Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News. Welcome to Merrin Drug's Money,
Speaker 1: the podcast in which people who know the markets explain
Speaker 1: the markets. I am meren' sumset Web and this week
Speaker 1: we welcome back Evy Hambroke, Global Head of Thematic and
Speaker 1: Sector Investing. I think it last one about eight months ago, right, Yeah.
Speaker 2: It was definitely some middle of last year. Yeah.
Speaker 1: Yeah, quite a few things have changed since then, right,
Speaker 1: So we've got a lot to talk about when it
Speaker 1: comes to the commodity markets. But listen, I want to start,
Speaker 1: and not everyone will agree that this is a correct
Speaker 1: place to start, but I know what our listeners hold
Speaker 1: in their portfolios, and it's an awful lot of gold.
Speaker 1: And you know, I was speaking at the weekend at
Speaker 1: this thing called the Weekend of the Mistakes in hay
Speaker 1: on Y and I did an investment breakfast chat for
Speaker 1: the audience and I asked them to put up their
Speaker 1: hands if they held more than five percent of their
Speaker 1: portfolio in gold, which is a pretty unusual, right, The
Speaker 1: average of wealth manager will hold maybe two percent of
Speaker 1: a portfolio in gold. At five percent, pretty much everyone
Speaker 1: put up their hands, So I'm like, okay, all right,
Speaker 1: ten percent, A lot of people still hands up, fifteen percent,
Speaker 1: a lot of people hands up, twenty still a lot
Speaker 1: of hands, twenty five, lot of hands, thirty, lot of
Speaker 1: hands around thirty it starts to go down. I'm actually
Speaker 1: beginning to like an auctioneer as well. But when I
Speaker 1: got to fifty percent of their portfolio, there were still
Speaker 1: two people with their hands up. Wow. Yeah. And that's
Speaker 1: effectively what they call over it gave cal they call
Speaker 1: the Turkish portfolio half equities, half gold. So someone who
Speaker 1: has that amount of gold in their portfolio, even the
Speaker 1: people who have ten percent or fifteen percent, they would
Speaker 1: have expected over the last three weeks for that goal
Speaker 1: to have protected them from the volatility in particular of
Speaker 1: the markets over the last three weeks. So what we
Speaker 1: around began absolutely hasn't happened. In fact, gold and silver
Speaker 1: have both behaved like volatile financial instruments, and they haven't
Speaker 1: done the job that I think a lot of people
Speaker 1: would have expected them to do. So we're going to
Speaker 1: start by me asking you to explain what on earth
Speaker 1: is going on.
Speaker 2: That is the question that we are asking ourselves, and
Speaker 2: let's think about it in steps. I think the first
Speaker 2: step to think about it is if we go back
Speaker 2: to points in history where we've had similar heightened volatility
Speaker 2: and I don't know, shocks or surprises and so on,
Speaker 2: the first reaction for most investors is to raise liquidity,
Speaker 2: and so there was a rush for cash. And in
Speaker 2: that scenario, there's a very high correlation across asset classes
Speaker 2: as things are sold, and that would be a pretty
Speaker 2: standard reaction in those environments. I think what's peculiar about
Speaker 2: this one, which would be the second point, is that
Speaker 2: going into this crisis, there was I think, as we
Speaker 2: spoke about maybe last time, an increased allocation to commodities
Speaker 2: within people's portfolios for many of the reasons that we
Speaker 2: discussed the ongoing devaluation of paper currencies, a positive view
Speaker 2: towards general commodities and materials related to cap expend and
Speaker 2: so on, so that if you had a commodity allocation
Speaker 2: in your portfolio, it didn't have energy in it. And
Speaker 2: so what we've now seen is the commodity the desired
Speaker 2: commodity mix has a much higher energy component in it
Speaker 2: because of the disruption that we've seen in the Middle East.
Speaker 2: So there would have been a liquidation of areas that
Speaker 2: you would have had historical profit on from the allocation
Speaker 2: you would have had relative to everything but energy, and
Speaker 2: then the switch out of that into energy related exposures.
Speaker 2: So you might be keeping the commodity sleeve the same size,
Speaker 2: but the components within it would have adjusted away from
Speaker 2: areas like gold and copper and other things and towards
Speaker 2: oil and gas and so on. So that's the second
Speaker 2: point that we would mention. I think the third thing
Speaker 2: is that there is, without a doubt, and you're a
Speaker 2: better expert on this than me, that there is going
Speaker 2: to be ongoing disruption to energy markets. Even if there
Speaker 2: was a cease fire or a victory or whatever a
Speaker 2: standown today, there would be ongoing disruption to energy markets
Speaker 2: for a period of time into the future. And I
Speaker 2: think Iran probably doesn't want people to forget that they
Speaker 2: have the ability to disrupt energy supplies. So there might
Speaker 2: be even if there was a cease fire, there might
Speaker 2: be some form of provocation or some kind of reminder
Speaker 2: that they're still around and they have the ability to
Speaker 2: disrupt things. So the premium that remains in the energy market,
Speaker 2: in oil premium or gas premium is likely to remain
Speaker 2: elevated and on that scenario, then we have to price
Speaker 2: in a higher degree of inflation prospects and therefore a
Speaker 2: higher degree of rates. So could he risk premiums will
Speaker 2: have gone up, and so in those things, then you've
Speaker 2: got the prospect of higher rates. If you've got higher rates,
Speaker 2: that's normally negative for gold. So to us, without saying
Speaker 2: it's one of those three things, it's probably a combination
Speaker 2: of all of those three things. And then the last
Speaker 2: one is just probably some profit taking. People have made
Speaker 2: a lot of money in gold for a relatively short
Speaker 2: period of time. It probably got to an outsized level.
Speaker 2: You mentioned fifty percent in two people's hands going up
Speaker 2: at your event. If you used to have five and
Speaker 2: it doubled, you would be at ten. If your model
Speaker 2: was five, maybe you'd probably kick yourself and not taking
Speaker 2: some profits and bringing it back down to five. So
Speaker 2: there's probably a fifth or fourth element as well to
Speaker 2: that mix. So those would be the things that I
Speaker 2: would explain when I think about the gold market. Though,
Speaker 2: looking forward into the future, in just about all time
Speaker 2: frames going forward from now, apart from the very short term,
Speaker 2: the ongoing issues at government haven't disappeared. If anything, they're
Speaker 2: going to be spending more money on defense. They're going
Speaker 2: to have higher interest bills on their debt. They're going
Speaker 2: to require greater amounts of overall funding for everything that's
Speaker 2: going on, which means more indebtedness, it means more devaluation
Speaker 2: of paper currencies and better returns for real assets.
Speaker 1: Let's look at some of those reasons for gold volatility.
Speaker 1: One of the things, and I think suggest is that
Speaker 1: you'd have a lot of effectively gold tourists have been
Speaker 1: in the market over the last little while. If you've
Speaker 1: had your long term gold holders who imagine they're going
Speaker 1: to be staying in this market, the hold for all
Speaker 1: the long term reasons that you and I've discussed, But
Speaker 1: then you have people who've come in quickly, they've made
Speaker 1: a lot of money, and they've gone out again. And
Speaker 1: there's also maybe this time around there's more people using
Speaker 1: various instruments to buy gold, and previous gold ball markets
Speaker 1: people are being buying gold actual gold, and now we're
Speaker 1: buying gold ETFs and other instruments that represent gold. So
Speaker 1: maybe the market is a lot more financialized than it
Speaker 1: used to be, so it's less likely to work as
Speaker 1: a steady head for you.
Speaker 2: Maybe I think you've definitely had financial additional sources of
Speaker 2: financial capital added to the market, so you've got greater
Speaker 2: leverage behind the scenes. So people would have been having
Speaker 2: a five percent waiting and then borrowing two and a
Speaker 2: half percent against it, taking it to seven and a
Speaker 2: half and whatever the mass might have been, and so
Speaker 2: that financial leverage would up to the exposure, which is
Speaker 2: good in a rising market, but obviously very bad in
Speaker 2: a falling market. So the pressure a margin call or
Speaker 2: whatever might to be able to reduce your position would
Speaker 2: have prompted some action. I think algorithmic training as well
Speaker 2: would definitely have been a factor. When things fall or
Speaker 2: companies miss earnings or whatever. The computers got involved, and
Speaker 2: the volatility is normally far greater than you would have
Speaker 2: expect without that kind of part of the market being present,
Speaker 2: so I think that would have extended the returns.
Speaker 1: Yeah, and there's always also a suggestion that the last
Speaker 1: few years, we've always had central banks as their last buyer.
Speaker 1: There's always this backup from the central banks who've been
Speaker 1: buying and buying and buying, and that we might now
Speaker 1: be at a point where they might think, like lead,
Speaker 1: do you know what, Maybe that's enough gold, and particularly
Speaker 1: under these circumstances, is maybe we'll hold some different commodities
Speaker 1: as well, and also that perhaps that the central banks
Speaker 1: in them add least, might no longer want to keep
Speaker 1: buying gold when they've got an awful lot of other
Speaker 1: things to worry about.
Speaker 2: So I think central I don't see central banks changing
Speaker 2: course in terms of adding to gold holdings. The ones
Speaker 2: that have been buying have got aspirations in terms of
Speaker 2: percentage weights far higher than their current holdings. So if anything,
Speaker 2: price weakness normally triggers that as an opportunity for them
Speaker 2: to be able to step up some activity. We won't
Speaker 2: know whether they've done so for a few months until
Speaker 2: the official data comes out, but I'd be surprised that
Speaker 2: if you'd had that. I think the point about selling
Speaker 2: some gold or assets, or liquidating treasuries or equity positions
Speaker 2: to be able to fund spending on defense in the
Speaker 2: Middle East might be the case. And at the end
Speaker 2: of the day, these economies are not thriving right now.
Speaker 2: Your tourism's gone, the airport's are shut, the hotels will
Speaker 2: be empty, and you're not exporting a lot of the
Speaker 2: things that you were the foundation of your economy, which
Speaker 2: is the petroleum revenues. So these countries are going to
Speaker 2: be really suffering and so for them to raise some
Speaker 2: capital to be able to cover their needs is probably
Speaker 2: a likely outcome. But I would have thought that won't
Speaker 2: just be gold specific. It would be across a range
Speaker 2: of different financial assets that they might have, and they
Speaker 2: will be obviously reaching for the liquid ones. They're going
Speaker 2: to be able to sell a port very quickly, or
Speaker 2: to sell a property in London or whatever it might be.
Speaker 1: If you can't be selling a property in London these days,
Speaker 1: that's very a liquid stuff though.
Speaker 2: That ship definitely sailed. But gold you can sell, yeah, well,
Speaker 2: you definitely can. And there clearly has been more sellers
Speaker 2: and buyers in the last few weeks. But it wouldn't
Speaker 2: surprise me if we saw more buyers and sellers at
Speaker 2: the end of the day. This is a very big retracement.
Speaker 2: We've dropped over one thousand dollars in ads in a
Speaker 2: number of DEAs and it wouldn't surprise me to see
Speaker 2: quite a lot of that put back on.
Speaker 1: Yeah, and interest rates are a big deal, aren't they.
Speaker 1: I mean a month ago in the UK everyone was
Speaker 1: busily pricing and rate cuts through the end of the year,
Speaker 1: and now everyone's begun to price in rate rises, which
Speaker 1: may or may not be the correct strategy. But as
Speaker 1: is always the case in a crisis, our central banks
Speaker 1: will be busily fighting the last war. And they didn't
Speaker 1: raise write nearly soon enough last time. And they're never
Speaker 1: going to utter the word transitory ever again, and probably
Speaker 1: never ever utter the words look through this inflation that
Speaker 1: these things simply can't be said again. So they're more
Speaker 1: likely to make a mistake on the upside than the downside.
Speaker 2: Yeah, it is going to be interesting in the restoric
Speaker 2: this time. Remember all of the inflationary chat last time,
Speaker 2: and the government's had a control with the previous government
Speaker 2: being criticized by the current government inflation's crazy, look at
Speaker 2: what you've done. And I think was that Rishie Sunak
Speaker 2: was getting all of the jabs in the side and
Speaker 2: that was Ukraine related and now we've got Middle East related.
Speaker 2: Does the current government get the same kind of pain
Speaker 2: verbally from the opposition parties on the back of what
Speaker 2: we look to see is high gas prices and so
Speaker 2: on today, I sh'd think.
Speaker 1: So, now we're going to come onto energy in a minute,
Speaker 1: although it's your core area, but we must side swipe
Speaker 1: silver before we move on from prescious metals, which has
Speaker 1: been even more dramatically throwing itself around the place.
Speaker 2: And gold right, yeah, I know. Silver's absolutely been a
Speaker 2: hell of a roller coaster prices as well, above one
Speaker 2: hundred and come back down again. It's definitely been one
Speaker 2: that's it was long overdue the industrial imbalances in the market,
Speaker 2: so we needed to see higher prices. The demand of
Speaker 2: supply situation was completely out of kilter. Did it get
Speaker 2: a bit too far? Probably, as it now come back
Speaker 2: to levels which look very attractive again. Absolutely, and that's
Speaker 2: how we're certainly positioned in the portfolio for some kind
Speaker 2: of recovery there.
Speaker 1: The dop ten shareholdings are very heavily weighted toward precious metals,
Speaker 1: and you appear to be completely happy with that.
Speaker 2: Yes, I mean, across the range of funds we have
Speaker 2: different exposures, but in the world mining Trust be out
Speaker 2: with the core of Some of the absolute return that
Speaker 2: we generated in twenty twenty five, which was one of
Speaker 2: our record years, a lot of that came from precious metals,
Speaker 2: but it also came from copper as well. That was
Speaker 2: another key contributor, and those two fat plus the gearing
Speaker 2: and some of the other things around royalties and other
Speaker 2: areas in our encoached sleeve delivered a lot of value
Speaker 2: in twenty twenty five.
Speaker 1: Okay, So energy is such a tiny part of everyone's
Speaker 1: portfolios and about the three percent of the global markets
Speaker 1: for its absolutely nothing and as a proportion of the
Speaker 1: US market of any of the big markets against small
Speaker 1: of them. It's been for such a long time, so
Speaker 1: we can expect that to change, Right, where does that go?
Speaker 2: Yeah? So I think this topic that you touch on
Speaker 2: with energy is one example, has a multitude of examples
Speaker 2: that could sit withinside that. So it's been fascinating for
Speaker 2: me to read the reports that have been written. I'm
Speaker 2: sure you've seen similar ones underneath the kind of title
Speaker 2: of this halo trade hard assets and low obsolescence. So
Speaker 2: that was in motion prior to the events in the
Speaker 2: Middle East. And just to remind everybody, there's obviously a
Speaker 2: threat around AI and disruption of existing business models, and
Speaker 2: many of the existing business models that are under threat
Speaker 2: are areas where people have large amounts of exposure in
Speaker 2: their portfolios and have had for many decades. Because they've
Speaker 2: been consistent, high growth, high margin, successful tech companies and
Speaker 2: so on. There are some now question marks about the
Speaker 2: future value of those business models, and so there is
Speaker 2: a rotation of capital. And as you completely rightly point out,
Speaker 2: if you looked at a pie chart of the global
Speaker 2: economy and broke it down into segments, there are areas
Speaker 2: that are stand out within there as being really important.
Speaker 2: Now when you compare that to the market cap of
Speaker 2: the world economy, the shape of the slices is completely different.
Speaker 2: So as you say, the market cap of energy is tiny,
Speaker 2: but it's relevance in GDP for the global economy is enormous. Now,
Speaker 2: is it right that you've got a market cap that's
Speaker 2: so low relative to such an important part of today's economy.
Speaker 2: There's clearly an imbalance there, and so there is likely
Speaker 2: to be this rotation of capital back towards areas that
Speaker 2: are geopolitically important, industrially important, and like the backbones of
Speaker 2: the global economy, away from areas that maybe have some
Speaker 2: threats to their business model. And people have made a
Speaker 2: lot of money in and so that rotation, that halo
Speaker 2: strategy rotation was in motion before the Middle East. I
Speaker 2: think the Middle East is an accelerator with a focus
Speaker 2: on energy. But I think the overall trend where you
Speaker 2: have a lot of the companies that sit in I
Speaker 2: would describe them as second and third order beneficiaries of
Speaker 2: the Hyperscala capex spend. That rotation again is going to
Speaker 2: be part of that. So you've got a kind of
Speaker 2: high growth in those businesses that have been quite sleepy
Speaker 2: for a long time because of the capex spend and
Speaker 2: less probability of disruption to their business models, which means
Speaker 2: they might look relatively safe compared to some of the
Speaker 2: uncertainties that exist elsewhere.
Speaker 1: Yeah, there's been a long period where there's been an assumption,
Speaker 1: both in stock markets and at a political level, that
Speaker 1: energy is available whenever you want it and in whatever
Speaker 1: volume you wanted, that you could trade cats for energy
Speaker 1: at any point. And it's quite a wake up call
Speaker 1: for those who didn't quite hear the siren blaring during
Speaker 1: the beginning of the Ukraine War, who are now hearing
Speaker 1: it blaring very loudly now finally getting for a bit
Speaker 1: where everyone across the market understands those business of Ed
Speaker 1: Conway's wonderful phrasen. The difference between the ethereal world and
Speaker 1: the material world. Anyone who didn't get it now surely
Speaker 1: gets it now, so that rotation must be under away
Speaker 1: at some speed.
Speaker 2: Yeah, he's fantastic and I love reading his book. One
Speaker 2: of the words that's missing in the conclusion part of
Speaker 2: that is complacency. There is a widespread complacency on supply
Speaker 2: of things that we take for granted, and whether that's
Speaker 2: agricultural products, whether it's commodities, whether it's energy and so on.
Speaker 2: The amount of work and effort that goes into delivering
Speaker 2: these things for society. How dependent we are upon them,
Speaker 2: but how little we're prepared to pay for them is extraordinary,
Speaker 2: whereas we pay a lot more for something that's probably
Speaker 2: less essential to our daily lives. And I think that
Speaker 2: and as a result, you've seen the profitability of those
Speaker 2: industries decline through time, and therefore they've been disincentivized to
Speaker 2: invest in future supply opportunities, which means when events come
Speaker 2: along to disrupt supply, either because there's too much demand
Speaker 2: or supply itself it gets physically disrupted. There's a significant
Speaker 2: price outcome. Because the world is set up to be
Speaker 2: very finely balanced between supply and demand, and so that
Speaker 2: kind of complacency both in how people will invest but
Speaker 2: also what people take for granted does play out with
Speaker 2: extreme outcomes.
Speaker 1: Yeah, I mean fertilizer has been the other rig bit
Speaker 1: of that, hasn't it. Everyone suddenly realizing how you need
Speaker 1: sulfuric acid and those other inputs which I don't think
Speaker 1: anyone ever thought about before, and suddenly realizing that without
Speaker 1: the fertilizer inputs that come through the Middle East, maybe
Speaker 1: you won't have quite as much food as you thought
Speaker 1: you would have. And so the impact of these last
Speaker 1: three weeks will be seen in food prices at the
Speaker 1: end of this growing season.
Speaker 2: That's what I mean when we said about inflation earlier on.
Speaker 2: There are going to be profound impacts from this, and
Speaker 2: whether it's through direct energy costs, whether it's through fertilizers,
Speaker 2: whether it's through the manufacturing of chips, in the availability
Speaker 2: of helium for a lot of these countries.
Speaker 1: Been fascinating watching people learn that helium is the cooland
Speaker 1: and MRI machines. We too, I didn't know that helium
Speaker 1: was the cooland and MR. Yeah.
Speaker 2: So there's a huge disruption across the kind of spread
Speaker 2: and It's not just barrels of oil. It's a whole
Speaker 2: bunch of things that come from that. And then you've
Speaker 2: got the disruption to the supply chain of all of
Speaker 2: the different fuels that we use and so on. So
Speaker 2: I think the inflationary impact on this is going to
Speaker 2: be around for a while.
Speaker 1: I suppose shorter term all this is quite deflationary. It
Speaker 1: suggests if it goes on much longer. And I know
Speaker 1: we hum and heart between are we negotiating or are
Speaker 1: we escalating? We can possibly know. But if it goes on,
Speaker 1: it becomes a bit of a recessionary influence as well,
Speaker 1: and that presumably hits demand for commodities across the board
Speaker 1: and maybe at the very least delays the supercycle that you're.
Speaker 2: Yeah, I don't think we necessarily thinking about a supercycle.
Speaker 2: I just think we're going to be in a period
Speaker 2: of time. You probably get the clue. I don't really
Speaker 2: like supercycle. We had a China cycle in the early
Speaker 2: two thousand.
Speaker 1: I know, but everyone likes to talk about commodity supercycles.
Speaker 1: Remember the last time around, When was the last time
Speaker 1: we all got very excited about a.
Speaker 2: Commodity two thousand and one to two eleven.
Speaker 1: Two thousand exactly, and that was great.
Speaker 2: It was good. It was good, and I think we do.
Speaker 2: We're definitely at the foothills of a cycle now, and
Speaker 2: it's a cycle link to capex spend and you know,
Speaker 2: and they're the same foundations are there about the under
Speaker 2: investment into supply and the price elasticity that this doesn't
Speaker 2: exist to be able to turn the ups and produce
Speaker 2: more of these commodities. And we've got a decade plus
Speaker 2: of if high spend. I think it's say one caveat
Speaker 2: to that would be if equity prices fall too far.
Speaker 2: I'm sure that some of the hyperscalers are going to say, look,
Speaker 2: it must make more sense to buy shares back again now,
Speaker 2: and maybe there's a little bit of reallocation of capital
Speaker 2: towards that. That would be one of the kind of
Speaker 2: only risks I see to that hyperscale spend generally. Absolutely,
Speaker 2: we're at the foothills of a cycle. It's very exciting.
Speaker 2: As I mentioned, the sector trades on low multiple and
Speaker 2: it's completely out of balance relative to its kind of
Speaker 2: geopolitical significance, and it's significance too extand of living and
Speaker 2: in the overall economy.
Speaker 1: I'm just sticking with the negative brief shocation. We have
Speaker 1: to do that. We have to do that. The other
Speaker 1: possible thing that could hit demand, the demand that we
Speaker 1: talk about so much, and when we talk about rare
Speaker 1: earth metal, then we talk about copper, and we talk
Speaker 1: about silver. We're very awful talking about the energy transition.
Speaker 1: And there are two views here on where the war
Speaker 1: in Iranch should make people head on the energy transition.
Speaker 1: One is further faster and the other is, for heaven's sake,
Speaker 1: slow this down and keep using the oil and gas
Speaker 1: that you've got, or focus on that, etc. So there
Speaker 1: are two views, either slow it down or speed it up.
Speaker 1: And I suspect that the slow it down view is
Speaker 1: gaining traction here. So if the energy transition drive slows,
Speaker 1: that also affects demand for a lot of the things
Speaker 1: that you're quite bullish on.
Speaker 2: Yeah, potentially, But I actually think the answer is the
Speaker 2: third scenario, which is all of the above, because we
Speaker 2: do have a changing energy demand graph. We've been flatlining
Speaker 2: for years and we've now it's now. I guess it's
Speaker 2: pretty consensual that demand for energy molecules is going to rise.
Speaker 2: We've got higher use cases across, whether it's robotics, electric vehicles,
Speaker 2: DEATA centers, etc. So we have got a change ahead
Speaker 2: of us. So we're going to see rising consumption and
Speaker 2: fossil fuels can't meet that demand all on their own.
Speaker 2: Renewables can't meet that demand on their own. You can't
Speaker 2: build the nuclear reactors fast enough as a seven year
Speaker 2: waiting list for the gas turbines, for the gas plants.
Speaker 2: In the near term, it's going to be an all
Speaker 2: of the above answer to be able to meet that
Speaker 2: rising energy need for the growth that we think is
Speaker 2: built into the global economy. Over the medium to long term,
Speaker 2: there's definitely going to be some kind of transition, and
Speaker 2: I'm sure as we get more competent, more efficient, more
Speaker 2: reliable when it comes to alternatives, they will have a
Speaker 2: bigger and bigger role to play. I'm sure the nuclear
Speaker 2: is going to come out and maybe replace coal as
Speaker 2: that kind of base load power, and so you will
Speaker 2: see some stuff phased out. But I don't think we're
Speaker 2: I think we spoke about it last time. I don't
Speaker 2: think we're in a kind of transition as such. I
Speaker 2: just think we're just in a phase where things are
Speaker 2: changing to be able to meet the need of rising consumption.
Speaker 1: Yeah, so we're talking about just a general admission that
Speaker 1: this is an addition, not a transition. Correct, absolutely on
Speaker 1: that matter of the not transition but addition coal. Suddenly
Speaker 1: people are talking about coal again and there are some
Speaker 1: minds reopening. Is there any coal in any of your
Speaker 1: portfolios and how would you express that?
Speaker 2: Yeah, so we have indirect exposure to coal in the portfolio.
Speaker 2: So we have some large cap diversified mining companies that
Speaker 2: still have thermal coal assets and metallurgical coal assets in
Speaker 2: the portfolio. So definitely we have exposure, but we don't
Speaker 2: have any pure play coal exposure in the fun And
Speaker 2: I think that's a legacy of what is the future
Speaker 2: as one point, and the second is where is the value?
Speaker 2: And when we looked at the value, you could see
Speaker 2: huge amounts of value in the goal equities and precious
Speaker 2: metals equities, in the copper equities, in aluminum and so on.
Speaker 2: So there was a lot of obvious value there. The
Speaker 2: coal was less obvious. And then when you think about
Speaker 2: future pricing outside of this event, coal prices were on
Speaker 2: their knees and so the outlet was pretty bleak and
Speaker 2: I think this tragic event in the Middle East has
Speaker 2: said we do need this stuff, probably longer than we thought.
Speaker 2: And when we see higher gas prices coming through, that
Speaker 2: translates directly into thermal coal because you have that parity pricing.
Speaker 1: Yeah. Okay, so coqualities as a whole, the ordinary investors
Speaker 1: portfolio at this point, at this stage in the cycle
Speaker 1: that I won't call a supercycle. Just to hear you
Speaker 1: this stage in the cycle, how much for a portfolio
Speaker 1: should make it up? You shouldn't make up? And how
Speaker 1: let's say that you've got a default position of five
Speaker 1: percent pure gold in your portfolio. Just the sake of arguments,
Speaker 1: I think that's probably where mootht wealth managers will be
Speaker 1: heading these days, and that's in an ETF or something
Speaker 1: like that, exposure to gold. What about the.
Speaker 2: Rest, I can answer, from my personal point of view.
Speaker 1: Will be fine, and from what I what we really like,
Speaker 1: we'd like to hear a personal view and then your
Speaker 1: professional views so we can compare them. That will be great.
Speaker 2: Okay, So this is too. So one is my view
Speaker 2: and one is the view that I hear from clients.
Speaker 2: And so the first one personal point of view I
Speaker 2: look after my own pension plan that for my wife,
Speaker 2: my three kids, and we have an allocation of a
Speaker 2: typical allocation of about twenty percent invested in gold equity.
Speaker 2: It's not physical gold. In gold equities. That number is
Speaker 2: now thirty because it's outperformed the rest of the portfolio,
Speaker 2: like all professional fund managers that are really bad at
Speaker 2: running their own money.
Speaker 1: So I haven't Actually, you never rebalanced. You can't do
Speaker 1: the admin clear.
Speaker 2: Any obviously, the bureaucracy of the firm you work for
Speaker 2: gets in the way as well and stuff. So I
Speaker 2: haven't rebalanced, and it's done a little bit of natural rebalancing.
Speaker 2: But I think if it came back a bit further
Speaker 2: from where we are today, even though I'm above my threshold,
Speaker 2: I'll be looking to add to that, and that would
Speaker 2: be my kind of thing. And now why do I
Speaker 2: have so much is because I think it's a lovely
Speaker 2: natural foil to the rest of the portfolio. But I
Speaker 2: also have exceptionally high conviction on the ongoing loss of
Speaker 2: purchasing power paper currencies, and therefore real assets will outperform
Speaker 2: government bonds and things through time. What do I see
Speaker 2: from clients? Clients have a range of outcomes. Now, going back,
Speaker 2: I don't know ten years from where we are today,
Speaker 2: allocations would have been close to zero. You know, they're
Speaker 2: way above that number. I would say most people that
Speaker 2: I encounter aren't as high as five. I'd say they're
Speaker 2: in their kind of two to five bucket that kind
Speaker 2: of range. I do occasionally encounter some people who have
Speaker 2: a more kind of turbocharged view of ten plus, but
Speaker 2: those allocations will typically been split between physical gold via
Speaker 2: gold ETF and gold equities, so they will have some
Speaker 2: kind of higher beta within there. And in fact, most
Speaker 2: people who have that kind of two to five range
Speaker 2: typically have a larger waiting to gold equities because then
Speaker 2: they get that higher bang for their buck, yeah, for
Speaker 2: the gold move than they do in just having the
Speaker 2: physical gold, and they get the dibben ends and the
Speaker 2: growth and the M and A and all the things
Speaker 2: we like.
Speaker 1: Yeah. And what about commodities as a whole, I think,
Speaker 1: and commodities.
Speaker 2: Tend to equities, Yeah, it tends to be separate to that.
Speaker 2: And I think that we again, that number would have
Speaker 2: been very low, So that would have been one percent
Speaker 2: or so. I think, what because people are now starting
Speaker 2: to better understand the need to look to the second
Speaker 2: and third order beneficiaries of this kind of capex spend
Speaker 2: and this energy change in the global economy, that increased
Speaker 2: digitization and so on. There is a reason to have
Speaker 2: more old economy, more industrials, more suppliers of kit, more
Speaker 2: producers of commodities, to be able to build the kit
Speaker 2: from to be able to satisfy the spend at the
Speaker 2: end of the day, to build the kind of final outcome,
Speaker 2: whether it's the robots or the data centers or whatever
Speaker 2: you might think about in that regard. So that's a
Speaker 2: growing number, but it's still very small, single digit, low
Speaker 2: single digits.
Speaker 1: Yeah, yeah, but it should be more like twenty twenty
Speaker 1: five percent.
Speaker 2: FOROO, if it matches the shape of the global economy,
Speaker 2: it's going to be high single digits. So it's some
Speaker 2: number between there and where it is today. But I
Speaker 2: would have thought five percent somewhere in there. Four or
Speaker 2: five percent would be a decent number. And then you've
Speaker 2: got lower you've got a good balance. If you've got
Speaker 2: that kind of five percent towards gold, you've got that
Speaker 2: kind of four or five percent towards broader materials. As
Speaker 2: long as you're not overlapping and double counting by having
Speaker 2: gold within the material slice. I think that's a decent thing.
Speaker 2: Then you'd have some energy on top, and then you
Speaker 2: can have your high growth and consumers and everything else
Speaker 2: to make up your mix.
Speaker 1: Yeah. Yeah, and valuations. As you say, last year was
Speaker 1: one of your best years ever. So there's been the
Speaker 1: a lot of movement in the sector and the valuation
Speaker 1: to the big miners that have aversified minus they to look.
Speaker 2: Okay, yeah, when you look at the historical multiples that
Speaker 2: they used to trade on, they're all substantial discounts. Those
Speaker 2: historical multiples. They continue to be at discounts to the
Speaker 2: broader market. The one thing that's lagging is the dividends.
Speaker 2: The company's made a lot of money last year, but
Speaker 2: they didn't have a full year of high prices. This year,
Speaker 2: today's commodity prices, it's going to be a full year
Speaker 2: of good prices, which should result in good cash flow
Speaker 2: and good earnings, and so we should see that dividend
Speaker 2: bump start to come through. So the only metric that
Speaker 2: looks a little bit expensive today is yield, but that's
Speaker 2: because it's lowering the payments.
Speaker 1: People don't really do people really expect high yields from
Speaker 1: that part of their portfolio.
Speaker 2: I do.
Speaker 1: I know they did, they hold them? You do?
Speaker 2: Yeah. I think dividends are a fantastic discipline and I
Speaker 2: hate it when companies just don't reward the equity investor,
Speaker 2: because everybody needs to be paid. I think the equity
Speaker 2: shouldn't come for free, and without a dividend, it's basically free.
Speaker 2: And then the second thing is it's like a handbreak
Speaker 2: on a management's desire to spend. So if they know
Speaker 2: they've got to pay the dividend and they've got to
Speaker 2: be able to have that as a kind of core
Speaker 2: thing that they do for their shareholders, they can't just
Speaker 2: charge off and spend loads of money on building stuff
Speaker 2: and buying stuff because they've got that anchor that they
Speaker 2: need to do, which is pay the dividend. And so
Speaker 2: I think it's really healthy.
Speaker 1: What are you buying in the portfolios at the moment.
Speaker 2: Well, we're taking advantage of some of the weakness we've seen,
Speaker 2: so we're leaning into a few of the names that
Speaker 2: have fallen the most relative to their own fundamentals, and
Speaker 2: at the moment for the last kind of a few
Speaker 2: days or bit of last week. That's been painful because
Speaker 2: they've fallen further.
Speaker 1: Listen, I know this is in your area. But the
Speaker 1: other thing that hasn't really performed as a lot of
Speaker 1: people would have hoped this year is bitcoin. And we've
Speaker 1: talked about bitcoin before, and I know you're not a believer,
Speaker 1: but after all this time, any changes to your mind.
Speaker 2: So rather than narrowing it down just to one coin,
Speaker 2: if we just talk about the kind of digitization, tokenizations,
Speaker 2: stable coins and so on. So I'm a big believer
Speaker 2: in what has been achieved by some of the stable
Speaker 2: coin companies. I think the efficiency they bring to the
Speaker 2: mark get to areas of the world which didn't have
Speaker 2: access to hard currency and would beholden to their domestic
Speaker 2: currencies which often had trouble, I think is actually a
Speaker 2: really great tool for society as long as it's managed.
Speaker 2: There's no fraud, there's no corruption, et cetera, et cetera,
Speaker 2: and so far, so good on that front. So I
Speaker 2: think the digitization of these assets, whether it's the tethers
Speaker 2: or the state, or the circles or these other things,
Speaker 2: I think it's a really great tool. But I do
Speaker 2: think we're going in the direction of people being able
Speaker 2: to spend digital currency much more efficiently than paper currency.
Speaker 2: And I think that we will get to a time
Speaker 2: when we're already seeing it. I don't know how many
Speaker 2: coins you have in your pocket or cash, but probably
Speaker 2: a lot less than you would have had twenty or
Speaker 2: thirty years ago. And so everyone's touching their telephone or
Speaker 2: going pay things, and you happen to be spending a
Speaker 2: pound or a euro or a dollar. What's wrong with
Speaker 2: spending a digital item instead of that? And so I
Speaker 2: think that's going to happen with far greater frequency. And
Speaker 2: so whether that digital item is a bitcoin, or whether
Speaker 2: it is a tether US T bill token, or whether
Speaker 2: it's a circle item, I think that is absolutely coming.
Speaker 2: And then the next logical leap beyond that is to
Speaker 2: spend equities. So if you're saving in equities and you
Speaker 2: have a fractional ETF that's tokenized to be able to
Speaker 2: spend that, so spend a little bit of S and
Speaker 2: P five hundred or a little bit of footsie one
Speaker 2: hundred or whatever it might be. It's not a small jump. Sorry,
Speaker 2: it's a very small jump to be able to get
Speaker 2: to that. It's probably a lot of administration that I
Speaker 2: don't know about to be able to do that and
Speaker 2: then have a CGT statement at the end of the year.
Speaker 2: But it means that your cash isn't sitting in cash
Speaker 2: in a digital form, it's actually sitting in an investment.
Speaker 2: And if you wake up in the morning and you
Speaker 2: set foots you one hundreds up three percent, your coffee
Speaker 2: costs three percent less in terms of your money because
Speaker 2: you're able to bring that forward and spend it that way.
Speaker 2: And I think that's a logical next step in terms
Speaker 2: of the kind of increased digitization of the global economy.
Speaker 1: That'd be fascinating. But all that when you talk about
Speaker 1: that kind of thing, and whenever I hear anyone talking
Speaker 1: about stable coins and how much more faces they're becoming,
Speaker 1: and how the rise of a AI, of course I
Speaker 1: mean that the stable coins will be used much more
Speaker 1: in that area. That always sounds to me like an
Speaker 1: argument against bitcoin as an asset, because most of the
Speaker 1: arguments that we've heard over the years, all the stories
Speaker 1: that we hear about the constantly moving story about where
Speaker 1: bitcoin will be the asset, they're all done by the
Speaker 1: stable coins.
Speaker 2: Yes, but the stable coins is a format, so it's
Speaker 2: an ability for you to be able to spend the item,
Speaker 2: and the item can be.
Speaker 1: Right, I understand that, But nonethless, when you've been told
Speaker 1: about bitcoin, it's very often about exactly that. It's important
Speaker 1: because of people who can't hold dollars in their home countries.
Speaker 1: For example, it's important to give people in emerging markets
Speaker 1: access to an easy way to transact across borders. All
Speaker 1: these stories, Yeah, they're very much taken care of by
Speaker 1: a stable coin. Yes, it is probably without the extreme
Speaker 1: volatility that you get.
Speaker 2: With I think with the stable coin you wouldn't want
Speaker 2: any volatility because you just wanted as flat, as close
Speaker 2: to one as much as possible. But I think the
Speaker 2: underlying but.
Speaker 1: You have the volatility of the doll you have VOLTI
Speaker 1: dollars different.
Speaker 2: Yeah, so I think whatever use whatever sits behind the
Speaker 2: stable coin is going to have the volatility, and that
Speaker 2: could easily be bitcoin. If you don't believe in dollars,
Speaker 2: when you believe in bitcoin, then that's how you're going
Speaker 2: to choose to have the item that sits behind. Some
Speaker 2: people might decide to have treasury bills or gold or
Speaker 2: silver or perhaps probably not pounds, but it lots of
Speaker 2: other things that might sit behind it. I'm fully of
Speaker 2: the view that we're going to go into this much
Speaker 2: more digital economy.
Speaker 1: Interesting, let's go back to the hyperscalers briefly. While we're
Speaker 1: talking about modern exciting technology stuff. One of the things
Speaker 1: that I have heard several times recently, and I will
Speaker 1: do I've asked someone on to do a separate podcast
Speaker 1: about this in a couple of weeks, is that the
Speaker 1: current model isn't working and as hit a ceiling, and
Speaker 1: that it may be that a lot of the work
Speaker 1: and energy being put into giant data centers and the
Speaker 1: energy that they require and all these things is entirely unnecessary,
Speaker 1: and five years out we will all realize that we've
Speaker 1: gone down the wrong road, and the alternative road about
Speaker 1: which I so far know almost nothing, is much less
Speaker 1: energy intensive, much less metal intensive, and has no need
Speaker 1: for giant building full of servers. If that is the case,
Speaker 1: that does have a knock on effect quality board.
Speaker 2: If that was to be the case, it would have
Speaker 2: an impact, But it's a question of time. All I
Speaker 2: can reference is what I've read and consumed and started
Speaker 2: to understand, and so when I listened to some of
Speaker 2: the podcasts by some of the hyper scalers, Masks and
Speaker 2: so on and so forth. They see no letup in
Speaker 2: spend based on improvement, which is effectively just one word
Speaker 2: to describe what you've said for many years to come.
Speaker 2: Even Elon Musk when he talks about this, references with
Speaker 2: the building of solar panels in space and data centers
Speaker 2: on the mood that's years away into the future. The
Speaker 2: AI arms races today and if you listen to the
Speaker 2: quotes that they will say, you know it's about it's
Speaker 2: not about chips. It's about power and property and power.
Speaker 2: That's effectively everything we've spoken about in relation to rising
Speaker 2: energy demand and I will be associated materials consumption growth
Speaker 2: that comes with that. Property is about the construction of
Speaker 2: these things, which again is materials in So you look
Speaker 2: at that journey for the next five plus years into
Speaker 2: the future, it's a very exciting time. Now that's mispriced
Speaker 2: by the market after the volatility that we've seen. Five
Speaker 2: plus years from there, it's probably still going to be
Speaker 2: the case. You're not going to rely on everything in space.
Speaker 2: There's also a limit on terms of how much you
Speaker 2: can get up there improvements. There's definitely going to be improvements.
Speaker 2: The world is constantly improving in terms of technology, and
Speaker 2: we will get more energy efficient et cetera, et cetera
Speaker 2: into the future. But again that's far away, and people
Speaker 2: don't want to lose the race in the short term.
Speaker 2: So I think the spend is going to be resilient
Speaker 2: many many years into the future, and then there might
Speaker 2: be some kind of step change and so on and
Speaker 2: so forth. And if that's the case, that's great, because
Speaker 2: then we've got an enormous amount of capacity that's built
Speaker 2: that's going to be able to do things even more efficiently.
Speaker 2: So therefore there's going to be more token to consumption
Speaker 2: and they're going to be more tokens is going to
Speaker 2: be generated, which means to still need more capacity. And
Speaker 2: when you look at the amount of tokens that people
Speaker 2: need for certain tasks, it goes up pretty exponentially. So
Speaker 2: you and I sitting there playing on Oi Home and
Speaker 2: building an app, that's one thing, But a robot trying
Speaker 2: to replicate what a human does, the amount of tokens
Speaker 2: that you need there is just simply extraordinary. And so
Speaker 2: that change in token consumption is very far from being built.
Speaker 2: So I think the amount of capacity that we need
Speaker 2: to add globally, even with efficiency and improvement, is massively underestimated,
Speaker 2: is what I'd say.
Speaker 1: Okay, so exciting times for investors in mind.
Speaker 2: I think it's exciting times for some parts of the economy.
Speaker 2: I think it's very scary for other parts of the
Speaker 2: I think it's very scary for employment. I think it's
Speaker 2: very scary for society. I think it's very scary for
Speaker 2: government tax receipts. I think it's very scary for lots
Speaker 2: of different things. When we look back into the past,
Speaker 2: when technologies come along, there have been periods of interruption,
Speaker 2: and then things tend to bounce back from that period
Speaker 2: of interruption. But this is this does feel like a
Speaker 2: big one.
Speaker 1: Luckily you can hedge all those downsides by holding a
Speaker 1: nice portfolio of copper, tin and zinc.
Speaker 2: Yeah, we'd like to think so certainly the foundations are
Speaker 2: there for that heavy Before you.
Speaker 1: Go, there was one thing I wanted to ask you,
Speaker 1: What are you reading at the moment?
Speaker 2: I have got to answer to your question, but it's
Speaker 2: not one you probably expect. My daughter is likely to
Speaker 2: be performing in Cold Comfort Farm, and I've never read
Speaker 2: Cold Comfort Farm, so one of my books that I'm
Speaker 2: reading this holidays is Cold Comfort Farm, so we can
Speaker 2: talk about what roles he's going to play in the autumn.
Speaker 2: So that is definitely on my list.
Speaker 1: Yeah, that is exciting.
Speaker 2: Yeah, it's a very different one and all the business
Speaker 2: and biographies, but that's this is going to be the
Speaker 2: real departure.
Speaker 1: Excellent. We'll talk about that next time we meet.
Speaker 2: Thanks very much.
Speaker 1: Okay, thanks, thank you for listening to this week's Merrin
Speaker 1: Talks Money. If you like us, share, rate, review, and
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Speaker 1: We'd love to know how much of your portfolio is
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Speaker 1: John on Just Gorge Steppe. This episode was hosted by
Speaker 1: Me Maren Sunset, where it was produced by Somersidi Roses
Speaker 1: And and Eleanor Harrison dan Gage. Sound designed by Blake
Speaker 1: Naples and Aaron Casper, and special bank of course to
Speaker 1: Heavy Hambroke