Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News. Welcome to Merin Trucks Money,
Speaker 1: the podcast in which people who know the markets explain
Speaker 1: the markets. I'm Merin Sumset Web and today I am
Speaker 1: speaking with Michael Haig, Managing director and global head of
Speaker 1: Fixed Income and Commodities Research for Society General R.
Speaker 2: Well.
Speaker 1: It has been a fairly eventful start to the year,
Speaker 1: to say the least. In a move that's stunned most
Speaker 1: of US US forces carried out the audacious seizure of
Speaker 1: Venezuela's president, Nicholas Maduro. Now, given the Venezuela holds the
Speaker 1: largest proven oil reserves on the planet, this has major
Speaker 1: implications for the oil markets, or rather a lot of
Speaker 1: people think it has major implications for the oil markets.
Speaker 1: We're going to get into that with Michael. But also,
Speaker 1: of course we are not going to let them go
Speaker 1: without talking about gold and silver and how we can
Speaker 1: make even more money im precious metals. Michael, Welcome to
Speaker 1: Merin Talks Money.
Speaker 2: Great to be here, Thank you.
Speaker 1: Okay, Now, I just I said that at the end
Speaker 1: about making even more money and gold and silver. Because
Speaker 1: Marin talks money, listeners I think are quite heavily invested
Speaker 1: in precious metals, so we will get to that, hopefully
Speaker 1: we'll have quite a lot of time for that. But
Speaker 1: I think we kind of got to start with Venezuela,
Speaker 1: haven't we. I said in the introduction about the massive
Speaker 1: oil reserves, the largest on the planet. But of course,
Speaker 1: at the moment, Venezuela produces very little oil, well under
Speaker 1: a million barrel today, and this move doesn't really mean
Speaker 1: that they'll be producing much more in the near future,
Speaker 1: so maybe there aren't really any implications for oil markets
Speaker 1: at all.
Speaker 2: I think there is something a little bit technical that
Speaker 2: we have to just bring up before we get into
Speaker 2: how this affect the global markets. So when we talk
Speaker 2: about the largest oil reserves in the world, this is
Speaker 2: what Venezuela says that they have. And actually when we
Speaker 2: talk about reserves, we talk about proven reserves, and that
Speaker 2: has to do with the geology, how likely it is
Speaker 2: that we can extract this easily, and the economics behind it.
Speaker 2: So unless the economics makes sense, it's not considered to
Speaker 2: be proven reserve. So when they announced they had three
Speaker 2: hundred and three billion barrels of oil in reserves, this
Speaker 2: is when oil prices were roughly one hundred dollars a barrel.
Speaker 2: Now they're at sixty, so I don't know the exact
Speaker 2: proven reserves that they would have, but it's certainly less
Speaker 2: than three hundred and three billion barrels in reserves, but
Speaker 2: it's still massive.
Speaker 1: Hang on, Michael, can I can I just stop you there?
Speaker 1: I want to go back to your definition there of
Speaker 1: proven reserves. Do you mean if it's not economic to
Speaker 1: remove it extracted at the current oil price, it doesn't
Speaker 1: count as a proven reserve?
Speaker 2: That's right? Yeah, okay, interesting, these things aren't audited all
Speaker 2: the time. It's kind of a little bit you know,
Speaker 2: the beauty is in the eye of the beholder. The
Speaker 2: SEC actually has very strict definitions as to what's considered
Speaker 2: to be a proven reserve. But price is forty dollars
Speaker 2: lower than when we had the three hundred and three
Speaker 2: billion barrel number being released to the market is a
Speaker 2: bit high, but nonetheless it's still massive. Even eighty billion
Speaker 2: barrels would be massive. But we have this number of
Speaker 2: reserve out there, as you rightly point out, that doesn't
Speaker 2: match what they produce and certainly doesn't match what they export.
Speaker 2: So you're right, they produce about nine hundred thousand barrels
Speaker 2: a day right now and export nine hundred minus two
Speaker 2: hundred and fifty ish, because that's what they consume locally.
Speaker 2: Now that difference, that export number has even dropped further
Speaker 2: with sanctions. The other thing to point out, of course,
Speaker 2: is that not all oil is equal, and Venezuela is
Speaker 2: in a very special place in the sense that it's
Speaker 2: oil isn't just heavy, it's what we call extra heavy.
Speaker 2: So it's almost like goo coming out of the ground,
Speaker 2: and that means that you need to add dilutant or
Speaker 2: condensate or as we keep an eye on napther, so
Speaker 2: you need to add that into the solution. It comes
Speaker 2: out of the ground, and you even need it to refine.
Speaker 2: So even if you could manage to change the entire
Speaker 2: refining industry in the world to use just Venezuelan oil
Speaker 2: at three hundred and three billion barrels, that would satisfy
Speaker 2: eight years worth of consumption. Now that's not what's going
Speaker 2: to happen. But just to give you some context on
Speaker 2: the size of their.
Speaker 1: Reserves, okay, can I just check with you? So where
Speaker 1: does that additive come from? I think, as I understand it,
Speaker 1: comes from Russia into Venezuela at the moment, but could
Speaker 1: also be imported from the US.
Speaker 2: Yes, right, yes, So back in the day, about three
Speaker 2: hundred thousand barrels of naptha was being imported into Venezuela
Speaker 2: from the United States. That match is about three million
Speaker 2: barrels a day of production. So right now nine hundred
Speaker 2: thousand barrels a day is being produced of crude oil
Speaker 2: and about one hundred thousand barrels is being imported of
Speaker 2: which in the last month that we had observation it
Speaker 2: came from Russia and Singapore actually, but normally it comes
Speaker 2: from Russia and China.
Speaker 1: Okay. So with Venezuela can only be a major oil
Speaker 1: producer and exporter of it has a symbiotic relationship with
Speaker 1: an exporter of sorry, what's it called again, napthera naphtha.
Speaker 1: You could only do it if it has a symbiotic
Speaker 1: relationship with somebody who produces naptha.
Speaker 2: It for its very extra heavy oil. It doesn't have
Speaker 2: just extra heavy oil. It has the majority of it
Speaker 2: is extra heavy.
Speaker 1: Okay, thank you. And just for context, if we talk
Speaker 1: about Venezuela producing at the moment under a million barrel
Speaker 1: of oil a day? How much do the really big producers,
Speaker 1: So the top producers in the world of the US, Saudi, Russia,
Speaker 1: and they're all churning out well over ten million, right, yeah, twenty.
Speaker 2: For the US thirteen million barrels a day. Saudi is
Speaker 2: roughly nine, but they're cutting back on their production on purpose.
Speaker 2: They could go up to eleven, Russias around ten, so
Speaker 2: they're pretty small by all accounts.
Speaker 1: Yeah, and then after that you get down to Iraq, Iran, Crea, etcetera,
Speaker 1: all three, three, fourish and Norway a bit below that exactly, etcetera.
Speaker 1: So it is possible in theory for Venezuela to get
Speaker 1: up to sort of two three is right there with
Speaker 1: three peak?
Speaker 2: Oh yeah, for sure. I mean the question is how
Speaker 2: long that would take?
Speaker 1: That's my next question. How long if everything went well
Speaker 1: for Venezuela. We can argue about what well means, but
Speaker 1: in this context, let's have well becoming a country that
Speaker 1: people feel is politically stable and financially stable enough to
Speaker 1: invest in, and the oil infrastructure is gradually built out
Speaker 1: as President Trump would like, using the big US oil
Speaker 1: services companies. How long would it take for Venezuela that
Speaker 1: are producing much more.
Speaker 2: So, if we think about getting to between two and
Speaker 2: three million barrels a day, most industry experts would say,
Speaker 2: without rushing the situation, that would take between five and
Speaker 2: ten years. If you listen to Donald Trump, he said
Speaker 2: that his ambition is to actually get these things moving
Speaker 2: in the next eighteen months. Now, it could get moving,
Speaker 2: but it's certainly nothing to be excited about in terms
Speaker 2: of barrel But if we wanted to go back to
Speaker 2: where we were back in the days of the peak
Speaker 2: three point four million barrels a day, I'm going to
Speaker 2: guess ten years.
Speaker 1: Okay, So I suppose the answer to the original question,
Speaker 1: does the political change of Venezuela mean anything for the
Speaker 1: oil market? The answer is kind of know.
Speaker 2: It doesn't mean anything from a barrel perspective. It definitely
Speaker 2: means something from a sort of a geopolitical perspective, because
Speaker 2: within Venezuela you have China that is very much part
Speaker 2: of its industry. Russia is very important in the context
Speaker 2: of supplying that naptha, and also it's important in the
Speaker 2: context of because Venezuelan oil has declined over the years,
Speaker 2: Russian oil has replaced it. Because they're quite similar kind
Speaker 2: of gravity levels, viscosity. So if you change the Venezuelan makeup,
Speaker 2: you change the outlook for Russia, you changed the outlook
Speaker 2: for China, and then you might get responses from them,
Speaker 2: which creates some sort of more geopolitical term or potentially
Speaker 2: and that then could as a second order, affect the
Speaker 2: oil market.
Speaker 1: Okay, And there are other things that may affect the
Speaker 1: oil market and at the moment as well. I mean
Speaker 1: you say that OPEK has been restricting output, but there
Speaker 1: is political shifts in Saudi right which may change that. Yeah.
Speaker 2: I mean, OPEK does what it has originally set up
Speaker 2: to do, which is to manage the market, reduce the volatility,
Speaker 2: and by doing that, it's essentially cutting its own production
Speaker 2: or bringing its production back online. Right now, they are
Speaker 2: still cutting. They were bringing back a lot of oil
Speaker 2: barrels last year in twenty twenty five. They have cut
Speaker 2: because they see surpluses rising, demand being quite low, so
Speaker 2: they have refrained from bringing back their barrels until April.
Speaker 2: In my own opinion, they're going to have to reevaluate
Speaker 2: their strategy in April because we're very, very oversupplied, and
Speaker 2: that's even ignoring Venezuela. So yeah, there's a few dynamics
Speaker 2: at play here. There's another dynamic, of course, which isn't
Speaker 2: real demand. Its Chinese strategic petroleum reserve buying. So that's
Speaker 2: them putting oil into their commercial as well as government
Speaker 2: stockpiles for quote unquote energy security. That has been absolutely
Speaker 2: rampant over the last six months, maybe even the last
Speaker 2: nine months, and that is part of the reason, if
Speaker 2: not the majority of the reason as to why oil
Speaker 2: prices haven't dropped yet.
Speaker 1: So, Michael, let's talk more about this Chinese strategic reserve.
Speaker 1: Why are they building this? What's the plan?
Speaker 2: Well, China imports roughly twelve million barrels a day of
Speaker 2: oil eleven twelve million barrels a day. They're not a
Speaker 2: significant enough producer so that they don't have to rely
Speaker 2: on the international markets. Most of that oil is obviously
Speaker 2: coming from the Middle East and Russia, some of it
Speaker 2: a little bit comes from Venezuela. But obviously they're in
Speaker 2: a very sensitive situation, so they have been building out
Speaker 2: their spr strategic pratronium reserve and they combine that with
Speaker 2: their commercial reserves. Actually that belong to the state owned
Speaker 2: oil companies and we guess that they have roughly one
Speaker 2: point four billion barrels in SPR. Compare that to the US,
Speaker 2: which has probably about four hundred million barrels. So it's
Speaker 2: gigantic and some people believe, and I think it's a
Speaker 2: little bit extreme, that this could go to two billion
Speaker 2: barrels by the end of twenty twenty six, but probably
Speaker 2: more like one point five to one point six. If
Speaker 2: you divide that those billions by their daily import numbers,
Speaker 2: they're covered for not just thirty days, they're covered for
Speaker 2: hundreds of days should anything go wrong. So you have
Speaker 2: a lot of conspiracy theorists that think, okay, well, what
Speaker 2: if they invaded Taiwan and the West cut off their
Speaker 2: supplies of oil? How long could they survive for? Who
Speaker 2: knows what the motivation is. They'll say they're building their
Speaker 2: SPR for energy security. There's no rawl in place as
Speaker 2: to how much they must accumulate. But these numbers are gigantic.
Speaker 2: But at some point they'll stop buying and that's what
Speaker 2: will affect be all.
Speaker 1: Market slight side question, how do you store that amount
Speaker 1: of oil?
Speaker 2: Well, I mean it depends on where you are in
Speaker 2: the world. There are natural caverns in the US. For instance,
Speaker 2: they're called salt dome caverns. They're along the Gulf coast,
Speaker 2: so these are natural caverns with very thick salt that
Speaker 2: has been solidified, so it's a natural storage facility and
Speaker 2: it's very cheap to store it there. But generally speaking,
Speaker 2: you're building these facilities. These could be above or underground
Speaker 2: storage facilities, which by the way, is very metal intensive,
Speaker 2: so these are basically large storage facilities.
Speaker 1: Huh okay, amazing. Well, I mean, it seems perfectly sensible
Speaker 1: for China to do that under circumstances, wouldn't you say,
Speaker 1: And obviously they must have much higher reserves than the
Speaker 1: US if they're going to do it, because the US
Speaker 1: is such a big producer in China is not. So exactly,
Speaker 1: this makes sense in not necessarily a scary way.
Speaker 2: It does. It's just that we've never seen these kind
Speaker 2: of builds we have in the past with China, which
Speaker 2: leads to the question of why they're doing it. But
Speaker 2: without trying to get too deep into that, it's about
Speaker 2: energy security.
Speaker 1: At the end of the day, let me ask you
Speaker 1: about the long term outlook for oil. I know you
Speaker 1: wrote an interesting article the other day, not the other
Speaker 1: day a while back about comparing whale oil to oil
Speaker 1: and about how long it took, even even once crudel
Speaker 1: was discovered started to be used, how long it took
Speaker 1: for people to stop using whale oil. So you say
Speaker 1: it was about fifty years until it was only negul
Speaker 1: little supply coming into the US. And of course you
Speaker 1: could argue that's because there weren't very many whales left,
Speaker 1: or it could just be the gradual shift from waleil
Speaker 1: to crude oil. And I think the point you were
Speaker 1: trying to make there was that if an energy infrastructure
Speaker 1: is set up for one type of energy, it takes
Speaker 1: a very very long time to shift it to using
Speaker 1: a different type of energy.
Speaker 2: No, that's exactly right, And by all accounts, back in
Speaker 2: the eighteen sixties, seventies, eighties nineties, where we saw this
Speaker 2: decline in whale oil imports into the US and the
Speaker 2: growth of the crude oil industry, you know, the infrastructure
Speaker 2: was a lot more simple. Let's say, in the world
Speaker 2: wasn't addicted to oil. Now the entire world is set
Speaker 2: up for oil. In fact, you know, if you did
Speaker 2: want to transition away from oil, that's certainly likely to
Speaker 2: happen within the developed markets, but I don't anticipate it
Speaker 2: happening in the emerging markets. In fact, that's going to
Speaker 2: continue to grow.
Speaker 1: Yeah, I mean, one of the unusual things about the
Speaker 1: whale old story, well, it's very interesting, is it is
Speaker 1: one of the few examples of a source of energy
Speaker 1: stopping being used, whereas everything else has been not a
Speaker 1: transition but an addition. Right, It's exactly more, we use
Speaker 1: more word, we use more coal, we use more oil,
Speaker 1: et cetera, et cetera. Everything we add on is simply
Speaker 1: an addition. So with that in mind, the idea that
Speaker 1: long term demand for oil will actually fall is that
Speaker 1: for argument, isn't it?
Speaker 2: It certainly is.
Speaker 1: That would be very unusual in the history of the world,
Speaker 1: Very very unusual.
Speaker 2: That's right. And if you look at projections from US
Speaker 2: oil majors, from European oil majors, from industry associations like
Speaker 2: the International Energy Agency, for example, the EIA out of
Speaker 2: the USA, the path of oil demand out of twenty
Speaker 2: fifty is just so wide in terms of opinions as
Speaker 2: to where we go. Some think it continues to grow,
Speaker 2: some things, it declines dramatically from here on out. My
Speaker 2: own opinion on this matter when you look at the
Speaker 2: vast array of paths that oil could go, is that
Speaker 2: I anticipate that we peak at about one hundred and
Speaker 2: thirty million barrels a day of demand for oil, and
Speaker 2: then we get a gradual decline starting around twenty thirty
Speaker 2: five twenty forty.
Speaker 1: What is total demand now.
Speaker 2: So that one hundred and thirty million barrels a day
Speaker 2: compares to total demand today of around one hundred and
Speaker 2: three hundred and four million barrels a.
Speaker 1: Day, okay, and then a decline from twenty thirty five
Speaker 1: as we shift to what or as global population peaks
Speaker 1: in declines the.
Speaker 2: Population angle wouldn't really have a big of an impact there.
Speaker 2: I think what's replacing oil at that point is natural gas. Obviously,
Speaker 2: we see a lot of investment in liquefication and regasification
Speaker 2: facilities around the world. Natural gas is most certainly the
Speaker 2: transitional commodity that can be shipped around globally, and there's
Speaker 2: a lot more oppeiing than say something like coal. But yes,
Speaker 2: I mean the vast majority of what declines for oil
Speaker 2: by twenty thirty five and twenty forty is coming from
Speaker 2: the developed markets. And that switch to natural gas and alternatives, renewables,
Speaker 2: et cetera. But you know, as I mentioned, if you
Speaker 2: looked at the growth of demand the developed markets, you'd
Speaker 2: see it coming down in twenty thirty five. You'd see
Speaker 2: the emerging markets still increasing beyond twenty thirty five. But
Speaker 2: the decline in the developed mildly offsets the increase in
Speaker 2: the emerging markets, and that's why you see the decline.
Speaker 1: Interesting. I'm getting briefly back to whale oil. You know,
Speaker 1: there was there a supply problem there, right, and I
Speaker 1: don't know if you if you remember, I certainly do,
Speaker 1: the stress over peak oil a while back, where everyone
Speaker 1: was convinced that we were actually going to run out
Speaker 1: of oil, that there'll be no more discoveries, there'll be
Speaker 1: no more reserves, and we had to make the transition
Speaker 1: to other sources of energy, not because of climat or
Speaker 1: environmental worries, but because we were going to run out
Speaker 1: of the stuff. That no longer seems a risk at all.
Speaker 1: We constantly seem to be new discoveries. And did peqil
Speaker 1: just disappear as an idea?
Speaker 2: Yeah? I think so, because you know, we went through
Speaker 2: in fairly recent history and call it the two thousand
Speaker 2: to twenty fifteen period of time where technology really was
Speaker 2: developed to extract oil that we didn't think we had before,
Speaker 2: at least we didn't think we had assets access to.
Speaker 2: And what I'm talking about there is shale oil, which
Speaker 2: is a US story. This was not part of any
Speaker 2: conversation before the year two thousand. Now, I know, I'm
Speaker 2: going back twenty five years, but that is relatively recent
Speaker 2: and is still an incredibly part of the equation. So
Speaker 2: that wasn't part of the discussion when we were talking
Speaker 2: about peak oil back many many decades ago. But it
Speaker 2: just goes to show, you know, when you're running out
Speaker 2: of something or prices getting too high, technology has a
Speaker 2: way of fixing the problem, and high prices have a
Speaker 2: way of fixing the prosblem. So even without delving into
Speaker 2: technological advancements, if prices start to go up because you're
Speaker 2: thinking about running out of something, this incentivizes the oil
Speaker 2: companies to invest more in places where you weren't extracting
Speaker 2: all before.
Speaker 1: Yeah, well, as they were saying, commodities, right, the solution
Speaker 1: to high prices is high prices exactly. We could leave
Speaker 1: oil now but stick with energy and move maybe to
Speaker 1: talking about copper, because a big part of the idea
Speaker 1: of transitioning into a more electrified world is one in
Speaker 1: which we upgrade our grids, we make everything run off electricity,
Speaker 1: and we use renewable sources more, etc. Now, everyone who
Speaker 1: listens to this podcast, in fact, anyone who reads the newspapers,
Speaker 1: will know what a problem that is and the huge
Speaker 1: infrastructure demands that we have going forward, and that of
Speaker 1: course has affected the i s of various industrial commodities.
Speaker 1: And copper is the classic right for the electrification of
Speaker 1: the world, and we've seen it at new high after
Speaker 1: new high after new high. Is the solution to high prices?
Speaker 1: There high prices or are the dynamic different? Today?
Speaker 2: Copper does have a very unique outlook actually, because you know,
Speaker 2: we can talk about electrification of the world and need
Speaker 2: for copper and other base metals in energy transition. But
Speaker 2: you know, before we started, let's just step back, before
Speaker 2: we started talking about energy transition, the whole premise behind
Speaker 2: copper's rise or demand was purely about urbanization and population growth.
Speaker 2: That became less of a subject because we're all pretty
Speaker 2: much aligne that China has peaked in terms of its
Speaker 2: use for copper, incremental demand for copper for urbanization needs
Speaker 2: and population growth. And the question then became, ten years ago,
Speaker 2: would the incremental demand from electrication demand for copper way
Speaker 2: the decline that you would get from copper through demand
Speaker 2: declines from traditional demand, And the answer to that is yes.
Speaker 2: So if you go country by country and you look
Speaker 2: at what they're planning to do their stated policies for electrification,
Speaker 2: and you add up what does that mean in terms
Speaker 2: of tonnage of copper, and you compare that to the
Speaker 2: declining copper through traditional needs, it offsets it. So it
Speaker 2: always had this kind of bullish story. And we've been
Speaker 2: talking about this for four or five years. Even before
Speaker 2: COVID COVID hits, we didn't talk about anymore. We had
Speaker 2: lots of other things to worry about, including energy security,
Speaker 2: in the cost of living crisis, etc. But a couple
Speaker 2: of things have changed in the last two three years
Speaker 2: for copper and it's given it an extra leg up.
Speaker 2: So the first one, of course, is AI and data centers. Right,
Speaker 2: we talk about data centers and we talk about how
Speaker 2: energy intensive they are, but let's imagine you go inside
Speaker 2: one of these things. It's all about copper wiring, So
Speaker 2: the demand for copper from AI and data centers even
Speaker 2: talked about two three years and now we're talking about
Speaker 2: substantial amounts of copper needed for that. On top of that,
Speaker 2: we have to take into account the unfortunate geopolitical situation
Speaker 2: we're in right now where everybody is basically trying to
Speaker 2: increase their defense expenditure, and actually that is incredibly metal
Speaker 2: intensive because you think about aircraft carriers, bullets, tanks, it's
Speaker 2: all metal and copper is in everything.
Speaker 1: So well, it's even just the building of the factories,
Speaker 1: isn't it. I mean, you know, let alone the products themselves,
Speaker 1: but the building of the factories requires large amount.
Speaker 2: Copper is literally everywhere. If I took a part of
Speaker 2: this room we're sitting in, I'd find it pretty much
Speaker 2: in everything that we're touching or looking at. But you're
Speaker 2: exactly right, it's the building of factories as well, and
Speaker 2: you have to add into account, of course, hopefully successful
Speaker 2: resolution between Russia and Ukraine, and then we have to
Speaker 2: rebuild Ukraine, and that's incredibly copper intensive. If you look
Speaker 2: at countries in the past that have had to be rebuilt,
Speaker 2: the amount of copy that you need to do that
Speaker 2: is enormous. And you can look back even in World
Speaker 2: War Two where we had to rebuild most of the world,
Speaker 2: and that was incredibly copper intensive. So there's lots and
Speaker 2: lots and lots of things going on in copper that
Speaker 2: are supporting its price, not just one thing. So I'm
Speaker 2: not sure that the cure to high prices is high prices,
Speaker 2: which we generally say is the way that prices are
Speaker 2: going to drop. I have a hard time seeing how
Speaker 2: all of these things lose momentum in the short term
Speaker 2: here for copper, and I see it continuing to rally.
Speaker 1: Okay, and how could the supply of copper go up fast?
Speaker 1: Well it can't, Well what could we can't? It actually can't.
Speaker 1: There is no way to. I mean, obviously it's verging
Speaker 1: on im possible to open new minds anywhere anymore, isn't
Speaker 1: it because of environmental regulation, et cetera. And so if
Speaker 1: you get one big mind that goes offline for a
Speaker 1: short period or whatever, there's no way to compensate for that.
Speaker 2: Well, we have we do have inventories within Shanghai, the
Speaker 2: London Metal Exchange, the comics market in New York. There
Speaker 2: are inventories and buffers there, but you know that's just
Speaker 2: what they're there for as a moderate buffer in case
Speaker 2: there's a short term shock. Really, but if we're talking
Speaker 2: about long term needs for copper to cater all these
Speaker 2: things we're talking about, defense, AI, rebuilding countries, electrification, you
Speaker 2: need more copper to come out of the ground, and
Speaker 2: it takes ages to start a new mine, as you mentioned,
Speaker 2: for environmental reasons.
Speaker 1: So should everyone have a couple of existing copper miners
Speaker 1: in their portfolio.
Speaker 2: I don't think it's a bad idea. I mean, this
Speaker 2: is going to likely go on for quite some time. Obviously,
Speaker 2: nothing goes up in a linear bottom left to top
Speaker 2: right hand graph in terms of price performance. But it's
Speaker 2: one of these things that I'm having a hard time
Speaker 2: finding reasons as to why it would collapse other than
Speaker 2: a recession or even a depression. But there's too many
Speaker 2: things that are supporting it.
Speaker 1: Yeah, although even in a recession there's defense facility. Is
Speaker 1: it's just going to keep being rebuilt, aren't they That's
Speaker 1: one thing, or recession is not going to stop.
Speaker 2: Yeah, and let's get a bit macro here. You'd mentioned, well,
Speaker 2: copper is one of my favorite commodities because we call
Speaker 2: it Doctor Copper. It's the one thing that can forecast
Speaker 2: macroeconomic outlook. It's very very good at that, but it's
Speaker 2: also very very good at predicting a negative macroeconomic outlook
Speaker 2: if we were running into a recession. You look at
Speaker 2: copper prices historically, and we can go back hundreds of years, actually,
Speaker 2: well at least dozens in the futures market. In the
Speaker 2: spot market, we can go back hundreds of years. The
Speaker 2: copper market is the one that collapses before anything else
Speaker 2: when you're running into a recession. So I keep an
Speaker 2: eye on that for that reason. But it's very resilient
Speaker 2: right now.
Speaker 1: Okay, let's talk about the other industrial metals briefly. And
Speaker 1: one of the things I mentioned earlier was that in
Speaker 1: this geopolitical environment, on top of the idea that everyone
Speaker 1: is rebuilding their defense industries, people are also attempting to
Speaker 1: rebuild their well in the West anyway, their manufacturing basis
Speaker 1: to rebuild the infrastructure that maybe they've lost it over
Speaker 1: the last twenty thirty years as a result of relentless globalization.
Speaker 1: So if we've got that rebuilding and we've got people
Speaker 1: slightly concerned for all sorts of geopolitical reasons about all
Speaker 1: sorts of things, maybe stockpiling various metals. Is it the
Speaker 1: case that we're not just talking about copper, We're talking
Speaker 1: about the entire industrial metal base being in a fairly
Speaker 1: intense ballmarket over the next few years.
Speaker 2: Minimum, Yes, some of them more than others. Nicol has
Speaker 2: always been a favorite as a potential ballmarket metal on
Speaker 2: the back of electrification. Of course, Donald Trump and the
Speaker 2: US administration right now kind of backing off from that
Speaker 2: has made that market a little bit less exciting. Also,
Speaker 2: nickel was previously losed a lot in primarily in building
Speaker 2: as a component in the steel manufacturing. That's less exciting
Speaker 2: right now because of the decline if you like, or
Speaker 2: the slow down in China, So they're not as exposed
Speaker 2: to all these very bullet elements as say something like copper.
Speaker 2: So that's a bit of an outlier. But having said that,
Speaker 2: you've hit on something very important because another aspect of
Speaker 2: what is driving some of this bullish momentum, and maybe
Speaker 2: we can get into silver a little bit later.
Speaker 1: Is oh, we are definitely on our way to talking
Speaker 1: about zilver. I'm literally gearing up for that right now.
Speaker 2: It's about stockpiling, right, critical material stockpiling. So you know,
Speaker 2: to go back to oil, what countries generally do with
Speaker 2: oil in terms of stockpiling is that they collect import
Speaker 2: ninety days worth of oil, put it in storage, and
Speaker 2: that's called their strategic petroleum reserve. That's how much they're
Speaker 2: supposed to hold in case something goes wrong. We don't
Speaker 2: have things like that for base metals. And so if
Speaker 2: one was to look at the countries that import things
Speaker 2: like nickel and zinc and lead, aluminum, copper, et cetera,
Speaker 2: and you said, okay, well, what if they decided to
Speaker 2: do the same thing with those metal that they do
Speaker 2: with the energy complex, notably oil, and by ninety days
Speaker 2: worth of cover of what they normally import, you'd be
Speaker 2: talking about a tremendous amount of material that would put
Speaker 2: these markets in big deficits and that would would increase
Speaker 2: the prices. So we're not there yet in terms of
Speaker 2: critical material and the impact on things like zinc and lead,
Speaker 2: these smaller markets, but definitely copper and silver come up
Speaker 2: in this conversation.
Speaker 1: Yeah, okay, well let's go on to silver. That one
Speaker 1: of our favorite topics on this podcast. My co host
Speaker 1: John Steppek is mildly obsessed by silver, So I'm sorry
Speaker 1: he's not here to talk to you about it, but
Speaker 1: let me do it for him. So, given everything we've
Speaker 1: just said, but also given these stunningly sharp rise in
Speaker 1: the silver price, is that sustainable? Is this a bubble?
Speaker 1: And if it is a bubble, is it a rational bubble?
Speaker 1: Or is this not a bubble at all?
Speaker 2: Well, it's fascinating you say that. We try and be
Speaker 2: very quantity in our analytics at SOB. We've got a
Speaker 2: model for almost everything, including bubbles. Is a particular market
Speaker 2: in a bubble? So I test these things out all
Speaker 2: the time, and a couple of weeks ago we ran
Speaker 2: it through our silver complex and it churned out the
Speaker 2: fact that we were in a bubble. And I thought, well,
Speaker 2: hang on a second, have we been in a situation
Speaker 2: like we're in right now for silver compared to history?
Speaker 2: And the answer is no. What's going on there is
Speaker 2: the fact that silver, we have to remember, is basically
Speaker 2: fifty percent industrial and it's fifty percent precious. It doesn't
Speaker 2: move up and down with gold, but it can't move
Speaker 2: in a separate direction in the long term. So the
Speaker 2: gold silver ratio is fairly volatile, which means that they
Speaker 2: do have different paths. But generally speaking, silver does do
Speaker 2: what gold does. It's the market is ten times smaller
Speaker 2: than the gold market, which means it's way more volatile.
Speaker 2: The way I explained the silver market, it's it's just
Speaker 2: like gold but on steroids. Basically, if gold's going to
Speaker 2: go up, it's going to go up more. If gold's
Speaker 2: going to go down, it's going to go down with gold,
Speaker 2: but buy more. But I have to add on top
Speaker 2: the industrial complex. Now, what's going on with silver, of course,
Speaker 2: is the fact that we've been running into three years
Speaker 2: of deficit. Now, before we got all excited about investing
Speaker 2: in precious metals and de dollarization, central bank buying, etc.
Speaker 2: Nobody really cared about the small deficits in silver. But
Speaker 2: once you start getting a leg up in silver prices
Speaker 2: and ETF buying and movements of silver from one location
Speaker 2: to another because of fears of tariff impositions, then all
Speaker 2: of a sudden, the inventory of silver becomes incredibly important.
Speaker 2: And when you're in the market of deficits and you're
Speaker 2: expecting to have more deficits going forward, that's the support
Speaker 2: behind silver Now, silver's very volatile. Is it going to
Speaker 2: come off? Yes, of course it will. Will it continue
Speaker 2: to rise? I think it will.
Speaker 1: Okay, that's what we want to hear.
Speaker 2: And gold gold I have actually more conviction on because
Speaker 2: it's a much more solid market in terms of liquidity.
Speaker 2: And of course central banks don't really get involved in
Speaker 2: silver at all, but they're very much in the gold complex.
Speaker 2: So I took a very interesting experiment because nobody really
Speaker 2: knows how much more central banks are going to buy,
Speaker 2: how long this de dollarization story is going to continue.
Speaker 2: But if you take a list of all the central
Speaker 2: banks around the world and you look at see which
Speaker 2: central banks are holding lower amounts of gold relative to
Speaker 2: their total reserves. So some central banks, like the US
Speaker 2: has eight thousand tons of gold, China has two three
Speaker 2: hundred tons of gold. So these are pretty big. But
Speaker 2: the really important question.
Speaker 1: And we're sure about those numbers, are.
Speaker 2: We No, we're not sure about the China number. These
Speaker 2: are self reported by China to the IMF. We keep
Speaker 2: track of imports into China from London. We look at
Speaker 2: what they say they've bought, etc. So we go with
Speaker 2: the stated number, but knowing there's a little bit of
Speaker 2: probably uncertainty there, But I think the important thing is
Speaker 2: is that even if you take that two thousand and
Speaker 2: three one hundred ton number for China, that is roughly
Speaker 2: six percent of their total reserves. So if you're off
Speaker 2: by another two thousand tons, you're still below twenty percent
Speaker 2: of total reserves. And that's what most central banks are
Speaker 2: aiming to accumulate. So if you take the top, say
Speaker 2: fifty central banks, and you rank order them by the
Speaker 2: amount of gold that they're holding as a percent of
Speaker 2: total reserves, and you exclude the ones that are holding
Speaker 2: a lot of gold, and you're left with the remainder,
Speaker 2: and you ask this one question, what if those central
Speaker 2: banks moved one percent of their total reserves that are
Speaker 2: not gold into gold, just one percent, And you looked
Speaker 2: at all these different countries, whether it's the Philippines, Japan, China,
Speaker 2: et cetera. These are the countries that have low relative reserves,
Speaker 2: and you assume that they all did that, then you'd
Speaker 2: be talking close to one thousand tons of gold being demanded. Now, remember,
Speaker 2: in any given year, normally central banks by about seven
Speaker 2: hundred tons, So if they made this incremental shift to
Speaker 2: one thousand tons, in addition to the seven hundred that's
Speaker 2: normally being purchased, that mechanically would lift gold prices about
Speaker 2: one thousand dollars an ounce.
Speaker 1: Okay, which would make the share prices of the miners
Speaker 1: go even more berserk than they've gone already.
Speaker 2: Even more berserk. And by the way, we look at
Speaker 2: the cost of production of all the different miners, and
Speaker 2: they are all making money. There is not one gold
Speaker 2: mine that is making no money anymore.
Speaker 1: Makes a pleasant change, doesn't it. It does so from
Speaker 1: your point of view, it is not too late to
Speaker 1: buy silver, to buy gold, or indeed to buy the
Speaker 1: silver or the gold miners.
Speaker 2: I don't think it is. I mean, our house view
Speaker 2: is that by the end of this year, gold is
Speaker 2: going to be at five thousand dollars an ounce. Now,
Speaker 2: of course, we said that when gold is at four thousand.
Speaker 2: Now we're up to almost four thousand, five hundred. I
Speaker 2: have a feeling, but I'm not sure when this will
Speaker 2: be that I'm going to have to adjust that up again.
Speaker 2: If I adjust gold up, I'm going to have to
Speaker 2: adjust silver up.
Speaker 1: Can you see any point, any point in time in
Speaker 1: which the central banks would hold bitcoin as a reserve asset.
Speaker 2: That's a fabulous question. I have devoted a bit of
Speaker 2: time and attention of going to a variety of different
Speaker 2: central bank websites and looking at what their policies are
Speaker 2: on this, their statements, what they say they have, what
Speaker 2: they might do. I found two central banks that made
Speaker 2: a statement last year, the Czech Republic and Kazakhstan, that
Speaker 2: said they might consider holding bitcoin or crypto in their
Speaker 2: portfolios alongside gold. But the key question was might, and
Speaker 2: I think it was the Czech Republic central Bank that
Speaker 2: said if they did that, it would be a maximum
Speaker 2: of five percent. So it's a good question, but so
Speaker 2: far I don't I'm not I'm not concerned about.
Speaker 1: That, Okay, So that is not a risk to your
Speaker 1: outlook for gold. What is the risk to your view
Speaker 1: on gold? What would turn it around?
Speaker 2: A month two months ago, I was asked the question,
Speaker 2: you know, obviously with higher prices, central banks are going
Speaker 2: to stop buying because it just is just way too high.
Speaker 2: And so I looked at sort of elasticities of response
Speaker 2: of prices to demand across jewelry, across central bank buying,
Speaker 2: across etf buying, and it's all basically broken with the
Speaker 2: exception of jewelry demand elasticity, meaning if prices go up,
Speaker 2: people buy less jewelry. That is a very strong relationship.
Speaker 2: It's broken with central banks and ETF buying because those
Speaker 2: are the reasons why gold prices go up. So it's
Speaker 2: hard to think about an elasticity response when that is
Speaker 2: the reason why it goes up. So they are the
Speaker 2: causal influence. They have a positive elasticity, which means gold
Speaker 2: prices they buy more. But so far central banks have
Speaker 2: not reversed course on their statements as to how they
Speaker 2: accumulate their gold. They still say that this is a
Speaker 2: very strategic thing. It's not really about the price of
Speaker 2: gold right now. That's my concern is if we see
Speaker 2: a reversal in central bank buying. I do check on
Speaker 2: it every month using HMRC gold export data out of
Speaker 2: the UK into places like China. It has slowed down,
Speaker 2: I will admit that compared to say this time last year.
Speaker 2: I think if I see another one or two or
Speaker 2: three months of central bank buying decline, as proxied by
Speaker 2: exports out of the UK, then I'm going to have
Speaker 2: to reevaluate my thinking on the role of central banks
Speaker 2: and gold demand. For twenty twenty six, but so far
Speaker 2: haven't seen that. The other thing that people often ask
Speaker 2: about is what if we saw a massive reduction in
Speaker 2: reduction in uncertainty around the world, geopolitical uncertainty, because those
Speaker 2: things are very highly linked to ETF flows. So the
Speaker 2: average person on the street, like you and I, we
Speaker 2: don't go out and buy massive gold bars like the
Speaker 2: central banks do. The easiest way of us access in
Speaker 2: gold is to buy gold ETF that's backed by gold,
Speaker 2: and the relationship between uncertainty and ETF flows is through
Speaker 2: the roof. So uncertainty is measured in a variety of ways.
Speaker 2: There's lots of indices out there, trade uncertainty, geopolitical uncertainty,
Speaker 2: et cetera, et cetera. You can go on the web
Speaker 2: and find these things everywhere. My favorite is Economic Policy Uncertainty.
Speaker 2: It's an uncertainty index developed by some professors at the
Speaker 2: University of Chicago. You get daily versions, weekly versions, and
Speaker 2: if you plot it alongside ETF flows, they go up
Speaker 2: and down together. So the question is is uncertainty likely
Speaker 2: to come down? And my answer is no, not at
Speaker 2: least in the next three years.
Speaker 1: I can see where you might feel like that. Yes, listen,
Speaker 1: let's go back if you if you don't mind too
Speaker 1: energy And how is it best for an ordinary passing
Speaker 1: to invest in the energy markets at the moment? I
Speaker 1: mean it feels like it's very very hard to forcast
Speaker 1: the oil price. I mean you said that forecasts are
Speaker 1: all over the blaze and nobody even knows whether the
Speaker 1: demand is going to be up or down over the
Speaker 1: next decade, etc. So if you want to be invested
Speaker 1: somehow in energy, where do you go? I mean, honestly,
Speaker 1: obviously copper is a good answer, but an answer it
Speaker 1: isn't copper.
Speaker 2: Yeah, well, so for you know, the simplest way, simplest
Speaker 2: I use inverted commas on that is to access the
Speaker 2: energy complex through things like ETFs or even if you're
Speaker 2: a little bit more sophisticated, buying or selling futures or
Speaker 2: options on futures.
Speaker 1: The problem, you know, we don't want to do that.
Speaker 1: We absolutely don't want to do that. We are simple
Speaker 1: people here with simple people. We want to buy an
Speaker 1: equity or we want to buy any ETFEA and we
Speaker 1: want to buy a straightforward, properly exposed to the physical
Speaker 1: ETF nothing else with Yeah.
Speaker 2: I mean this is this is probably the most sensible
Speaker 2: way of accessing these markets. Now, I do have to
Speaker 2: be bearish on oil going forward in case. I didn't
Speaker 2: mention that before, so I wouldn't.
Speaker 1: Probably you weren't quite clear enough on that. That was
Speaker 1: pretty much what the question was. You were totally clearly there.
Speaker 2: Is yes, So I'm not sure I would. I would
Speaker 2: recommend that to people, But if you were in the
Speaker 2: interest of getting access in that, I think going through
Speaker 2: the energy companies themselves, or at least an ETF link
Speaker 2: to those companies the most sensible. But I would stay
Speaker 2: away from the actual flat price of energy through futures
Speaker 2: and options because we have funny shaped curves the forward curve,
Speaker 2: and if you invest in the front, you're going to
Speaker 2: lose money as it rolls down the curve, et cetera.
Speaker 2: So stay away from that.
Speaker 1: We don't do that. What about the oil services companies
Speaker 1: in the US? Now they for this for this very
Speaker 1: reason things we were discussing Eliot with Venezuelan and they
Speaker 1: had bit of a pop after the incident. What about those.
Speaker 2: I'm not an equity analyst, so I tend to stay
Speaker 2: away with making judgments on particular sectors. Within energy and
Speaker 2: particularly the companies themselves. But you'd have to imagine, you know,
Speaker 2: aside from Venezuela and potential opportunities there for using US
Speaker 2: energy services companies. You know, if you're talking about a
Speaker 2: market that is going to go through some sort of
Speaker 2: bearish cycle, which is what I think it's going to
Speaker 2: do in the next year, at least maybe two years,
Speaker 2: is I'm not sure I would look at those sectors, Okay.
Speaker 1: And the bet can we just go back briefly to
Speaker 1: the bear's cycle, because I don't think we completely cover
Speaker 1: up and we will talking about oil that is based
Speaker 1: on what because we don't expect demand of all off
Speaker 1: over the next couple of years.
Speaker 2: But you yeah, well, we don't expect demand to come off.
Speaker 2: It's not going to go negative, but the rate of
Speaker 2: growth is slowing every year, and it will slow all
Speaker 2: the way up to one hundred and thirteen million barrels
Speaker 2: a day, as I mentioned before. But it's about the
Speaker 2: supply side. So OPEK has been cutting oil production slash
Speaker 2: exports to keep prices at a high enough level so
Speaker 2: the cost of extraction in the open members is fully covered,
Speaker 2: but also the social costs within each country is covered.
Speaker 2: But at some point they've given up and they've said, Okay,
Speaker 2: we're going to produce more because we want more of
Speaker 2: the volume that we've been holding back on, which enables
Speaker 2: places like Brazil, Guyana, the US and Canada to enjoy
Speaker 2: that incremental demand growth by adding that supply. So they've
Speaker 2: reversed course and said we're not doing that anymore. We're
Speaker 2: bringing back oil into the market. So when you add
Speaker 2: in what the develop market is producing, when you add
Speaker 2: in what Opek is putting back into the market, and
Speaker 2: then you subtract from that the incremental demand that we
Speaker 2: might get next year, we end up with a surplus
Speaker 2: of about three million barrels a day of on one
Speaker 2: hundred and four million barrel a day market, which is
Speaker 2: gigantic as a percentage. And because of that, that means
Speaker 2: that inventories build around the world. They swell up. We've
Speaker 2: got plenty of oil, and prices collapse. The reason why
Speaker 2: they haven't collapsed right now is because China has been
Speaker 2: buying all for its strategic petroleum reserve, which is a
Speaker 2: whole different conversation in itself. But when they stop, that's
Speaker 2: when inventories kind of grow rapidly, and that's when prices
Speaker 2: come off next year.
Speaker 1: Okay, so this is absolutely fabulous news if we think
Speaker 1: as we do that, you know, all activity is energy transformed.
Speaker 1: The cheaper energy is the better for everybody. And we
Speaker 1: know so many horrible recessions have been prompted by high
Speaker 1: oil prices. Seeing oil prices go lower and exactly high
Speaker 1: in historical context at the moment, seeing them going lower
Speaker 1: will be absolutely fabulous for global economic growth.
Speaker 2: It totally well. I mean, you know, I'm not talking
Speaker 2: for a collapse in all prices. Our official forecast as
Speaker 2: it goes for Brent anyway, which is the more global market,
Speaker 2: to go to about fifty dollars by the end of
Speaker 2: the year. And we're at sixty right now. So we're
Speaker 2: not talking about a twenty or a thirty percent decline.
Speaker 2: And if I turn around and I tell my economists, hey,
Speaker 2: I've got some good news oils coming down, what does
Speaker 2: that mean for inflation? What does this mean for GDP growth?
Speaker 2: They don't get overly excited by the level that I've
Speaker 2: just explained there, but obviously at the margin, this is
Speaker 2: very positive for people's pockets.
Speaker 1: Excellent, brilliant, Thank you, Michael. See how we are ended
Speaker 1: there on a positive note, see how that works.
Speaker 2: We're done.
Speaker 1: We are Thanks for listening to this week's Marrying Talks Money.
Speaker 1: If you like us, show, rate, review, and subscribe wherever
Speaker 1: you listen to podcasts and keep sending questions or comments
Speaker 1: and Merrin Money at Bloomberg dot net. Also follow me
Speaker 1: and John on Twitter or x I'm at marinsw and
Speaker 1: John is John on The Scorest Effect. This episode was
Speaker 1: hosted by me baron Sunset What. It was produced by
Speaker 1: Samasadi and Moses and sound designed by Blake Mabels and
Speaker 1: Aaron Casper. And special thanks of course to Michael Hay