08
  Speaker 3: I think is really interesting and original. Most gold investors
• 19:13
  Speaker 3: identify a strong silver price as the sign that you
• 19:18
  Speaker 3: have a robust precious metals rally. So they'll say, for instance,
• 19:22
  Speaker 3: every time you get these big gold rallies, these gold
• 19:24
  Speaker 3: bull markets, silver outperforms gold.
• 19:27
  Speaker 2: Well, there's a little bit of.
• 19:28
  Speaker 3: A wrinkle to that because actually what happens is the
• 19:31
  Speaker 3: gold bull market starts and silver lags for sometimes years.
• 19:36
  Speaker 3: And the lag can be very, very big and can
• 19:39
  Speaker 3: frustrate a.
• 19:40
  Speaker 2: Lot of people.
• 19:41
  Speaker 3: And then typically silver will stage this massive catch-up rally.
• 19:45
  Speaker 3: So if you only focus on that catch-up rally, yeah,
• 19:48
  Speaker 3: silver does much better than gold. If you zoom out
• 19:50
  Speaker 3: a little bit, they actually tend to perform from the
• 19:53
  Speaker 3: precious metals bottom. They tend to perform about the same.
• 19:57
  Speaker 3: And there's another kind of corollary to that, which is
• 19:59
  Speaker 3: when silver does stage its catch up rally. That is
• 20:03
  Speaker 3: your great signal or indicator to maybe start to reduce
• 20:06
  Speaker 3: your exposure to both because both tend to pull back
• 20:09
  Speaker 3: after that.
• 20:10
  Speaker 2: So whereas everyone says.
• 20:11
  Speaker 3: You need silver for a robust gold bull market, I say,
• 20:15
  Speaker 3: and my partner Lee says, when you see the silver
• 20:17
  Speaker 3: catch-up rally, that's when you want to look for higher
• 20:19
  Speaker 3: ground and maybe rotate. So we definitely had that in
• 20:22
  Speaker 3: January after lagging for three or four years, silver caught
• 20:25
  Speaker 3: it all up. And so I think we're now in
• 20:27
  Speaker 3: this period of a gold retracement within a broader bull market.
• 20:30
  Speaker 1: And we also had a slight pullback in central bank buying,
• 20:33
  Speaker 1: didn't we? Because that was one of the big drivers
• 20:35
  Speaker 1: of the early part of this gold bull market was
• 20:37
  Speaker 1: that there was a huge new buyer in town and
• 20:40
  Speaker 1: it was the world's central bank. So we've now pulled
• 20:42
  Speaker 1: back from that a bit.
• 20:43
  Speaker 3: You're absolutely right. There was really two central bank changes
• 20:46
  Speaker 3: that occurred around that time. The first was, as you said,
• 20:50
  Speaker 3: there's a little bit of a buyer's pause in central
• 20:52
  Speaker 3: bank buying and they've come back and there's maybe a
• 20:56
  Speaker 3: bit more volatility. But I don't think actually that that
• 20:59
  Speaker 3: trend is over. I think all the motivations for central
• 21:02
  Speaker 3: banks to want to diversify on the margin away from
• 21:05
  Speaker 3: the dollar remain. I don't think that the geopolitics have
• 21:09
  Speaker 3: become calmer since January, certainly. But I think that the
• 21:13
  Speaker 3: big change that happened around then was the fact that
• 21:18
  Speaker 3: with Warsh coming in as the Fed chairman, the last
• 21:22
  Speaker 3: kind of rise in gold, that last blow off rise,
• 21:26
  Speaker 3: was really driven by the view that Warsh was going
• 21:29
  Speaker 3: to deliver two to three cuts. And finally, President Trump
• 21:33
  Speaker 3: was going to get his cuts that Powell kept away
• 21:36
  Speaker 3: from him for however many years. And that I would
• 21:41
  Speaker 3: argue that that was already priced into gold.
• 21:43
  Speaker 2: In fact, we had this debate.
• 21:44
  Speaker 3: We said, I bet if you were to get a
• 21:46
  Speaker 3: rate cut tomorrow, gold would sell off because so many
• 21:49
  Speaker 3: people had bought in anticipation of exactly that. And we
• 21:53
  Speaker 3: had this view and we wrote about it, actually.
• 21:55
  Speaker 2: So we're in print. You can go and see.
• 21:57
  Speaker 3: In January, we said... I bet we get hikes later
• 22:01
  Speaker 3: this year. And everyone said, well, why on earth would
• 22:02
  Speaker 3: you think that? And our extremely sophisticated analysis was simply this.
• 22:08
  Speaker 3: When everyone is expecting cuts, more often than not, the
• 22:11
  Speaker 3: market does what punishes the greatest number of people. And
• 22:14
  Speaker 3: so we said, what's not being priced in a hike? Now,
• 22:18
  Speaker 3: of course, because of the Strait of Hormuz and persistent inflation,
• 22:21
  Speaker 3: We've had those. So we're in a rate hike cycle
• 22:25
  Speaker 3: right now. We're at the beginning of that. And the
• 22:27
  Speaker 3: question to gold investors that I would posit is, do
• 22:31
  Speaker 3: you feel that gold has sold off enough that it's
• 22:34
  Speaker 3: already priced in two to three hikes? We've had one,
• 22:38
  Speaker 3: maybe we get two or three more from here. Has
• 22:40
  Speaker 3: that already priced in? If Warsh came out tomorrow and
• 22:43
  Speaker 3: announced a surprise hike, would gold rally? Would people have
• 22:47
  Speaker 3: shorted gold into it and now cover on that news?
• 22:50
  Speaker 3: I think the answer is no. And in fact, when
• 22:52
  Speaker 3: Warsh did deliver his first hike, gold did sell off
• 22:55
  Speaker 3: quite sharply. So I don't think that's priced in yet.
• 22:58
  Speaker 3: And I suspect when you look at what a normal
• 23:02
  Speaker 3: retracement of gold after the silver sell signal comes in,
• 23:06
  Speaker 3: et cetera, you typically will move down anywhere from 20
• 23:11
  Speaker 3: was the most mild pullback to 45%. And on average,
• 23:16
  Speaker 3: it lasts about two years. And so now we're sort
• 23:19
  Speaker 3: of nine months and 20-ish percent into it. And so
• 23:22
  Speaker 3: for gold to bottom here, it's possible, but it would
• 23:25
  Speaker 3: be tied for the shallowest retracement we've ever seen since
• 23:29
  Speaker 3: 1971 when gold free floated. And I suspect it has
• 23:31
  Speaker 3: lower to go.
• 23:32
  Speaker 1: I mean, I suppose it's some slight pushback to that
• 23:35
  Speaker 1: view would be that at the moment, some people look
• 23:39
  Speaker 1: at gold as protection against financial repression, which seems to
• 23:43
  Speaker 1: be one of the few ways that we'll be able
• 23:44
  Speaker 1: to deal with that. high levels of public debt. And
• 23:47
  Speaker 1: if you're in Europe, you're looking at potential fiscal crisis in, say,
• 23:51
  Speaker 1: France or the UK. You might want to keep gold
• 23:54
  Speaker 1: in your portfolio as insurance against all that.
• 23:57
  Speaker 3: Well, and I have a very difficult time arguing against that.
• 24:00
  Speaker 3: For people, like I said, that are looking for gold
• 24:02
  Speaker 3: as a ballast that's going to stay in their portfolio
• 24:05
  Speaker 3: for the next 10 or 15 years, I suspect that
• 24:08
  Speaker 3: you'll be very happy that you did so. However, given
• 24:12
  Speaker 3: that we're still in this rate hike cycle, given that
• 24:15
  Speaker 3: A lot of goods and services, notably oil for us,
• 24:18
  Speaker 3: because that's one of the big decisions we have to make,
• 24:21
  Speaker 3: is essentially at record cheapness relative to gold. And given
• 24:27
  Speaker 3: the fact that there's still a lot of metal in
• 24:29
  Speaker 3: the ETF and it's now shedding, the question is really
• 24:33
  Speaker 3: a probability one. Do you think that those factors point
• 24:37
  Speaker 3: to the shallowest contraction within a bull market ever? I
• 24:40
  Speaker 3: would say not. But if you're willing to take another
• 24:43
  Speaker 3: down 20 before you double... from the old high. So
• 24:47
  Speaker 3: let's say we think gold eventually goes to $ 10, 000 an ounce.
• 24:51
  Speaker 3: If you're willing to take a down 20 or 25
• 24:54
  Speaker 3: before you get the double from that 5,000.
• 24:58
  Speaker 2: Then keep it.
• 24:58
  Speaker 3: And I think for a lot of individual investors and
• 25:01
  Speaker 3: even some institutions for whom gold is a constant weight
• 25:05
  Speaker 3: in the portfolio, I can't argue with that at all.
• 25:08
  Speaker 3: For someone that has a two-year tactical view, I'm not
• 25:11
  Speaker 3: talking a 30-day tactical view, a two-year tactical view, I
• 25:15
  Speaker 3: think the probability suggests that you'll have a better entry point.
• 25:18
  Speaker 1: So, I mean, the key point here is that you're
• 25:21
  Speaker 1: running an active commodity equity fund and other people are
• 25:25
  Speaker 1: running long-term retail portfolios of their own. So, it's a
• 25:28
  Speaker 1: slightly different priority. So, excellent. That's very clear. So let's
• 25:41
  Speaker 1: move on then to oil, because we're all getting a
• 25:44
  Speaker 1: bit confused. What's going on in the oil market?
• 25:47
  Speaker 2: Oh, nothing. It's quiet and calm as can be.
• 25:50
  Speaker 1: And we now hear, of course, I mean, interesting news
• 25:52
  Speaker 1: from various sources that the exports from the Middle East
• 25:55
  Speaker 1: are now pretty much back to where they were, give
• 25:57
  Speaker 1: or take a few percentage points here or there, before
• 26:00
  Speaker 1: this conflict began. So the bottleneck is no longer pure
• 26:04
  Speaker 1: exports from the Middle East. It's more refining capacity and distribution.
• 26:08
  Speaker 3: So- Let's get into it, shall we? Let's again take
• 26:12
  Speaker 3: a sort of shorter-term view and a longer-term view. So
• 26:16
  Speaker 3: on a longer-term view, the important thing that's happening in
• 26:19
  Speaker 3: the energy markets today is that the shales have slowed down,
• 26:23
  Speaker 3: and they're essentially no longer growing. And if you go
• 26:26
  Speaker 3: all the way back, really to the beginning of the
• 26:28
  Speaker 3: age of oil, we've had three moments where the main
• 26:33
  Speaker 3: driver of growth from supply, I'm talking, up until that
• 26:37
  Speaker 3: point was suffers challenges and it stops growing. Now, I
• 26:41
  Speaker 3: should point out, you know, that's very much a Hubbard's
• 26:44
  Speaker 3: peak style view. And we believe in a lot of
• 26:47
  Speaker 3: the work that King Hubbard did over the years. But
• 26:50
  Speaker 3: I do think that those views get a little bit
• 26:52
  Speaker 3: distorted sometimes. And people think that it's sort of this
• 26:55
  Speaker 3: doomsday call that we're running out of oil.
• 26:57
  Speaker 1: Not everybody will know about Hubbard and the peak oil idea.
• 27:00
  Speaker 1: So maybe can we have a couple of sentences on that?
• 27:03
  Speaker 2: Absolutely.
• 27:03
  Speaker 1: Thank you.
• 27:04
  Speaker 3: King Hubbert was a shell geologist. He worked for the
• 27:08
  Speaker 3: Shell Oil Company in the 1940s and 1950s. And he
• 27:12
  Speaker 3: put forward these views that essentially, I mean, they seem
• 27:16
  Speaker 3: so simple on their surface, but they're highly controversial.
• 27:19
  Speaker 2: He said that any.
• 27:21
  Speaker 3: Oil field that you look at, whether it's a well
• 27:24
  Speaker 3: or a field, let's talk about a field or a basin,
• 27:27
  Speaker 3: will exhibit a moment where it doesn't produce anything. It'll
• 27:31
  Speaker 3: then ramp up and production will grow and grow and
• 27:34
  Speaker 3: grow and grow. And then eventually you'll run out of
• 27:36
  Speaker 3: that oil. And so production, if you've run out, has
• 27:38
  Speaker 3: to fall and it essentially has to fall quite sharply.
• 27:41
  Speaker 3: And so you can then appreciate that there's a moment
• 27:45
  Speaker 3: there that has peak production. And the question is, how
• 27:49
  Speaker 3: does the size of the field, the oil in the ground,
• 27:52
  Speaker 3: how does the size of that field correspond to where
• 27:56
  Speaker 3: you get the peak and how big the peak is? Because,
• 27:59
  Speaker 3: of course, everyone appreciates that if you have a finite resource,
• 28:01
  Speaker 3: it doesn't produce forever. I think that's the definition of
• 28:03
  Speaker 3: a finite resource.
• 28:04
  Speaker 2: So the point is.
• 28:05
  Speaker 1: That at some point, there is a moment of peak
• 28:08
  Speaker 1: oil across the board and the supply of oil declines
• 28:12
  Speaker 1: from there.
• 28:12
  Speaker 2: That's right.
• 28:13
  Speaker 3: And when you say across the board, he's really talking
• 28:15
  Speaker 3: basin by basin. He never made claims that you would
• 28:17
  Speaker 3: hit a global peak because you could bring on new basins.
• 28:20
  Speaker 3: But every basin would exhibit this curve that ramps up, peaks, plateaus,
• 28:24
  Speaker 3: and rolls over. And what he sort of added to
• 28:26
  Speaker 3: the literature was trying to make estimates by looking at
• 28:30
  Speaker 3: how big he thought each field was and making a
• 28:32
  Speaker 3: prediction as to when that field would roll over. And
• 28:35
  Speaker 3: it turns out that there's a very, very strong connection,
• 28:38
  Speaker 3: as you would expect. You know, if you found a
• 28:40
  Speaker 3: little pool of oil in your backyard, you wouldn't produce
• 28:43
  Speaker 3: at 10 million barrels a day for six minutes and
• 28:46
  Speaker 3: then it would go away. You would produce at 10
• 28:48
  Speaker 3: barrels a day for X number of years. And if
• 28:51
  Speaker 3: you found something that was a billion barrels, it would
• 28:53
  Speaker 3: hit a higher peak and ultimately produce more. And so
• 28:57
  Speaker 3: the size of the field corresponds to how and when
• 28:59
  Speaker 3: you peak that out. And so he made a prediction
• 29:02
  Speaker 3: in 1955 that 1971, the US, which had only ever
• 29:05
  Speaker 3: grown its production year on year, would roll over and
• 29:09
  Speaker 3: begin a period of decline.
• 29:10
  Speaker 2: And it did that. And so for 15 years, people
• 29:12
  Speaker 2: debated it.
• 29:13
  Speaker 3: Then it happened and he was vindicated. And that brought
• 29:16
  Speaker 3: on the first oil crisis that essentially took oil prices
• 29:19
  Speaker 3: up 15 fold. Now, I should point out on a
• 29:22
  Speaker 3: global basis, In the 1970s, we continued to produce more oil.
• 29:27
  Speaker 3: We didn't run out of oil as a civilization, but
• 29:30
  Speaker 3: the single biggest driver suffered a challenge. And that's all
• 29:34
  Speaker 3: it takes to tip the scales in the favor of
• 29:36
  Speaker 3: the bulls in the oil markets. So then what happened? Well,
• 29:39
  Speaker 3: in classic capital cycle investing, it created a huge oil
• 29:42
  Speaker 3: exploration boom. We brought on the North Sea and the
• 29:45
  Speaker 3: Gulf of Mexico in the 1980s, and oil prices collapsed
• 29:48
  Speaker 3: all the way back down to $ 11 by 1999. My partner, Lee,
• 29:53
  Speaker 3: in the early 2000s made an estimate at when the
• 29:56
  Speaker 3: North Sea and Cantarelle might roll over. And what's so
• 30:00
  Speaker 3: interesting about commodity markets is that the cycles are so long.
• 30:03
  Speaker 3: And you brought this up at the beginning. It was
• 30:05
  Speaker 3: such an insightful comment. There's very few people that remember
• 30:08
  Speaker 3: the last cycle. If the cycle was five years, you'd
• 30:11
  Speaker 3: have more institutional memory. But because it can be 20
• 30:13
  Speaker 3: years from peak to peak, you ultimately lose that connectivity
• 30:18
  Speaker 3: with the prior generation. They're long gone. And usually they
• 30:22
  Speaker 3: don't have quiet retirements. They have big blowups and they're fired.
• 30:26
  Speaker 3: And so nobody bothered to look at a Hubbard style.
• 30:28
  Speaker 3: Hubbard was relegated to the dustbin. But we did an
• 30:32
  Speaker 3: analysis and we said that the North Sea and Cantarelle
• 30:35
  Speaker 3: were going to do the same thing. that the US
• 30:38
  Speaker 3: did in 71.
• 30:39
  Speaker 2: And they did.
• 30:40
  Speaker 3: And I would argue that was a big reason. You
• 30:42
  Speaker 3: talk about China. Yes, China was a big growth driver.
• 30:45
  Speaker 3: But the slowdown in those two large sources of growth,
• 30:49
  Speaker 3: they represented about 70% of all the growth in the
• 30:52
  Speaker 3: decade prior. The slowdown of those fields was enough to
• 30:56
  Speaker 3: tip the market into deficit. And all of a sudden,
• 30:58
  Speaker 3: prices were at 145.
• 30:58
  Speaker 2: What did that do?
• 31:00
  Speaker 3: Another spending boom, this time the shales. The shales brought
• 31:04
  Speaker 3: on the equivalent of two and a half Saudi Arabias
• 31:07
  Speaker 3: in a country with good rules of law and deep
• 31:09
  Speaker 3: capital markets. It was an unbelievable bonanza, probably the most
• 31:13
  Speaker 3: important energy find. Probably it'll go down in history. And nobody, nobody,
• 31:18
  Speaker 3: nobody ever bothered to ask, will they run out too?
• 31:22
  Speaker 3: And that's what we started to study in 2019, 2020.
• 31:25
  Speaker 3: We built a big neural network before everyone had one.
• 31:29
  Speaker 2: We had one before they were cool.
• 31:31
  Speaker 3: And we used our neural network, which we trained ourselves,
• 31:34
  Speaker 3: to just study a very narrow topic, which was oil
• 31:37
  Speaker 3: productivity in the shales. And we concluded that the shales
• 31:41
  Speaker 3: would still grow. but that the growth would begin to slow.
• 31:45
  Speaker 3: So every year we would grow, but we would grow less.
• 31:47
  Speaker 3: That hadn't happened so far from the shales to 2020.
• 31:51
  Speaker 3: Every year grew more than the year before. And for
• 31:54
  Speaker 3: the first time, we said on a sustained basis, growth
• 31:57
  Speaker 3: is going to slow. And that's exactly what has been
• 31:59
  Speaker 3: happening from 2020 to 2026. And now we're actually flirting
• 32:04
  Speaker 3: with negative on a year-on-year basis. Okay.
• 32:06
  Speaker 1: So you think shale has peaked?
• 32:08
  Speaker 2: Shale has peaked.
• 32:10
  Speaker 3: It's possible always that you could get another small bit
• 32:14
  Speaker 3: of growth. It's possible that if you had a real
• 32:18
  Speaker 3: energy crisis and a spike in prices for six or
• 32:21
  Speaker 3: eight or 12 months, you could have production grow again.
• 32:25
  Speaker 3: But look what happened in the 70s. Oil went up
• 32:27
  Speaker 3: 15-fold and the US lost 30% of its production. It
• 32:31
  Speaker 3: wasn't for a lack of trying. All the energy companies
• 32:34
  Speaker 3: had a bonanza. They had a great time of it.
• 32:36
  Speaker 3: They went out and They drilled four times as many
• 32:39
  Speaker 3: wells through the 1970s than they were drilling at the beginning,
• 32:42
  Speaker 3: but it wasn't enough to arrest the declines. I think
• 32:44
  Speaker 3: that's what we're facing with the shales.
• 32:46
  Speaker 1: Okay, so long-term, that's very interesting. So we're hitting another
• 32:49
  Speaker 1: one of these peaks, and that could be the trigger
• 32:53
  Speaker 1: for this long-term bull market in oil.
• 32:56
  Speaker 2: I think that's exactly right.
• 32:58
  Speaker 1: Even with the endless conversation about the energy transition and
• 33:02
  Speaker 1: decline in demand for oil, etc., none of which has
• 33:05
  Speaker 1: actually happened, but which conceivably could happen.
• 33:08
  Speaker 3: The full cycle energy efficiency is horrible. And that's why
• 33:11
  Speaker 3: countries are having a very difficult time. apart from virtue
• 33:14
  Speaker 3: signaling or outright subsidizations. So outside of that, we're starting
• 33:19
  Speaker 3: to see a little bit of a hitting of a
• 33:20
  Speaker 3: wall with straight EV penetration outside of China. China has
• 33:26
  Speaker 3: a very different goal. China is looking to get off
• 33:28
  Speaker 3: of its dependence on imported crude. So I don't see
• 33:31
  Speaker 3: that as a long-term problem. And of course, it's not
• 33:33
  Speaker 3: showing up in the numbers, right? Crude oil demand growth
• 33:35
  Speaker 3: has been fairly steady at about a million barrels a day,
• 33:38
  Speaker 3: year on year. And that's pretty much the long-term run
• 33:41
  Speaker 3: rate as well.
• 33:41
  Speaker 1: Let's look short term then. What is going on short term?
• 33:45
  Speaker 2: Short term is all about the Strait of Hormuz, as
• 33:48
  Speaker 2: we all know.
• 33:48
  Speaker 3: And so when the Strait of Hormuz closed on March
• 33:51
  Speaker 3: the 1st, you know, we were one of the first
• 33:52
  Speaker 3: to come out and try to quantify its impact.
• 33:55
  Speaker 2: And we were maybe.
• 33:56
  Speaker 3: Naive and we said, let's say it stays shut for
• 33:59
  Speaker 3: 100 days and we lose 10 million barrels per day.
• 34:03
  Speaker 3: And when I say lose 10 million barrels per day,
• 34:05
  Speaker 3: I mean the fields have to be shut off because
• 34:07
  Speaker 3: there's nowhere to put and move the oil.
• 34:09
  Speaker 2: Right.
• 34:10
  Speaker 3: And that's what happened. We lost 10 million barrels, except
• 34:14
  Speaker 3: it wasn't 100 days. It's 215 days or so and counting.
• 34:18
  Speaker 3: But we said on 100 days at 10 million barrels,
• 34:21
  Speaker 3: that's a billion barrels lost. And we don't have a
• 34:24
  Speaker 3: billion extra barrels sitting in inventory to make that up.
• 34:27
  Speaker 3: And as a result, we're going to have a major problem.
• 34:29
  Speaker 3: And we cautioned people that we could hit tank bottoms,
• 34:33
  Speaker 3: meaning we run out of inventories sometime throughout the summer.
• 34:37
  Speaker 3: And JP Morgan said the same. So we weren't alone
• 34:39
  Speaker 3: in saying that. And the numbers were fairly straightforward. And
• 34:42
  Speaker 3: now here we are, the big question and the big
• 34:45
  Speaker 3: mystery in everyone's mind. is after 215 days, we haven't
• 34:49
  Speaker 3: hit tank bottoms twice as long as we had expected
• 34:53
  Speaker 3: this to last.
• 34:54
  Speaker 2: What's going on?
• 34:55
  Speaker 3: And I think the bears will say it proves that
• 35:00
  Speaker 3: the oil market was in a huge surplus at the
• 35:03
  Speaker 3: outset of this crisis. It shows that we were more resilient, right?
• 35:06
  Speaker 2: We had more.
• 35:07
  Speaker 3: Supply sloshing around than anyone expected for us to be
• 35:10
  Speaker 3: able to withstand that. And I'm not so sure that's true.
• 35:14
  Speaker 3: I think we are in the midst of a crisis
• 35:16
  Speaker 3: as we speak. I think that crisis is getting worse.
• 35:20
  Speaker 3: It's just not happening in an area of the market
• 35:23
  Speaker 3: that anyone has much visibility into.
• 35:26
  Speaker 2: And I'll tell you what I mean by that.
• 35:28
  Speaker 3: So if you kind of read the headline numbers, The
• 35:32
  Speaker 3: reason this 10 million barrel a day of shut in
• 35:35
  Speaker 3: productive capacity hasn't resulted in a crisis is because demand
• 35:41
  Speaker 3: apparently has fallen by 6 million barrels per day. So, yes,
• 35:45
  Speaker 3: inventories have fallen and that makes up the rest of it.
• 35:47
  Speaker 3: But six out of the 10 million lost barrels was
• 35:51
  Speaker 3: made up for by demand that has been destroyed. Now,
• 35:55
  Speaker 3: I don't think that's true. Six million barrels a day
• 35:58
  Speaker 3: is massive. That's worse than what we lost in the GFC.
• 36:02
  Speaker 3: That's on par with what we lost during COVID when
• 36:06
  Speaker 3: the whole world shut its mobility. And yes, people are
• 36:08
  Speaker 3: worried about a recession and economic hardships, but for the
• 36:11
  Speaker 3: time being, GDP prints are positive pretty much everywhere in
• 36:14
  Speaker 3: the world. And I certainly don't think anyone feels that
• 36:18
  Speaker 3: the true underlying industrial and productive economy today is as
• 36:24
  Speaker 3: bad as it was during the GFC, nor do I
• 36:27
  Speaker 3: think that anyone thinks that from a transportation basis, were
• 36:31
  Speaker 3: as restricted today as we were during COVID. So why
• 36:35
  Speaker 3: would we think that oil demand is down 6 million
• 36:38
  Speaker 3: barrels per day? And this might shock your listeners, but nobody.
• 36:41
  Speaker 1: They're unshockable, Adam. They're not.
• 36:44
  Speaker 2: I'll try.
• 36:45
  Speaker 1: I'll show my readers.
• 36:46
  Speaker 2: I'll try. Nobody measures oil demand. It's not a measured number.
• 36:54
  Speaker 3: Nobody goes and looks at how much gasoline is going
• 36:56
  Speaker 3: into gas tanks and jet planes and etc. What they
• 37:00
  Speaker 3: do instead is they model it. And the biggest source
• 37:04
  Speaker 3: of their model is refinery inputs. So it's much easier
• 37:09
  Speaker 3: to look at the massive crude intake pipeline going into
• 37:14
  Speaker 3: a refinery than it is to count the millions of
• 37:17
  Speaker 3: cars that consume the product coming out the other side.
• 37:20
  Speaker 2: And look, for the.
• 37:21
  Speaker 3: Most part, that is a completely reasonable way of going
• 37:24
  Speaker 3: about things because refineries really are not in the business
• 37:28
  Speaker 3: of running crude that no one needs, right?
• 37:32
  Speaker 2: They don't speculate. maybe a little bit, they.
• 37:34
  Speaker 3: Have trading desks, but in general, right, they run what
• 37:37
  Speaker 3: the market is demanding. And so if there's a lot
• 37:40
  Speaker 3: of demand, they ask for more crude. If there's no demand,
• 37:42
  Speaker 3: they ask for less crude. They collect the crack spread
• 37:45
  Speaker 3: or the spread between the diesel price, the gasoline price,
• 37:48
  Speaker 3: and the crude oil barrel is their margin in the middle.
• 37:51
  Speaker 3: So if you think about what's happened to refining since
• 37:54
  Speaker 3: the war started, we have lost, surprise, surprise, precisely 6
• 37:59
  Speaker 3: million barrels of refining capacity around the world. Two of
• 38:03
  Speaker 3: that is in Russia, where it was destroyed by Ukraine.
• 38:07
  Speaker 3: Two of that is in the Persian Gulf itself. And
• 38:10
  Speaker 3: then the final 2 million barrels has taken place in China.
• 38:14
  Speaker 3: And that was a policy decision. It had to do
• 38:17
  Speaker 3: with the fact that they wanted to cap the gasoline
• 38:21
  Speaker 3: and diesel price for domestic consumers. So we lost 6
• 38:24
  Speaker 3: million barrels of refining, and that's why people think we've
• 38:27
  Speaker 3: lost 6 million barrels of demand. But I don't think
• 38:29
  Speaker 3: the consumption of those refined products has gone down It's
• 38:33
  Speaker 3: just the refinery runs have gone down.
• 38:35
  Speaker 1: OK, so this all makes sense. The demand for oil
• 38:38
  Speaker 1: is down, but that is only because refining capacity is down.
• 38:43
  Speaker 1: So the supply out of the refiners is down. And
• 38:47
  Speaker 1: that is why the price of diesel and petrol is rising,
• 38:51
  Speaker 1: diesel in particular, obviously. So it's a falling demand for
• 38:55
  Speaker 1: oil because of refinery capacity and therefore a limited supply
• 38:59
  Speaker 1: of the finished product coming out the other end. So
• 39:11
  Speaker 1: how are you investing then at the moment? What equities
• 39:14
  Speaker 1: are you buying to be in this part of the market?
• 39:16
  Speaker 3: So I think at this point in the cycle, and look,
• 39:18
  Speaker 3: I'll be completely upfront. We ought to have been in
• 39:22
  Speaker 3: the refiners since the beginning of this crisis.
• 39:25
  Speaker 2: We were not.
• 39:25
  Speaker 3: We've been, we ultimately figured that the companies that will
• 39:29
  Speaker 3: benefit the most will be the crude oil producers themselves.
• 39:33
  Speaker 3: Because look, eventually we have a crude oil problem. We
• 39:37
  Speaker 3: shut off 10 million barrels of crude production. That's the problem.
• 39:42
  Speaker 3: And so eventually the crude oil price will lift. It's
• 39:44
  Speaker 3: being masked now by what I would call this logistics
• 39:48
  Speaker 3: in the middle. We didn't appreciate how long and how
• 39:50
  Speaker 3: severe that could be. So we're in the upstream molecule.
• 39:53
  Speaker 3: Certainly today, even if you were smart enough to have
• 39:55
  Speaker 3: bought the refiners, today I think what you should be doing...
• 39:58
  Speaker 3: is rotating from the refiners into the upstream companies. Because
• 40:03
  Speaker 3: I think you asked what happens in the next six months.
• 40:06
  Speaker 3: $ 200 diesel, maybe that stays there, comes down a little bit.
• 40:10
  Speaker 3: But the big thing that's going to move is $ 100
• 40:12
  Speaker 3: crude is going to come up to match that. There
• 40:14
  Speaker 3: should be a $ 20 gap between those. You're now at
• 40:17
  Speaker 3: $ 100 gap. That's $ 80 of crude price rise that would
• 40:22
  Speaker 3: happen if those refiners turned back on. I think that's
• 40:25
  Speaker 3: the path forward. And in that environment, who benefits? It's
• 40:29
  Speaker 3: the oil producing companies and particularly the pure play companies
• 40:34
  Speaker 3: with long reserve life. So we really like the oil sands.
• 40:37
  Speaker 3: Suncor and CNQ are two big holdings of ours. I
• 40:40
  Speaker 3: think those are very, very well run companies that have
• 40:43
  Speaker 3: 100 year assets, essentially.
• 40:45
  Speaker 2: They almost never decline.
• 40:47
  Speaker 3: The capital has all been spent And they will be
• 40:50
  Speaker 3: the biggest beneficiaries from a rise in the crude price.
• 40:52
  Speaker 1: What about your shells and your BPs?
• 40:55
  Speaker 2: You have to be a little bit more careful.
• 40:56
  Speaker 3: You know, some of those companies are obviously most of
• 41:00
  Speaker 3: them are all integrated, meaning they have pipelines and refining
• 41:03
  Speaker 3: businesses as well. So I don't think they will participate
• 41:06
  Speaker 3: quite properly.
• 41:06
  Speaker 2: Quite as much.
• 41:07
  Speaker 3: I think their prices have rallied a little bit more
• 41:10
  Speaker 3: already because of the refining. And I think, you know,
• 41:13
  Speaker 3: if the crude price rises sharply, they're going to make
• 41:15
  Speaker 3: a lot more money upstream and they're going to earn
• 41:17
  Speaker 3: a lot less money in their refining. And that's going
• 41:20
  Speaker 3: to somewhat net out a little bit. So you have
• 41:22
  Speaker 3: to be a little cautious there. I think that owning
• 41:24
  Speaker 3: a large integrated oil company here, if oil goes from
• 41:26
  Speaker 3: 100 to 200, you'll probably do well. The question, I suppose,
• 41:30
  Speaker 3: is could you do better in a name that's a
• 41:33
  Speaker 3: little bit more of what we would call a pure
• 41:34
  Speaker 3: play on oil?
• 41:35
  Speaker 1: Let's look at some of the other metals. You talked
• 41:38
  Speaker 1: about there being separate markets for these. So lithium, obviously
• 41:41
  Speaker 1: not participating in this in the same way. What are
• 41:44
  Speaker 1: the interesting metals, for example, to look at at the moment?
• 41:48
  Speaker 3: Well, I think the most interesting and we can debate
• 41:50
  Speaker 3: whether we call it a metal or whether it's an
• 41:52
  Speaker 3: energy source. I mean, it's obviously both. But uranium, I think,
• 41:55
  Speaker 3: is going to continue to move much higher. And to
• 41:58
  Speaker 3: give a little bit of context, we started our uranium
• 42:02
  Speaker 3: odyssey this cycle. We've been investors in the past, but
• 42:05
  Speaker 3: this cycle, we got it right.
• 42:06
  Speaker 2: At the bottom.
• 42:07
  Speaker 3: It was $ 18 a pound. It's just going to be,
• 42:09
  Speaker 3: I think, continuously steady up and to the right. is
• 42:12
  Speaker 3: punctuated by these moments of retail and hedge fund euphoria
• 42:18
  Speaker 3: and massive pessimism. And we've seen a couple of these
• 42:20
  Speaker 3: cycles already. We've seen there's a huge Twitter and Reddit
• 42:25
  Speaker 3: group devoted to uranium, and the hedge funds love to
• 42:28
  Speaker 3: play it on the long side and on the short side.
• 42:30
  Speaker 3: And so the way I like to think about it
• 42:33
  Speaker 3: is you have this trend that's up and to the right.
• 42:35
  Speaker 3: And in a lot of ways, it's probably the easiest
• 42:38
  Speaker 3: to understand commodity market that we have. It takes a
• 42:43
  Speaker 3: long time to bring on supply, a long time to
• 42:45
  Speaker 3: bring on demand. You have good, clear visibility, and it's
• 42:47
  Speaker 3: going to be a tight market. However, it's punctuated by
• 42:51
  Speaker 3: these moments of unbelievable euphoria and then pessimism. And so
• 42:56
  Speaker 3: you're going to get these oscillations around an upward trend.
• 42:59
  Speaker 3: So you can either try to hold on and just
• 43:03
  Speaker 3: stomach that volatility. You can try to trade it. The
• 43:06
  Speaker 3: problem is, of course, they don't ever ring the bell
• 43:09
  Speaker 3: at the top and the bottom of those mini cycles.
• 43:11
  Speaker 2: So we just like to hold it.
• 43:12
  Speaker 1: And when you hold it in as an equity, what
• 43:15
  Speaker 1: are you holding?
• 43:16
  Speaker 3: Well, that's an interesting question because there's not a lot
• 43:18
  Speaker 3: of companies that are producing today in any real size.
• 43:22
  Speaker 3: We own Cameco, which is the big bellwether up in Canada.
• 43:26
  Speaker 3: We own Kazatomprom, although much smaller. That's the Kazakh uranium producer.
• 43:31
  Speaker 3: We've been comfortable with that governance and country risk for
• 43:35
  Speaker 3: a long time. But there's a few things that are
• 43:37
  Speaker 3: giving us a little pause there right now. There's been
• 43:39
  Speaker 3: some changes to the tax regime that's not the right direction.
• 43:44
  Speaker 3: There has been, obviously, Kazakh uranium has become a little
• 43:49
  Speaker 3: bit more of a hot button issue between the Russians
• 43:51
  Speaker 3: and the Americans. It sits right in the middle of
• 43:53
  Speaker 3: the East and West to some degree. And then the
• 43:56
  Speaker 3: third thing, which is probably the most important, is that
• 43:59
  Speaker 3: the geology of their assets has actually started to deteriorate
• 44:03
  Speaker 3: quite sharply. And so I don't think they have quite
• 44:05
  Speaker 3: the exceptional assets they did five years ago.
• 44:09
  Speaker 2: So you can own those.
• 44:10
  Speaker 3: Then you have to move into the development companies, the
• 44:13
  Speaker 3: next-gen denizens. They don't produce anything yet, but they'll be
• 44:16
  Speaker 3: probably the first to do so. There's a few smaller
• 44:20
  Speaker 3: companies in the U.S. that have some really interesting projects,
• 44:23
  Speaker 3: but they're smaller and more speculative. And then you have
• 44:25
  Speaker 3: the SMR companies or the small modular reactor companies. These
• 44:28
  Speaker 3: are the companies that are going to build the next
• 44:31
  Speaker 3: generation of nuclear reactors.
• 44:33
  Speaker 2: And the problem with them is- We're.
• 44:34
  Speaker 1: All very, very excited about those. Don't be too pessimistic
• 44:37
  Speaker 1: because we try to be excited about those.
• 44:39
  Speaker 2: Well, I think that the technology is excellent.
• 44:41
  Speaker 3: I undertook a very big research project a number of
• 44:44
  Speaker 3: years ago to really go and spend a lot of
• 44:46
  Speaker 3: time in the labs of all these companies. And some
• 44:49
  Speaker 3: of the work that's being done by some of them
• 44:51
  Speaker 3: is extreme. That will be our next generation of nuclear reactor.
• 44:56
  Speaker 3: Others are a little bit more of hype and hope.
• 45:00
  Speaker 3: And the problem with the publicly listed ones right now
• 45:03
  Speaker 3: is that they're awfully expensive on sort of the promise
• 45:07
  Speaker 3: of revenue sometime in the 2030s. So I would stay
• 45:11
  Speaker 3: clear of them for the time being. You will have
• 45:13
  Speaker 3: some winners. My personal belief is that the company that
• 45:16
  Speaker 3: will win and dominate that cycle is.
• 45:19
  Speaker 2: Actually not publicly traded right now. It's Bill Gates' TerraPower.
• 45:23
  Speaker 2: Back to the company, it's still private.
• 45:25
  Speaker 3: So we don't invest in the SMRs, not by a
• 45:28
  Speaker 3: mandate or rule, but just for the time being, I
• 45:30
  Speaker 3: don't think they're attractive. Yeah.
• 45:32
  Speaker 1: Is there anything you're invested in that has projects across
• 45:35
  Speaker 1: the board? A generalized commodity company, you can say, do
• 45:39
  Speaker 1: you know what, if you just want to have a
• 45:41
  Speaker 1: one hit company that'll cover you for the commodity super cycle,
• 45:45
  Speaker 1: what would it be?
• 45:46
  Speaker 2: Well, two different questions. The first answer is no, we don't.
• 45:49
  Speaker 3: And the reason we don't is that we've always found
• 45:51
  Speaker 3: there to be more value in going into a little
• 45:53
  Speaker 3: bit more targeted pure play companies, right?
• 45:55
  Speaker 2: BHP, Rio, Glencore.
• 45:58
  Speaker 3: The way that they manage commodity volatility is to have
• 46:00
  Speaker 3: 20 different product lines. And if I had to create
• 46:02
  Speaker 3: a private company for my kids and grandkids, that would
• 46:05
  Speaker 3: be a really good way to do it. But it's
• 46:07
  Speaker 3: never going to give you the upside capture if you
• 46:10
  Speaker 3: get that oil call right or the copper call or
• 46:13
  Speaker 3: the uranium or whatever it's going to be. Typically, we
• 46:15
  Speaker 3: stay away from those. I would suspect for investors not
• 46:19
  Speaker 3: looking to invest in a resource equities fund where someone
• 46:23
  Speaker 3: is going to actually go and do the work to
• 46:25
  Speaker 3: find those, and for someone who's not unduly passionate about
• 46:31
  Speaker 3: the space, you'll enjoy good returns still owning a collection
• 46:37
  Speaker 3: of those super majors. I just think there's probably better
• 46:41
  Speaker 3: targeted ways to get exposure, and that's what we focus on.
• 46:44
  Speaker 1: Fair enough. And inside a portfolio, this is not necessarily
• 46:47
  Speaker 1: a question that you'll have a ready answer to, given
• 46:50
  Speaker 1: that for you, of course, the portfolio is all commodities.
• 46:53
  Speaker 1: But in an ordinary retail portfolio, In a cycle like this,
• 46:57
  Speaker 1: what kind of percentage of the portfolio would you say
• 47:01
  Speaker 1: should be in commodities one way or another? And we
• 47:03
  Speaker 1: often ask this question about gold and we get told
• 47:06
  Speaker 1: anything from, you know, 4% up to 15% of a
• 47:09
  Speaker 1: portfolio should be in gold. So we still don't really
• 47:11
  Speaker 1: know the answer. But for commodities as a whole, what
• 47:14
  Speaker 1: would you say?
• 47:15
  Speaker 3: Look, I think there's been a lot of work that's
• 47:17
  Speaker 3: been done on what the optimal commodity allocation has been. Now,
• 47:22
  Speaker 3: the problem with that, of course, is that commodities move
• 47:25
  Speaker 3: in these massive, massive cycles, so it very much depends
• 47:28
  Speaker 3: if your look-back window is in the bear market or
• 47:30
  Speaker 3: the bull market.
• 47:31
  Speaker 2: If it's in the bull market, it'll tell 25%. If
• 47:33
  Speaker 2: it's in the bear market, it'll say 5%.
• 47:35
  Speaker 3: Let's split the difference and call it probably 10% to 15%
• 47:37
  Speaker 3: across the entire cycle. At the bottom of a bear market,
• 47:46
  Speaker 3: like what I think we're still at right now, could
• 47:48
  Speaker 3: you argue for a little higher? You could, but the
• 47:50
  Speaker 3: thing that everyone needs to remember is that the reason
• 47:54
  Speaker 3: that this is such a shied away from area and
• 47:59
  Speaker 3: the reason that it creates these, what you can only
• 48:02
  Speaker 3: call our inefficiencies over decades, is because it's very volatile.
• 48:08
  Speaker 3: It's very, very volatile. People often don't like that. I
• 48:12
  Speaker 3: would size it not to the opportunity, I would size
• 48:15
  Speaker 3: it to the risk tolerance. I suspect for most investors, 10%
• 48:18
  Speaker 3: or 15% is okay. If you're comfortable with the volatility
• 48:22
  Speaker 3: and you appreciate that we're at the bottom of a cycle,
• 48:24
  Speaker 3: and somebody told me they had 20% to 25%, just
• 48:28
  Speaker 3: be prepared for those drawdowns.
• 48:29
  Speaker 2: But you probably will end the decade happy you have that.
• 48:32
  Speaker 1: There we go. Brilliant. That's what we want. We want
• 48:34
  Speaker 1: to end this decade happy. Adam, thank you so much
• 48:37
  Speaker 1: for joining us today. I really appreciate it.
• 48:39
  Speaker 2: Thank you so much.
• 48:40
  Speaker 3: This is great.
• 48:44
  Speaker 1: Thanks for listening to this week's Merrin Talks Money. If
• 48:46
  Speaker 1: you like our show, rate, review, and subscribe wherever you
• 48:48
  Speaker 1: listen to your podcasts. And keep sending your questions or
• 48:51
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• 48:54
  Speaker 1: and John on X. I'm Merrin SW, and John is
• 48:57
  Speaker 1: John underscore Stepak. This episode was hosted by me, Merrin
• 49:01
  Speaker 1: Somerset Webb. It was produced by Sam Asadi and Moses Andam.
• 49:05
  Speaker 1: Sound design by Blake Naples. And special thanks, of course,
• 49:07
  Speaker 1: to Adam Rosenzweig.