Edward Bonner: Navigating Commodity Cycles - Opportunities in Rare Earths, Copper, and Vanadium

Key Concepts

Gold as a Safe Haven: The primary argument is that gold is the only true safe haven asset in the current economic climate characterized by high debt, fiscal largesse, and financial repression.
Underowned Asset: Gold is significantly underowned by the general public and even by major financial institutions, suggesting substantial room for growth.
Bull Market Stages: The discussion implies that the gold bull market is in its early to middle stages, with potential for significant gains.
Sentiment and Inflows: Current sentiment towards gold miners (e.g., GDX ETF) is bearish, with outflows, while physical gold is seeing inflows, particularly from institutions.
Indicators for Gold: Key indicators discussed include M2 money supply, the Dow Jones Industrial Average to gold ratio, and central bank buying.
Central Bank De-dollarization: Central banks are increasing their gold holdings, partly as a response to US policies and a desire to diversify away from US Treasuries.
Gold Miner Valuation: Despite pullbacks, there is still value in gold miners, particularly in growth producers, developers, and late-stage explorers that can deliver alpha through discovery, increased production, or de-risking projects.
Qualities of Good Mining Projects: Key factors include the management team's experience, skin in the game, jurisdiction, metallurgy, and deposit continuity.
Platinum Supply-Demand Imbalance: Platinum is seen as undervalued due to a supply-demand imbalance, with limited new platinum discoveries and a lack of control over byproduct production.
Undervalued Commodities: Oil and gas, and vanadium are identified as "unloved" commodities with potential value, though timing is difficult. Rare earths and copper are also seen as interesting but not unloved.
Vanadium Uses: Primarily used for steel hardening and in nascent vanadium redox flow batteries for energy storage.
Geographic Exploration Frontiers: The Guyana Shield, Arabian Nubian Shield, Mexico, Argentina, West Africa, and Serbia are mentioned as areas with exploration potential, each with varying risk profiles.

Gold as the Only Safe Haven Amidst Fiscal Largesse

Edward Buller, an investment advisor at Sprott Global Resource Investments, argues that given the current level of debt and fiscal largesse, there is only one logical direction for the economy, and gold is emerging as the sole safe haven trade. He notes that major financial institutions are only now beginning to discuss gold's role, indicating that it is still early days for this trend. Buller emphasizes that gold remains one of the safest places to be.

Current Gold Pullback and Bull Market Progression

On October 21st, gold and gold miners experienced a pullback. Buller attributes this to a natural release of tension after a strong buying period, a necessary shakeout of "weaker hands," and a normal progression in a bull market. He notes that gold was in overbought territory, but despite this, it remains an "underowned" asset. He contrasts this with historical averages where gold comprised 6-7% of portfolios, and even higher in the 1970s. Buller suggests that jitters over potential rate cuts and geopolitical shifts, such as a potential ceasefire in the Middle East, might also be contributing factors.

Underownership and the Debasement Trade

Buller reiterates that gold is "completely underowned," with most individuals holding less than 1% of their portfolios in gold, compared to historical averages. He observes that while people talk about owning gold, they haven't "pulled the trigger" yet. He links this to the ongoing "debasement trade" and the high levels of debt and fiscal largesse, coupled with financial repression. This environment, he believes, inevitably leads to gold being the only safe haven. He points to significant inflows into Sprott's physical trust products over the past few months, primarily from larger institutions, suggesting that retail investors have yet to drive the market to parabolic levels seen in past bull markets. Despite not being the cheapest or easiest part of the cycle, Buller maintains that gold is one of the safest places to be due to global instability.

Gold Miners: Outflows Despite Value

Despite inflows into physical gold products, the GDX ETF, which tracks large-cap gold miners, has seen outflows. Buller finds this "crazy" because while the GDX's value has increased due to the rising value of its constituents, the net number of shares has declined by approximately 25% over the past year. He views this bearish sentiment towards mining stocks as a positive sign, providing conviction to remain "long" as it indicates that most investors are still not looking at mining stocks, but rather physical gold.

Historical Parallels and Bull Market Duration

Buller draws parallels to gold bull markets in the 1970s and 2000s. He suggests that a bull market inflow period can last anywhere from a few years to a decade, depending on the "rate of change" of other economic indicators. He emphasizes looking at "relative value" rather than absolute price. Historically, gold mining stocks have seen gains of 500% to 1000% over a decade. He estimates that the current market is in the early to middle stages, with potential for 200-300% gains.

Key Indicators for Gold

Buller tracks several indicators:

M2 Money Supply: This is a useful tracker, as M2 money supply is at all-time highs and historically correlates with gold price increases. This confirms ongoing government money printing and fiscal largesse, which should benefit gold as an inflation hedge.
Dow Jones Industrial Average to Gold Ratio: Historically, when gold is overvalued relative to stocks, this ratio hits around 5. Currently, it's around 11-12, and the S&P 500 is at all-time highs. Buller looks for this ratio to drop drastically, indicating gold's relative attractiveness. He stresses the importance of looking at investments in relative terms, not just absolute terms.

Central Bank De-dollarization and Gold Accumulation

Buller notes that central bank buying has been a significant driver of gold demand. Central banks were historically under-owning gold until recently, particularly after the US froze Russian assets. Now, central banks own more gold than US Treasuries. While not at historical highs seen in the 1970s (40-50%), their strong buying trend is evident. Buller believes that if the US continues policies that undermine its currency and potentially lead to a "soft default" on Treasuries, central banks will continue to diversify away from US debt, especially as yields remain volatile despite rate cuts.

Finding Value in Gold Miners

Despite a pullback on October 21st, Buller sees continued value in gold miners. He highlights Agnico Eagle as an example, trading at one times Net Asset Value (NAV) at spot price. He finds the most value in companies that can deliver "alpha" by:

Discovering more ounces: Expanding existing resources or finding new deposits.
Producing more ounces: Increasing operational efficiency and output.
De-risking a project: Advancing through permitting, construction, or bringing a project to production.

He focuses on growth producers, developers, and late-stage explorers, noting that while large caps have moved the most, there's still significant undervaluation. He believes development projects are ripe for M&A, as senior and mid-tier producers have substantial free cash flow but have under-invested in exploration. This creates an opportunity to acquire projects trading at low multiples (e.g., 0.4 times NAV).

Qualities of High-Quality Mining Projects

Buller looks for several qualities in mining projects:

Management Team: Experienced teams with a track record of success and knowledge of the area are crucial. Past successes act as a de-risking factor.
Skin in the Game: Management alignment with shareholders is important.
Jurisdiction: While some areas have great deposits, they can be uninvestable due to political risk (e.g., government seizure).
Metallurgy: Even high-grade deposits can be costly to develop if the metallurgy is poor, leading to higher processing costs and lower recoveries.
Deposit Continuity: The consistency and predictability of the ore body are vital.
Payback Period: The time it takes to recoup initial investment.

He cautions against projects that are brought out of "the cupboard" during bull markets without a solid history or underlying issues like poor metallurgy, continuity problems, or permitting challenges.

Platinum: A Supply-Demand Imbalance Play

Buller was bullish on platinum in late May when it was trading around $1,000 an ounce, based on a clear supply-demand imbalance. He describes platinum as an "unloved commodity" with supply constraints and ongoing demand. He sees targets around $1,800-$2,000 an ounce. He notes that most new discoveries in the Platinum Group Metals (PGM) space are palladium-dominant, and even development plays outside South Africa are more palladium-rich. This suggests an ongoing challenge in meeting platinum demand from a supply perspective. He also points out that platinum group metals producers cannot control their product mix, and even if platinum prices incentivize more production, the supply of other byproducts cannot increase as quickly.

Other Commodities of Interest

Buller identifies the following commodities as interesting:

Oil and Gas: Subject to recession risks but currently "unloved."
Vanadium: Also "unloved" and subject to recession risks.
Rare Earths and Copper: Interesting with upside potential, but not "unloved." However, they are influenced by factors like the Grassberg mine going offline and US-China trade war disruptions for rare earths. He notes that rare earth prices can be volatile due to political trends.

He advises a diversified portfolio approach and taking gains to rebalance, focusing on areas of conviction while protecting downside.

Vanadium: Uses and Producers

Vanadium's primary uses are:

Steel Hardening: Enhancing the strength and durability of steel.
Vanadium Redox Flow Batteries: A nascent but potentially significant demand driver for energy storage due to their efficiency.

Largo is identified as the primary and most investable producer. Buller notes that even the lowest-cost producers are struggling, which can be a catalyst for commodity price rebounds.

Geographic Exploration Frontiers

Buller highlights several geographic areas of interest:

Guyana Shield: Sprott has been invested here for a long time with good results. G Mining is also involved.
Arabian Nubian Shield: Very prolific mineral belt but higher risk. Avenue Electric is a player here, noted by Morgan Stanley. It's less advanced and riskier, but offers potential value.
Mexico: Coming back into favor after being out of favor. Still carries some risk due to the administration's direction, but mining companies are reporting positive feedback.
Argentina: A frontier that has recently opened up, with high-quality projects, though recent elections add a layer of uncertainty.
West Africa: An evolving jurisdictional risk area, requiring selectivity in country selection. It has seen great discoveries and ongoing M&A.
Serbia: Dundee is operating here, and the belt is considered underexplored but difficult to operate in due to environmental challenges and permitting hurdles.

Buller explains that the Arabian Nubian Shield's higher risk is due to ongoing conflicts and civil wars in some regions, making operations more challenging. He cautions that "value can be a trap" and that lower multiples don't guarantee price appreciation. Companies in safer jurisdictions with better projects often command higher multiples.

Conclusion and Contact Information

Buller concludes by emphasizing the importance of conversations with clients and investors to gain diverse perspectives. He can be reached via email or phone through Sprott Wealth Management. He encourages investors to reach out to him for discussions.

Disclaimer: The podcast is for general information only and does not constitute investment advice. Listeners should conduct their own research and consult a licensed financial advisor.