MacroVoices #503 Adam Rozencwajg: Gold, Oil & Uranium

Key Concepts

• Gold: Discussed as a unique commodity with a large above-ground stock, driven by central bank diversification and price inelastic demand, contrasting with oil's marginal cost-driven market.
• Crude Oil: Analyzed as a currently "hated" asset class with a bearish narrative driven by electrification, but with underlying bullish fundamentals due to understated demand and declining shale production.
• Uranium: Presented as a fascinating market in a structural deficit, driven by depleted Japanese stockpiles and curtailed mine supply, with potential for significant price appreciation.
• Natural Gas: Identified as the likely short-term beneficiary of AI-driven electricity demand due to its role as a swing fuel, contrasting with nuclear's long-term potential.
• Monetary Regime Change: A recurring theme, posited as a catalyst for commodity bull markets, with historical parallels drawn to the end of the gold standard and Bretton Woods.
• AI Boom: Discussed as a driver of future energy demand, with natural gas seen as the immediate solution and nuclear as a long-term one.
• Term Structure: Analyzed in the context of oil futures, distinguishing between arbitrage-driven contango and scarcity-driven backwardation.
• Geopolitics: Identified as a significant factor influencing commodity prices, particularly in oil and gold.
• Valuation: Assessed for gold relative to financial assets and for SMR companies.
• Trade of the Week: Focuses on a strategy for investing in natural gas via the UNL ETF.

Gold: A Bull Trend Despite Recent Volatility

Adam Rosenwag addresses the recent sharp decline in gold prices, acknowledging the significant intraweek swing of $378. He asserts that despite this volatility, the larger bull trend in gold is not over.

Key Points:

• Gold's Unique Nature: Unlike oil, where supply and demand are balanced by marginal production costs and ~40 days of inventory, gold's market is driven by trading within its vast ~100-year above-ground stock. Mine supply is only 1% of this total.
• Central Bank Demand: The primary driver of gold's recent bull market has been central bank diversification, particularly from emerging markets like China, India, and Brazil. This is a direct response to the US freezing Russian Treasury assets, prompting concerns about asset susceptibility to geopolitical actions. This demand is described as "price inelastic."
• Limited Western Speculative Interest: A crucial factor supporting the bull case is the absence of significant Western speculative investment buildup, unlike in past cycles. This source of demand is momentum-driven and can be fickle, selling off during pullbacks.
• Price Sensitive Sellers vs. Insensitive Buyers: The market is characterized by price-sensitive sellers (Indian retail, recycling, mine supply) and price-insensitive buyers (central banks). This dynamic is seen as a recipe for a bull market.
• Valuation: While gold appears expensive relative to housing or a basket of goods, it is considered cheap relative to all global stocks and debt. The ratio of the Dow to gold price, historically as low as 1:1 or 2:1, suggests significant upside potential for gold.
• Investment Stance: While holding gold investments, Rosenwag suggests potential for rebalancing due to gold's strong recent performance relative to other commodities like oil. He believes gold still has "legs to run" but may not be the "cheapest" or "most out of favor" commodity.

Supporting Arguments:

• Geopolitical Risk: The freezing of Russian assets is a clear signal to other nations about the vulnerability of dollar-denominated reserves.
• Historical Parallels: Past commodity bare markets have ended with significant shifts in the global monetary system.

Crude Oil: A Hated Asset with Underlying Bullish Fundamentals

Rosenwag argues that crude oil is currently the most "hated" asset class, with its representation in the S&P 500 at historically low levels. He draws a parallel to gold in 1999, which was considered a "barbarous relic" but became the best performing asset class.

Key Points:

• Narrative vs. Reality: The dominant narrative is that oil is a relic of the past due to electrification. However, Rosenwag contends this is wrong, citing understated demand and the IEA's surplus figures not materializing in storage levels.
• Understated Demand: The fact that storage levels are flat despite reported surpluses suggests demand is running hotter than anticipated.
• Declining Shale Production: The primary source of non-OPEC oil supply growth for the past 15 years, shale, has rolled over. US production, including the Permian, began declining in October 2024, a trend predicted since 2019. This is attributed to drilling out the best areas and moving to lower-quality wells.
• Historical Precedent: Declines in conventional US production (1970) and North Sea/Gulf of Mexico (2003) preceded major bull markets in crude oil.
• Term Structure: While the term structure has shifted from backwardation to contango, indicating more ample inventories, Rosenwag believes this reflects the current balanced market. He anticipates a tight market and backwardation by mid-to-late next year.
• Valuation: Oil is trading at historically cheap levels when priced in gold, with 76 barrels of oil per ounce of gold compared to 7 barrels in 1999.
• Government Influence: The administration's desire for lower oil prices is acknowledged, but their levers are limited, and the geological constraints on production cannot be fixed politically.

Supporting Arguments:

• IEA Data Discrepancy: The reported surplus not appearing in storage data points to underestimated demand.
• Geological Constraints: The rollover of shale production is a fundamental, not political, issue.

Uranium: A Tight Market with Significant Upside Potential

Rosenwag describes the uranium market as "absolutely fascinating" and in a structural deficit that is expected to worsen.

Key Points:

• Primary Deficit: The market has been in a deficit for four years, initially masked by the liquidation of Japanese stockpiles. These stockpiles are now depleted, leading to a tighter balance between mine supply and reactor demand.
• Hedge Fund Activity: In 2023, hedge funds drove speculative fever by buying junior miners and inflating the Sprott Physical Uranium Trust (SPUT), which then issued shares to buy spot uranium. This trade reversed in early 2024, with hedge funds going net short.
• Hedge Funds Exiting: Hedge funds have largely exited the market, removing distortions and allowing for a gradual increase in uranium prices.
• Supply Constraints: New mine supply is not expected before 2030, with NextGen being the first potential producer. This means the market will remain tight until then.
• Demand Drivers: While SMRs and new nuclear reactors are a long-term story (2030s), the current tightness is based on existing reactor demand.
• Price Potential: Given the tight market and the cost of reactors, buyers may be willing to pay significantly higher prices for fuel, potentially $300-$500 per pound, to avoid shutting down reactors.
• Potential Risks: A Fukushima-sized accident would be a major sentiment blow to the industry. The potential for SPUT to be acquired and its stockpiles released could psychologically signal a top, but this is seen as a distant event.
• AI Impact: The AI boom's demand for electricity will be met by natural gas in the short term (next 5 years), with nuclear becoming a solution for 2030 and beyond.

Supporting Arguments:

• Depleted Japanese Stockpiles: This is the key factor that shifted the market from a balanced state to a deficit.
• Mine Supply Lag: The long lead times for new mine development create a structural supply constraint.

Natural Gas: The Short-Term AI Beneficiary

While nuclear is the long-term solution for AI-driven energy demand, Rosenwag identifies natural gas as the primary short-term beneficiary.

Key Points:

• Swing Fuel for AI: Natural gas will be the "swing fuel" to meet the immediate surge in electricity demand from AI data centers over the next five years.
• Market Setup: Natural gas prices are near decade lows, with increasing LNG export capacity and AI-driven demand creating an asymmetric setup for a tightening market.
• "Widowmaker" Contract: Trading natural gas futures directly is risky due to extreme seasonality and volatility, earning front-month contracts the nickname "widowmaker."
• Trade Recommendation: Patrick Serzna recommends the 12-month natural gas fund (UNL) as a smarter way to play the theme. UNL holds a laddered portfolio of the next 12 monthly contracts, smoothing out seasonality and reducing roll decay compared to the front-month-only UNG.
• Investment Strategy: A delta-1 long position in UNL, with scaling into the position as technical signals suggest a new bull cycle, is advised.

Supporting Arguments:

• Time Lag for Nuclear: The long lead times for building nuclear capacity make it unsuitable for immediate AI demand.
• Depressed Pricing: Current natural gas prices are compressed near marginal production costs, offering an attractive entry point.

Monetary Regime Change and Commodity Cycles

Rosenwag posits that major commodity bare markets typically end with significant shifts in the global monetary system. He draws historical parallels to illustrate this point.

Key Points:

• Historical Precedents:
  • 1920s: The end of the commodity bear market coincided with Britain's departure from the gold standard, followed by the Great Depression and a subsequent commodity bull market.
  • 1970s: The end of the Bretton Woods system led to a massive bull market and inflation.
  • 1990s: The Asian currency crisis changed monetary systems and led to the current model of global south currencies pegging to the dollar.
• Current Monetary Shifts: The current environment is characterized by potential major monetary regime changes, including:
  • US proposals like the Mar-a-Lago accords and stablecoin treasury initiatives.
  • China's potential introduction of a gold-backed currency for global commodity trade settlement.
• End of the "Carry Bubble": These monetary shifts are seen as catalysts to end the current "carry bubble," characterized by an "everything bubble" and AI bubble, and a high equity market to GDP ratio (240%).
• Dollar Devaluation: These shifts tend to devalue the dollar relative to gold and shift investment from long-duration growth assets to real assets.

Supporting Arguments:

• Observational Pattern: A consistent pattern of monetary system shifts preceding commodity bull markets.
• Current Geopolitical Landscape: The actions of both the US and China point towards significant changes in the global monetary order.

Equity Market Outlook and Technicals

Patrick Serzna provides a technical analysis of the equity markets, highlighting key levels and potential catalysts.

Key Points:

• Headline Driven Market: The market is currently driven by geopolitical headlines, particularly concerning the Trump/Bessant administration's actions and the Russia-Ukraine conflict.
• Inflationary Nature of War: Any escalation of the Russia-Ukraine conflict would be inflationary, which, after the initial panic, could be a tailwind for the stock market.
• Seasonality: While the November-April period is historically strong, the recent May-October period saw an extraordinary bull run (35%+), making further significant gains from current elevated levels questionable.
• Lack of a 5% Correction: The market has not experienced a typical multi-week or multi-month correction, suggesting one is due.
• Earnings Season: The upcoming "pig in the python" earnings season for the "Mag Seven" companies will be a key determinant of market direction.
• Technical Levels:
  • 6600 Level: A critical support level, representing both previous lows and the 50-day moving average. A break below this level could trigger systematic selling.
  • 7000 Level: A potential upside target.
• Market Breadth: Deteriorating market breadth is a bearish signal, though share buybacks post-earnings could provide a tailwind.
• Systematic Selling: A break below 6600 could trigger selling from volatility targeting funds and CTAs, potentially creating a stock market "air pocket."

Supporting Arguments:

• Historical Market Behavior: The tendency for markets to experience corrections and the impact of earnings seasons.
• Technical Indicators: The significance of moving averages and support/resistance levels.

US Dollar Outlook

Serzna analyzes the US dollar, suggesting it may be in a bear market that has paused.

Key Points:

• Bear Market Pause: The dollar has stopped declining and has formed a double bottom on the index.
• Technical Strength: The dollar index is trading above its 50-day moving average, making higher highs and higher lows.
• Bearish Sentiment: Overall sentiment remains decisively bearish, despite the technical improvements.
• Currency Weakness: Deterioration is observed in the Japanese Yen, British Pound, Euro, Canadian Dollar, and Australian Dollar.
• Key Level to Watch: A break above the 100 level on the Dixie would signal new six-month highs and could squeeze shorts.

Supporting Arguments:

• Chart Patterns: Double bottom formation and sustained trading above the 50-day moving average.
• Cross-Currency Performance: Weakness in other major currencies relative to the dollar.

Gold: Post-Correction Outlook

Serzna discusses the recent volatility in gold and its future prospects.

Key Points:

• Extraordinary Volatility: The gold market experienced a $378 peak-to-trough swing, with downside volatility being reflexively proportional to the speed of the prior rise.
• Consolidation Expected: Gold is likely to enter a prolonged consolidation phase, potentially dipping below $4,000.
• Big Picture Bullish: Despite the consolidation, the long-term bullish outlook for gold remains intact due to the fundamental macro backdrop.
• Geopolitical Premium: The recent geopolitical developments, particularly regarding Russia, are seen as potentially bullish for gold, as a quick resolution is doubted.
• Risk of Mispricing: Traders assuming a Russian capitulation may be mispricing the geopolitical risk.

Supporting Arguments:

• Historical Consolidation Patterns: Gold has a history of bursting higher and then consolidating.
• Geopolitical Uncertainty: The ongoing conflict and potential for escalation create a premium for gold.

Uranium: Buying the Dip and Policy Shifts

Serzna expresses a bullish view on uranium, advocating for buying the recent dip.

Key Points:

• Buying the Dip: Serzna is buying uranium in size, acknowledging that further downside is possible, especially if the AI narrative unwinds or natural gas is favored.
• Bull Market Continuation: The uranium bull market is considered to be just getting started.
• Plutonium Availability: A significant, largely ignored announcement regarding the availability of weapons-grade plutonium from Cold War stockpiles for advanced reactor companies is highlighted. This could avert a future crunch on HALEU fuel.
• "Plutonium Economy" Potential: The potential to utilize plutonium as fuel for advanced reactors, including breeder reactors, could revolutionize nuclear energy.
• Policy Reform Needed: Section 123 of US policy, which restricts other countries from reprocessing spent nuclear fuel, is seen as an impediment and in need of reform.
• Energy Secretary's Role: Secretary Steve Bessant is seen as a potential catalyst for a nuclear renaissance due to his understanding of these issues.
• Equity Correlation Concern: Increasing concern that uranium equities may be correlated with AI baskets, leading to potential volatility if there's a mean reversion in that space. Focus is shifting to the commodity itself.

Supporting Arguments:

• Structural Deficit: The fundamental supply-demand imbalance in uranium.
• Policy Changes: The potential for significant policy shifts to unlock new nuclear technologies and fuel cycles.

Copper: Catching a Bid with China as a Key Driver

Serzna notes that copper is finally catching a bid, with China's policy being central to its future.

Key Points:

• China Policy Centrality: China's economic policies are a critical factor for copper's performance.
• Viable Dip Opportunity: Further dips due to China-related geopolitical news are seen as viable buying opportunities.
• Technical Strength: Copper has held the 50-day moving average and is attempting to break out, with potential upside towards $5.25-$5.50.
• Bullish Tailwind: An overall bullish tailwind exists, though copper has shown sensitivity to broader commodity selling.

Supporting Arguments:

• China's Demand: China is a major consumer of copper, making its economic health crucial.
• Technical Breakout Potential: The chart is showing signs of strength.

10-Year Treasury Note: A Red Flag for Equities

Serzna identifies the demand for 10-year Treasury notes as a potential red flag for equity markets.

Key Points:

• Bond Market Leading Indicator: Historically, rising bond prices and declining yields often precede turns in equity markets.
• Demand for Treasuries: The current demand for bonds suggests a potential shift in market sentiment.
• Repercussions for Other Markets: This trend needs to be monitored for its impact on other asset classes.

Supporting Arguments:

• Historical Market Correlations: The observed relationship between bond market movements and equity market turns.

Trade of the Week: Natural Gas Investment Strategy

Patrick Serzna outlines a strategy for investing in natural gas, focusing on the UNL ETF.

Key Points:

• Asymmetric Setup: Natural gas is trading near decade lows with improving fundamentals (LNG exports, AI demand, industrial reshoring) and flattening production growth.
• UNL ETF Recommendation: The United States Natural Gas Fund (UNG) is structurally flawed due to its front-month contract holding and negative roll yield. The 12-month natural gas fund (UNL) is recommended as it holds a laddered portfolio of the next 12 contracts, reducing roll decay and smoothing out seasonality.
• Investment Approach: A delta-1 long position in UNL, with scaling into the position based on technical trend-following signals indicating a new bull cycle.
• Rationale: Natural gas is cheap in absolute and relative terms, and fundamentals are quietly improving, with potential for significant repricing.

Supporting Arguments:

• UNL's Structural Advantage: Its laddered portfolio mitigates the negative roll yield of front-month-only ETFs.
• Fundamental Catalysts: Demand growth from LNG, AI, and reshoring, coupled with production constraints.

Goring and Rosenwag's Research and Services

Adam Rosenwag explains the firm's approach to research and investment.

Key Points:

• Free Institutional Research: Goring and Rosenwag provides institutional-quality research for free on their website (gorosen.com).
• Transparency: They aim to be transparent by making all their research letters publicly available, including past successes and failures.
• Differentiated Commodity Views: A key aspect of their investment strategy is developing unique and differentiated views on commodities.
• Investment Funds: They manage long-only funds in various wrappers for US and international distribution.
• Passion for the Space: Their commitment to resource equity markets is driven by a deep passion for the sector.

Supporting Arguments:

• Auditable Research: Publicly available research allows investors to follow and audit their decisions.
• Long-Term Perspective: Acknowledging that markets take time to play out and can move against them.