Why the Commodity Bull Market Is Just Beginning

SPEAKER_1 (0:02)

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Adam Rozencwajg (0:08)

So why are commodities cyclical? I think a lot of investors and listeners will appreciate that they are.

But what drives that cycle, and most importantly for us today, of course, is where do we sit in that cycle? And I think that's what's so exciting. Because the commodity cycle, although it can be very abrupt and it can be very, very large in magnitude and duration, it does follow some rules when you start to really look at the history. And when you follow those rules and apply them today, they tell you that today, unlike 2012, we very much are in the early stages of a strong bull run.

Merryn Somerset Webb (0:49)

Welcome to Merryn Talks Money, the podcast in which people who know the markets, explain the markets. I'm Merryn Somerset Webb, and this week, I'm speaking with Adam Rozencwajg, co-founder and portfolio manager at Goehring and Rozencwajg, an investment firm focused on researching and investing in the natural resources sector. Now both gold and silver have done well this year. We have been watching them. Gold reaching record highs before falling back quite significantly actually, and natural resources in turn outperforming over the last five years. Have I wanted to bring on Adam to talk about all this because we wonder, are we at the beginning of a commodity super cycle or is the actual cycle kind of over? And what happens to gold? It's gone up a lot. Now it's gone down a lot. What next? So we talk about how he sees the gold price performing for the next 10 years. We talk about how his firm are thinking about oil in the wake of the Iran War, why he believes commodities could still be near the beginning of a major bull cycle.

Adam, welcome to Merryn Talks Money.

Adam Rozencwajg (1:46)

Wonderful to be here. Thank you.

Merryn Somerset Webb (1:47)

Now, listen, I think what I would like to do, if you don't mind, is set us up a little here, because you have an idea about how the commodity cycle works, and how you invest through that cycle. So can we just start by you giving us a run-through of how your ideas about commodity cycles really work?

Adam Rozencwajg (2:07)

So to give you a little bit of background, we run a natural resource equities strategy, and I've been doing this for about 20 years, and my business partner, Lee, has been doing it for 35 years. And the process has evolved a little bit over time, but really we try to keep it as consistent as possible because it's shown to work fairly well over the cycles. But there was one big thing that we missed, and this goes back about 15 years or so.

And I think it informs a lot of the work that we've done since, and I think it informs the way that we think about commodity cycles. And what that is, was that in 2012, we'd had a nice, good, strong bull market and resources. We'd seen commodity prices move up quite a bit, and the stocks had done quite well. And some people were saying, maybe we're getting close to the end. And we really didn't feel that. And the reason we didn't is because in our core we're value investors. And although the commodity price had moved up and the stocks had as well, they were printing so much money and doing so well that they were actually relatively cheap. And so I think I wrote with the hubris of a 20 something back then that perhaps this is the end of a bubble, but I've never seen a bubble burst at 10 times earnings. And of course, that was entirely wrong because the commodity market was about to roll over and enter into essentially an eight year protracted extreme bear market that saw commodity prices fall.

But the stocks were cheap at the time. So what did we get wrong?

Merryn Somerset Webb (3:34)

But were there any old hands around at the time, Adam, to tell you that this is just like the chip cycle that you sell when stuff looks cheap because that's when supply is about to turn or has turned?

Adam Rozencwajg (3:45)

The cycle did seem a little bit different. We'd had such a bad under investment period in the 90s that we were in a bit of a shortage of a lot of things. China was in its period of strong robust growth. And so it did really seem as though we were going to have good times for some time to come. And again, when you looked at those valuations, they seemed to be relatively modest and certainly not cause for alarm. But you're right, we did all miss something. I think a lot of the old hands did, and I did as well and Lee did as well. And what we missed was the capital cycle piece of it. We had had a huge capital investment cycle that really started in the early 2000s and probably hit its crescendo sometime around 2010 or 2011