The article below is an excerpt from our Q2 2024 commentary.
Investors showed little interest in commodities and natural resource equities in the second quarter. The A.I. frenzy continues to dominate the market, and capital flows into the tech sector remain huge. The investment public can focus on little else.
The Nasdaq 100, with its ties to the so-called “magnificent seven,” surged ahead by 8%, decisively outpacing the S&P 500 which posted a 4% gain. Meanwhile, both commodities and natural resource equities were lackluster. The Goldman Sachs Commodity Index, weighted heavily toward energy, crept up by a modest 0.7% while the Rogers International Commodity Index, with more emphasis on metals and agriculture, increased by 2.1%. Natural resource equities saw declines with the S&P North American Natural Resource Stock Index, heavily reliant on energy, dropping by 1.6% and the S&P Global Natural Resource Stock Index, with a greater focus on metals and agriculture, slipping by 2.0%.
Amidst this general malaise, certain commodities exhibited notable strength during the quarter. Copper witnessed a significant short squeeze, soaring to a new all-time high in May of $5.20 per pound. Henry Hub natural gas hit a low of $1.61 per mcf as the mild winter withdrawal season ended. However, after bottoming out at $1.48 per mcf in late March, it staged a remarkable comeback, climbing nearly 50% and emerging as the best-performing commodity of the quarter.
The US COMEX copper futures market experienced a severe short squeeze in the second quarter. The short squeeze pushed copper prices to $5.20—a new all-time high. Driven by widely shared beliefs that Chinese property woes would severely impact China’s copper consumption, hedge funds had established significant short positions on the COMEX exchange. With inventory at historically low levels, the stage was set for a significant squeeze. The squeeze was centered here in New York. The COMEX futures price at its peak traded at an unprecedented 55-cent premium to copper prices in London Previous letters have alerted our readers to the possibility of a short squeeze in copper markets. In our 2Q23 essay, we warned that “given the low-exchange inventories and the bullish supply/demand trends, we believe speculators will soon panic much as they did back at the end of 2005 into 2006 when low inventories combined with massive short covering spiked copper prices higher by almost 200% in just six months.”
In May, Sprott launched its Physical Copper Trust, a closed-end investment vehicle akin to its Physical Uranium Trust, designed to purchase and store the metal. Following the success of the uranium trust, short sellers feared the new Copper Trust might similarly introduce a significant new source of demand, prompting a rush to cover short positions.
The short squeeze in copper markets was short-lived. Copper prices began the quarter at $4.00—the developing squeeze pushed it to $5.20 and by quarter end the copper price stood only 35 cents above where it started.
Over the past year, our perspective on copper has become more conflicted. Many investors have adopted an extremely bullish stance. Strong anticipated demand and concerns over mine supply have become the consensus view. As contrarians, we have frequently cautioned against the dangers of herd mentality when most investors converge on a single outlook.
For instance, there is a widespread belief that no growth in copper supply is feasible between now and the end of the decade. However, copper mine supply is now unexpectedly exhibiting strong growth—a development largely ignored by analysts. After six consecutive years of drawing down, copper inventories are now also beginning to rise. While we remain bullish on copper in the short term, as global demand remains extremely strong, we are becoming increasingly cautious about the longer term. Please refer to the copper section of this letter, where we discuss the specifics of both supply and demand.
Natural gas prices, both in North America and abroad, staged a notable comeback after grappling with severe weather-induced weakness in the first quarter. In the U.S., gas bottomed at the end of April at $1.64 per mmcf, prompted by end-of-season inventories that stood 40% above the ten-year averages. When compared to oil, natural gas flirted with its historic lows. On April 26th, with gas at $1.61 per mmcf and West Texas Intermediate crude at $83.65 per barrel, the oil-to-gas ratio reached an astonishing 52x, illustrating that traders valued the BTUs contained in an mcf of gas at nearly a 90% discount relative to the BTUs in a barrel of oil. Such an undervaluation was only matched at the end of the comparably mild winter of 2011-2012. As we discussed in our last letter, today’s circumstances are far different from those of 2012. Please consult the natural gas section of this letter where we discuss the increasing number of bullish indicators appearing in the North American natural gas markets. As we navigate through the rest of 2024, our optimism for natural gas prices remains as robust as ever.
After a significant rebound in the first quarter, oil was volatile in the second quarter. The quarter began with oil at $83. It rallied to $87, pulled back to $73, and then closed at $82 per barrel – near where it started. Despite the volatility, our bullish outlook remains undeterred. We encourage you to read closely the oil section of this letter where we explore the array of bullish indicators that have come to light. Notably, the U.S. shale oil supply, which has accounted for nearly 90% of the growth in non-OPEC oil supply over the past f ifteen years, is beginning to decline—a critical development that has gone largely unnoticed by most analysts. This shift in U.S. shale dynamics could have profound implications for global oil markets and further bolster our optimistic stance on oil as we move forward.
“And yet, despite all the solar panels, all the windmills, the electric vehicles, and the government incentive to go green, the world has never used as much coal as it’s burning this year.”
~Bloomberg Opinion 7/25/2024
Coal prices were mixed on a global basis. In the United States, the situation was no different. Powder River Basin thermal coal prices dipped by 1%, the Illinois Basin saw a 5% increase, and Central Appalachian coal prices climbed by 8%. On the international stage, thermal prices displayed similar disparities. Newcastle (Australia) thermal coal, which had dropped 18% in the first quarter, rose by 3% in the second. Meanwhile, Richards Bay (South Africa) thermal coal, after a 3% decline in the first quarter, continued its descent with an additional 13% fall. Metallurgical coal prices remained flat with Australian hard coking coal down 2%.
The release of the 2024 Energy Institute (formerly B.P.) Statistical Review has underscored a point we have long emphasized—despite significant investments in renewable energies, global coal consumption shows no signs of peaking. The report reveals that global consumption hit record highs last year, growing by 1.5% from 161.5 to 164 exajoules in 2023. Although consumption in North America and Europe has declined for the past 15 years, coal usage in Asian economies like China, India, and Vietnam continues to show strong growth. China’s coal consumption in 2023 increased by nearly 5%, India’s by almost 10%, and Vietnam’s by an impressive 22%. These consumption figures are significant. Last year, India consumed 22 exajoules of coal, nearly three times the coal consumption of the entire European continent.
Another point should be highlighted: as we strive to power our world with renewables, we ironically become more dependent on coal. Nowhere is this more evident than in China, which, despite massive investments in solar, wind, and electric vehicles, continues to see strong growth in coal consumption. The July 25th Bloomberg Opinion piece underscores this point: “Ironically, coal is now getting a boost from the energy transition itself. Demand for power is rising briskly as the world moves to electrify everything—for example, putting more electric vehicles on the roads. Renewable sources are meeting the bulk of that increase, but coal is still required because it is reliable. It doesn’t rely on weather conditions like hydropower, wind, and solar do.” The long-ignored intermittency issue is finally becoming evident, even to the staunch renewable advocates at Bloomberg News.
The Bloomberg article also echoes a point we have consistently stressed: low renewable energy efficiency ultimately drives additional coal consumption. “The production of what’s needed for the shift toward green energy sources also is boosting demand for the fossil fuel. In China, mass production of solar photovoltaic panels, electric vehicles, and batteries is one of the main reasons why electricity consumption is rising. In Indonesia, nickel production, key for electric car batteries, consumes huge amounts of low-quality coal. Quietly, coal demand there has doubled in the last five years.”
Displacing coal in the West is becoming increasingly difficult. Even Bloomberg concedes, “...the low-hanging fruit of coal-to-gas and coal-to-renewable switching in Europe and the U.S. is largely gone. For a few years, Asian consumption growth was offset by dropping demand in the West. Now, that compensating mechanism has run its course.”
We firmly believe nuclear power is the only viable solution to our climate-related challenges— an incredibly efficient energy source that produces no CO2. Ultimately, we anticipate utilities will replace coal with a combination of natural gas and nuclear-generated power. However, in the meantime, global coal demand, primarily driven by the non-OECD world, will continue to grow. Displacing coal in the West is becoming increasingly challenging—a trend ironically exacerbated by the green energy transition. We expect coal consumption to peak within our investment lifetime, but that peak is still many years away. The recent price pullback offers another excellent buying opportunity for those who can invest in coal equities. No industry has been more deprived of capital than coal; there is no institutional ownership of coal stocks, they receive little research coverage, and their valuations are exceedingly low.
Spot uranium began the quarter priced at $88 per pound, gently rising over the next five weeks to a peak of $93 by the end of the first week in May. After that, prices quietly pulled back over the subsequent seven weeks, ultimately closing the quarter at $86. Such low volatility, we suggest, might well be the “calm before the storm.” The uranium market seems poised for potential bullish upheaval as we look ahead to the third quarter.
We encourage you to turn to the uranium section of this letter where we delve into the strong likelihood that Kazatomprom—the world’s largest uranium producer—will announce a substantial reduction in their 2025 production guidance. Additionally, we explore the burgeoning interest in building new nuclear power plants. A particularly intriguing development is unfolding in Australia, historically opposed to nuclear power, which is now inching towards a national debate over the potential construction of seven new nuclear power plants.
Grain investors remain incredibly bearish. Corn prices, already on the retreat, have pulled back an additional 7%, soybeans have slipped 3%, and wheat prices have slowed by 1%. The story is much the same in fertilizers, with urea (the solid form of nitrogen), phosphate, and potash declining by 17%, 12%, and 10%, respectively. Since the peak in the first quarter of 2022, following Russia’s incursion into Ukraine, grain prices have, on average, fallen 50%.
As the Northern Hemisphere’s agricultural cycle reaches its midpoint, the short-term fundamentals of global agricultural markets remain neutral. The U.S. Department of Agriculture (USDA) recently released its July World Agricultural Supply and Demand Estimates (WASDE), offering something for both the bulls and bears. On the one hand, the USDA lowered its 2024 corn-ending stocks estimate by 145 million bushels and raised domestic and export demand by 175 million bushels. On the other hand, they increased planted acres by 1.5 million. On balance, the USDA expects a slight reduction in its estimated 2025 ending stocks, now projected to reach 2.1 billion bushels.
The last time corn ending stocks were at these levels was during the 2019-2020 growing season when prices averaged $3.75 per bushel. As noted in our previous letter, recent WASDE reports were slightly bearish. When we last wrote, corn prices were $4.60 and we estimated prices could fall to $3.75 – just like they did in 2019-2020. Since then, corn has dropped to $3.95 per bushel, which is very much in line with our projection.
For soybeans, the USDA reduced planted acres by 400,000 while keeping other estimates unchanged, leading to a slight decrease in the 2025 ending stock assumption to 435 million bushels. The last time soybean ending stocks were at this level was in 2018, when prices averaged $10 per bushel. Soybean prices have since retreated from $12 to $10.80, approaching the figure noted in last quarter’s letter.
The recent pullback in grain prices has again generated a pervasive mood of bearishness among traders. Corn speculators are maintaining near-record short positions. For the week ending July 9th, speculators were net short 240,000 contracts, only slightly below the record net short position of 265,000 contracts established in mid-February. Soybean traders are exhibiting similar bearishness, with the most recent data showing speculators net short 150,000 contracts— a position second only to February when speculators were net short nearly 200,000 contracts.
Counterbalancing the bearishness among speculators (often considered the “dumb money”) are near-record bullish positions by commercial traders--- those who actually use the grain and are considered the “smart money.” Commercial traders now hold 250,000 net long contracts, only slightly below their all-time high of 285,000 in mid-February. A similar scenario exists in soybeans, where commercial traders are net long 160,000 contracts—a position only exceeded in mid-February when they were net long over 200,000 contracts.
Do these near-record bearish positions by speculators, offset by near-record long positions by commercials, signal an impending upheaval, possibly driven by weather, in global agricultural markets? As our readers are aware, we have been proponents of the significance of sunspot cycles and their long-term impact on global weather patterns. We are now in the third cycle—each lasting eleven years—where peak sunspot activity has waned, possibly heralding a long-term cooling trend. More crucially, we are on the brink of witnessing the recurrence of the Gleissberg cycle—an eighty-eight-year phenomenon affecting sunspot activity’s amplitude. Some scientists and climatologists believe the last occurrence of the Gleissberg cycle coincided and contributed to the infamous Dust Bowl in the U.S. Midwest during the 1930s.
For those interested in exploring the nexus between sunspot cycles and global crop conditions—an intriguing and contentious subject—we enthusiastically recommend attending the Goehring & Rozencwajg Associates Biennial Fall Conference on October 21st in New York. One of our esteemed speakers will be Shawn Hackett, CEO of Hackett Financial Advisors, a firm dedicated to agricultural commodity analysis. We have been ardent followers of Mr. Hackett for many years, and he offers one of the most insightful perspectives on how changing weather trends (particularly as they relate to sunspot cycles) could influence global agricultural markets in the coming years.
Traders in global grain markets are plumbing new depths of pessimism and a potentially pivotal shift in weather trends could be on the horizon. We invite you to turn to the agricultural section of this letter where we discuss the mounting pressures already manifesting in key agricultural regions worldwide—some of which may be linked to the developing Gleissberg cycle.
As the second quarter unfolded, gold and silver prices continued their upward march with gold advancing nearly 6% and silver surging by an impressive 17%. Among the platinum group metals, platinum rose 9% while palladium slipped by 4%. Gold and silver mining equities mirrored the performance of their respective metals with the GDX ETF advancing 7% and the SIL ETF rising almost 14%.
Are we witnessing monumental shifts in global gold and silver markets? Since gold last peaked in the summer of 2022, Western investors, spurred by rising real interest rates, have been steadfast sellers of gold and silver. However, it now appears these investors are transitioning from sellers to buyers. As indicated in the chart below, Western investors’ pace of physical gold liquidation has notably slowed and may be on the verge of reversing.
Between the summer of 2020 and May 2024, the eighteen physical ETFs we track shed nearly 1,000 tonnes of gold, a reaction to real interest rates that increased almost 3%. This scenario mirrors the period from late 2012 to early 2015 when Western investors liquidated over 1,100 tonnes of gold, again in response to a real interest rate hike of 3.5%.
The 1,100-tonne liquidation from 2012 to 2015 triggered a 45% gold sell-off. Contrast this with the present: despite the sale of 1,000 tonnes over the past four years, gold rose 15%, a new all-time high.
In our previous letters, we examined the key differences between these two periods—chiefly, the buying behavior of central banks. Over the past two years, central banks have turned into voracious gold buyers, more than counterbalancing the selling pressure from Western investors.
Over the last three and a half years, central banks have purchased nearly 3,000 tonnes of gold, dwarfing the 1,000 tonnes sold by ETFs. If we also account for the contraction in COMEX open interest—which we assume is primarily used to hedge physical gold—we estimate speculators liquidated an additional 1,200 tonnes. Central bank purchases have more than offset both ETF liquidations (1,000 tonnes) and COMEX trader liquidations (1,200 tonnes), culminating in a 15% increase in gold prices.
By contrast, between 2012 and the end of 2015, the combined liquidation from ETF sales (1,100 tonnes) and COMEX open interest contraction (900 tonnes) exceeded the 1,700 tonnes purchased by central banks by 300 tonnes, resulting in a 45% decline in gold prices.
The pressing question for gold investors today is whether Western investors have turned from sellers into buyers and if central banks will continue their brisk pace of buying. Should we enter a new phase of declining real interest rates, we might witness a surge in Western gold purchases—not unlike the trend that emerged when real interest rates began to fall in 2016. The shift from gold sellers to buyers might be commencing as we speak.
Western gold buyers seem to be returning just as central banks appear to be easing their aggressive buying. After acquiring a near-record 286 tonnes of gold in the first quarter of 2024, central banks seem to have paused their purchasing spree in the second.
For a deeper dive into our views on Western gold buyers, the recent actions of central banks, and the sustained strength of retail buying in China and India—the world’s top two gold consumers—please refer to the precious metals section of this Q2 2024 research letter, available below.
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