Auctus Overview Entering Year 2024
By David J Mitchell
2nd January 2024
Amidst the highly challenging current macroeconomic landscape, marked by conspicuous valuation imbalances across multiple asset classes, the need for a diversification away from the conventional portfolio structure of the past decade is indisputable.
In 2023, commodity markets predominantly experienced small declines in prices, with the S&P GSCI Index (a composite index of commodity sector returns) dropping by just -1% for the year.
Capital investment has been significantly limited in the 'Real Economy' over the past 13 years. This has led to considerable underinvestment across the commodities complex, as a result of global capital flows being concentrated on the financialization of bonds, equities and a property speculation frenzy led by a massive increase in money supply and zero-percent interest rates.
The surge in interest rates from zero-bound in 2022 and into 2023, triggered financial deleveraging and physical destocking across commodity markets. The rapid increase in the cost of capital has reduced short-term incentives to maintain physical inventories or paper risk. This has led to distorted price discovery, as financialized markets have responded more quickly than the real economy. Consequently, this has created substantial imbalances in
actual physical supply-demand dynamics with the ‘short-term’ limitations of running down inventories.
From a fundamental perspective, the setup for most commodities over this next year and into 2032 (a new capital starved commodity super-cycle looks unavoidable) is more bullish than it has been at any point since 2002 (the last commodity super-cycle ran from 2002 into 2008 and saw nearly +400% gains). Broadly depleted working inventories and spare capacity are nearly exhausted across most commodity markets.
Meanwhile, global demand for commodities over the last 13 years has increased by roughly 45% to 55% (taking an average of leading research agency numbers) and at the same time capital investment is recorded as flat, an imbalance that can no longer be sustained.
Platinum has experienced a significant global supply-demand shortfall, likely exceeding 1.3 million troy ounces in 2023. The available above-ground inventories have been nearly entirely depleted (excluding the critical reserves held by China and the USA, which are not accessible to global market demand). With mining and recycling outputs continuing to significantly fall, along with rising costs, deteriorating ore grades and a lack of investment, a breaking point seems imminent, when set against the backdrop of rapidly increasing industrial demand. This situation is likely to lead to a dramatic surge in prices given the current crippling of new supply.
In 2022, total global demand for silver reached a record high of approximately 1.27 billion ounces, marking a +17% increase over 2021. Industrial demand is expected to have hit a new annual peak in 2023 (once the final numbers come in). Significant contributors to this growth include the burgeoning growth in the green economy, with investments in photovoltaics (PV), power grids and 5G networks, as well as the expanding use of automotive electronics and related infrastructure. This marks yet another year of supply-demand deficits in silver, with the gap being bridged by virtue of drawing down existing inventories.
Mexico (the world's leading producer of silver by a considerable margin) is tightening regulations on mining operations by significantly reducing the duration of their permits, imposing a 5% surcharge on profits and limiting water usage. As a result, Mexico's silver production is witnessing a double-digit annual decline for the first time in nearly a decade!
2023 has also been characterized by the intensifying conflict in Ukraine, where they are experiencing significant loss of life and are clearly losing the war at this stage. NATO (read the USA here), seems more focused on escalating the conflict under Biden’s leadership, rather than promoting negotiations for peace.
Concurrently, there has been a surge in violence and warfare in Israel versus the Palestinians. This has escalated tensions across the region to now include attacks on merchant shipping (at risk of crippling sea-freight and causing major shortages of goods and commodities) in the Red Sea by Iranian-backed Houthi forces from Yemen, along with clashes and increased rocket attacks between Hezbollah fighters and Israel, originating from Lebanon and Syria. The situation is at high risk of further escalation.
Furthermore, tensions between the USA and China have been rising, particularly over the 'One China' policy, which considers Taiwan as part of a unified China. In response to what is perceived as US aggression, China has begun to restrict and control the export of critical metals, of which they control near 90% of the supply chain globally. These metals are vital for the Western world's commitment and transition to net zero, making this move a significant point of leverage in international relations.
These enormous destabilising global forces are trends that have been developing over the last decade or so.
A strong argument can be made that these forces can be traced back to the deeply rooted and long-term destabilizing effects of the escalating global debt crisis upon our present financial systems. This crisis has reached a point where any possibility of a gentle economic resolution seems unattainable, and its impact continuously ripples across the political landscape.
Key factors to consider include the continuing trend of deglobalisation, escalating geopolitical tensions, the ongoing political turmoil in the USA, global recessionary pressures caused by extreme imbalances in capital and debt sustainability, as well as the likelihood of further global debt monetisation in the immediate coming years. The banking balance sheet crisis and sovereign deficit spending (which escalates funding requirements) is clearly pointing to the potential implementation of stringent Yield Curve Control (leading to direct currency devaluations) by Western nations. These are hugely significant issues that demand our attention from a portfolio management perspective.
Gold has clearly recognised and responded to these unfolding events, functioning as a true 'crisis currency' it has risen nearly +14% versus the US$ in 2023; and also broken out of a very large bullish 3½ year consolidation pattern. Within new larger trends in development Gold often initially leads the move higher in precious metals and with the ever-growing constraints placed on both platinum and silver, the composition of precious metal holdings need to be weighted correctly.
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Disclaimer : The information contained in this website should be used as general information only. It does not take into account the particular circumstances, investment objectives and needs for investment of any investor, or purport to be comprehensive or constitute investment advice and should not be relied upon as such. You should consult a financial adviser to help you form your own opinion of the information, and on whether the information is suitable for your individual needs and aims as an investor. You should consult appropriate professional advisers on any legal, taxation and accounting implications before making an investment.