You're listening to Strictly Business Podcast with Lindsay Williams.
Global metal prices in US dollars are being pushed and pulled.
They go up and down on a daily basis, sometimes hourly basis.
With me now is Portfolio Manager, Natural Resources at 91 in London, George
Cheveley. George,
is it me or has the relationship suddenly changed between certain metals and what's
going on in the world?
Because it used to be that when there was a flare up, then the gold price would go
up.
And now when there's a flare up in the Middle East with the war on Iran by the US
and Israel,
what happens is that the gold price goes down because the dollar goes up.
It's all very confusing to me.
We've actually seen previously, if you remember the early weeks of COVID in early
March 2020 in the financial
crisis, in the first sort of risk off when markets are falling, we've seen gold fall
at those points.
And it's really a source of liquidity for many funds because it is such a liquid
asset.
and people use that to cover redemptions, etc.
But obviously, this time, people are looking at oil price rises and saying,
could this cause less likely, shall we say,
that interest rates fall and they could even go up?
My own view is, I think that's overplayed, and that obviously,
oil price rises initially will actually dampen growth and therefore, you know,
could actually mean that interest rates don't need to go up.
I think economists would say the worry is the second order effects.
It raises costs of living and people demand higher wages.
And that's why you get the worries about interest rates.
But I think at the moment, I mean, the uncertainty is just leading to people, you
know,
selling risk assets generally.
Yeah, but it is almost instantaneous these days.
I mean, look at the gold price now as we pre-record this podcast on Thursday
morning, London time.
We've got...
the gold price down 2% and the dollar up just a couple of pips.
So there's a lot of sensitivity.
The other thing that I thought of was the activities of the miners themselves
globally, because with yields rising,
therefore the gold contango goes out a bit and therefore it's more attractive to
hedge.
Have you seen any activity in the hedging department?
I've not seen it personally.
I think one of the concerns for a lot of gold miners at the moment is not so much
the
the gold price is because obviously there are two things on the oil.
One, they're worried, obviously, rising costs of diesel could squeeze their
margins.
But margins are at record levels.
So, yes, it does affect them, but it's not going to be that terrible.
More of a concern is whether they can get diesel.
And that's increasingly particularly countries like Australia are worrying
about diesel supply generally.
So it's not a question of margins being squeezed as having.
Really no margin because they can't produce.
And that's clearly, you know, miners, as they say, are pulling out their COVID
playbooks.
How are they going to cope?
I mean, clearly they can cut back on stripping, cut back on diesel usage.
But it is going to, you know, if this continues, it probably needs to continue
another couple of months.
But it could start to affect operations.
Given what's happened to gold, in other words, it's fallen quite precipitously.
There's been a couple of days when it's been down 10% in US dollar terms.
This Monday, actually, the Monday that's just passed was one classic example of
that, with Mr.
Trump being the main fundamental there.
But also we had the fall from 5,626, the futures price,
right back down to something like 4,400 in a couple of days.
Do you think that marked the peak of the market, which has run, let's face it, from
2,000 in quite quick time?
I think it's too early to say, frankly.
I'd remind you the average gold price in Q4 last year was just under 4,200 an
ounce.
So we're still above that even today.
And the average for this quarter is well above that.
So we're looking at companies are going to have absolute record earnings and cash
flows this quarter.
And silver also, which has fallen, only averaged $53 an ounce Q4 last year.
So we're still looking at prices, you know well above where they were last year on
the whole so
This is still very profitable times.
As I say, the main concern is around fuel supply for a number of miners.
But other than that, these companies are still making record earnings.
What about the industrial metal complex now?
Let's start with white metals, if we can.
Again, I'm looking at my screen, 2.5% down for palladium, 3% down for platinum.
And so it goes on.
They've also fallen very, very sharply indeed.
What's their future?
Yeah, I think, again, we had quite a long market coming into this, I think, and
therefore we've seen a lot of risk off.
I think on this side, there is a concern, really two things.
One, that we get obviously a pullback in global demand, a slowdown in global
growth.
And that will mean, you know, purchases of cars generally are lower, which is
obviously bad for catalyst demand.
and on top of that if We believe oil prices are going to remain higher.
That means higher diesel, petrol prices longer term.
You know, some people are now wondering if that's going to accelerate the move to EVs
again,
which in some ways has been going the other way.
So I think there is a longer term concern.
Does this encourage, you know, people to move more electric more quickly?
About a year ago, you were very, very enthusiastic about copper.
About a month or six weeks ago when we last spoke, that enthusiasm.
had waned.
And you're absolutely right, because at the time, it was around about $6.10 per
pound.
It's now $5.50 per pound.
Do you maintain that outlook of caution when it comes to copper?
Yeah, I think we remain cautious.
I must say, on the one side,
we've actually seen some quite good buying from China as copper has come down to sort
of
$12,000 a ton.
And it does seem that China has essentially is happy to buy it.
higher levels now than they were last year, where they seem to be supporting it
more like a 10,000.
So they seem to have moved up their base price.
But going forward, we do still see, you know, supply, you know, improving this
year.
And also, at the same time, we do have concerns about demand growth,
if we see these oil prices remain higher for longer.
So I think maybe, you know, copper it doesn't move too far.
I think the case for it going upwards is still not that strong.
What does it mean for your portfolio construction?
Because you can't ignore it.
I mean, you might say to yourself, OK, this might just be a blip and the base
case remains.
What is your base case and does it remain?
Yes.
So if you look at the Global Natural Resources Fund, we have been pretty active
in the last month.
We were just underweight energy, which is around 40 percent of our benchmark a month
ago.
We're now significantly overweight because our view is really whenever this resolves,
whether it resolves quickly or in the longer term, we believe either way, oil
prices,
which people see long term around $70 a barrel,
could remain above that for two or three years just because of the need for people
to build up stockpiles, etc.
And it will take some time for full production to resume.
So we think the case for energy does.
has improved.
In a sense, it's brought forward what we thought was a rebalancing happening over
the next 12 months.
In a sense, we've seen that happen almost immediately.
On the other side, we have in that fund, we've lowered our, we were overweight
pressure, so we're now slightly underweight.
And base and bulks metals were also slightly underweight.
The other areas we've increased is fertilizer, which is majorly impacted by
what's happened in the Gulf, particularly nitrogen.
And we've also increased our positioning in aluminium because, again, around 7%
of the world's supply is at threat at the moment in the Gulf.
George, thanks very much for your analysis.
George Cheveley is Portfolio Manager, Natural Resources at 91 in London.
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