Where Are We in the Commodity Cycle? w/ Rick Rule

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1:24And now to the top analysis of today's markets. Rick Rule is a favorite in the Real Vision community. If you'd like to meet up with Rick and get a master class from the master himself, you'll want to head to the Rick Rule Symposium on Natural Resource Investing in Florida, July 23rd to the 27th. You'll get access to industry insiders, elite bullion dealers, gold council members, and uranium pros. There is special early bird pricing for in-person and virtual sets until June 30th. Just head over to realvision.com forward slash Rick.

2:07Where are we in the commodity cycle? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Rick Rule, President and CEO of Rule Investment Media. Hi, Rick. It's great to see you again. Maggie, it's great to be back with you. Thank you for having me back on. Yeah. And we're sort of we're talking just as we're closing out the first half of the year, right? This week is going to be the final for the week, the quarter and the half year. And when we think about it, we've had so many guests coming on talking about what a complicated macro environment is, right? We have central banks either tightening or promising to hold rates higher for longer.

2:43We have a US economy, which is showing unexpected staying power, as we saw in housing and consumer confidence data that was released today. Geopolitical drama in Russia, a Chinese economy, which appears to be losing momentum. So there's a lot of factors feeding into this. for investors to kind of sift through. How are you thinking about commodities against this backdrop? Well, I think the outlook is mixed, but mostly bullish for reasons that we'll discuss later. I think it's likely that we continue to experience supply shortages in commodity, not as much demand-based as, in fact, a response to declining, sustaining capital investment.

3:23But as you also point out, there are many more geopolitical concerns, some of which have been expressed in the market so far, and some of which will be expressed in the markets to come. I note, too, that the awareness that the policy community has and the awareness that government has around these supply shortages are starting to increase investor interest, both official sector and private sector interest, something that we haven't seen for 10 years. Now, when you're talking about around the supply side, are you talking across the entire commodity complex? Are you more specifically talking about metals or rare earth materials, things that go into semiconductors?

4:10How are you thinking about that? Almost the entire supply side. As an example, in the biggest of all extractive industries, oil and gas, it is estimated that the oil and gas industry as a whole is underinvesting in sustaining capital to the extent of about a billion dollars a day,$365 billion a year. The industry can continue to do that for a little while, but over two or three years, deferred sustaining capital investments like that impair the industry's ability to produce oil. It isn't that we haven't discovered the oil. It isn't that we don't know where it is. It's that we are under-investing in, as an example, development, drilling, and infrastructure construction.

4:56The consequences of that can be seen historically in places like Mexico and Venezuela, potentially very large oil producers, countries, pardon me, that have under-invested in sustaining capital and have temporarily or perhaps even permanently impaired their ability to produce. I'm talking about this from an illustrative sense of point of view, but we've also seen historical underinvestment really across the spectrum in most commodities. We're starting to see that addressed in some of what are now called the battery or the electric metals. As an example, there's been a real surge in exploration for lithium.

5:34But the surge that we've seen in lithium exploration has not been repeated in other critical metals, things like zinc, things like tin, things like even copper and cobalt. We have had systemic underinvestment in the means of production around natural resources for a very long time. And the chickens are coming home to roost there. Yeah. When we're talking about, I want to talk a little bit about that. And our regular viewers know that we talk about those sort of necessary rare earth metals, the complex around EV, however you want to categorize it. We talk about that. We've talked about that a lot and we'll continue to do deep dives on that.

6:14When you're talking about energy and the underinvestment in oil and gas, why is that happening?

6:24Because the majors are not, I just saw a headline recently saying that they're once again deferring from capital investments. Is it the sort of ESG side of it? Is it because of the price sensitivity? I think it is the ESG side. The industry, the private industry, is exhibiting record high cash flows. There's money there to invest. But, you know, the policymakers are schizophrenic. On the one side, our president has told the domestic oil industry to increase production so he can bring down politically sensitive gasoline prices. While at the same time, he says he's going to put them out of business in 2030.

7:03The idea that he's going to put the oil industry out of business in six years is not a wonderful way to get them to invest tens of billions of dollars today. And this isn't a criticism that's leveled solely at Biden. The same has been true for Trudeau. Canada does one thing really well, produces oil and gas. It's what the country runs on, yet they discourage it. You know, we've seen this official sector schizophrenia for a very long time, and they being the political classes, I think have done their best to not only discourage by jawboning investment in oil and gas and natural resources, but also actively try to lobby institutional investors and banks against natural resource investment.

7:52particularly natural resource investment that is carbon generative. It's interesting. I spend a lot of time in other areas talking on a pretty granular level about this stuff too. And there's much more nuanced conversations when you're in other circles. I'm just wondering in this environment, when we saw the shortages, I feel like there was pre the invasion of Ukraine. And there was a sort of black and white rhetoric around this anyway, and a push to sort of move very quickly. And then the realities of what happens if you don't have a well thought out transition. There was some thinking that that would change the dynamics, that that would change the conversation.

8:39But it sounds like you're saying that hasn't happened, or you're not seeing signs of that. You're still seeing kind of widespread discouragement. I think Russia and the invasion of the Ukraine was the catalyst. But I think that the seeds were sown for that well before the Russian invasion of the Ukraine. I think what you're seeing is a reaction to the fact that the world's supply chains with regards to natural resources and energy in particular were compromised. That we had had a long time underinvestment. and also that investment in hydrocarbons was regarded as politically correct. The big thinkers in the world talk about a transition away from oil and gas, and they talk about peak oil demand occurring in 2030.

9:30Let me leave your audience with one statistic about that. We have now invested over 40 years almost$5 trillion in alternative energies. I'm not a critic of alternative energies, but we've invested$5 trillion in them, And we have reduced the market share of fossil fuels from 82 % all the way down to 81 % for a$5 trillion investment. What would it take to get the market share of fossil fuels down to 70 % in a market where demands for all forms of energy are increasing? The policymakers need to understand, but more particularly, your listeners need to understand that peak oil demand, just as an example, will probably occur in 2060.

10:15There's nothing nuanced about this. There's nothing narrative about this. This is pure arithmetic. The big thinkers in the world don't seem to want to understand that a billion people on earth have no access to primary electricity. and 2 billion people on earth have access to intermittent or unaffordable electricity. What that means is that the world is going to need more of all forms of electricity, more of all forms of energy going forward. And that's going to require, whether the big thinkers like it or not, both oil and gas and coal. Hey, everyone. We're going to take a quick break right now to hear a word from our partners.

11:00We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

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12:09Okay, so I'm going to veer it back a little bit to the markets right now, because I think there's a really extensive political conversation you can have about that. I mean, it's a really interesting one. You know, for those who want to go down that rabbit hole, there are lots of good places to go, including we're going to get to this a little bit later. But Rick is holding a symposium in Florida where they're going to talk a lot about this, too. I think at some point we're going to have to have everyone, no matter what side you are on. And unfortunately, this is very tribal and can get very, you know, people yelling at each other across the aisle when, you know, there are folks trying to work on a solution forward that kind of brings everyone along.

12:52But if we bring it back to the markets, it's very interesting that you're talking about supply and supply chains, because we spoke with Marco Popic yesterday from Clock Tower, and he made the argument that longer term, regardless of how you feel about these things, this isn't an endorsement of this. This is just, if you look at trends, some major trends that are happening with regard to supply, for one, are going to have, or they're going to prove really bullish for commodities. Let's have a listen to that, and then we'll talk on the other side. Everyone's decided, and by everyone, I mean the policymakers in almost every country have decided that they need to redesign supply chains away from China.

13:33So that's like a priority number one. There's this national security prerogative to redesign supply chains. I mean, China itself is doing it as well. So that's priority number one. Priority number two is apparently to sink a lot of capital into the green energy revolution. These two policy priorities are combining to create a very CapEx-driven cycle. Okay, what does this have to do with Russia? Well, what do you need to do if you want to redesign supply chains and do a green energy transition? What do you need? What is the fundamental need you need? What is the fundamental asset? You need commodities, a lot of them, and not just energy, you need metals.

14:14So we're basically redoing the 2001 to 2007 cycle for policy and political reasons and ideological reasons as well. So basically the West has decided China's evil now and that everyone's going to be cooked alive by climate change. Those are two priorities. So if you suddenly have political risk in Russia, and it doesn't have to be something extreme. It doesn't have to be like Mel Gibson roaming the highways of Russia in a Mad Max scenario. It doesn't have to be apocalypse or warlordism. It could simply be a reversion to sort of the instability of the 1990s. it's highly unlikely that Russia will receive the sufficient capital, sorry, sufficient financial and human capital to extract the supply of commodities that we're going to need.

15:03I think that was such an important comment coming from Marco yesterday. And by the way, this push and pull between supply and demand, the effects of some of these longer term macroeconomic developments, the kind of thing we dive into all the time on the platform. If you are not a member, scan the QR code, come join our community so you can get access to all that good content. So, Rick, how are, you know, I think I think he laid it out really well. The issue that the market seems to be grappling with. So Marco's perspective was longer term, which he was clear about. But he also said short term, you could get a lot more volatility as investors try to grapple with this demand side, which is if we look at especially the energy market this year, really cratered oil prices.

15:45So how are you thinking about the demand side right now? Well, I think it was a very important clip for just that reason. I have been surprised, as you said in the lead-in of the show, with the strength in the U.S. economy, given higher interest rates. I've been impressed on the demand side. I would have expected demand growth around the world to be slower. And I don't think that the strong interest that you've had in commodities is just around geopolitical issues, but rather the fact that we need to continue to accommodate more and more people on Earth that have more and more material needs. I think your comment with regards to volatility is right on.

16:29You have these long-term macro trends and you have these near-term geopolitical interest rate and economic trends. And I think the hallmark in the near term is going to be volatility. I think the hallmark in the long term is going to be supply shortages. Yeah, that. So that's super important. That's super important because this is and we talk all the time about time frame, both on this show, but across Real Vision. It's part of the academy. It comes up in the academy sessions we do. You and I have talked about it before. What's your time frame? Because people know you. They know your expertise in commodities.

17:05Longer term, you've been talking about some of these structural supply shortages. So everyone would assume that you are always a commodity bull. But that's not the case if you narrow it down to shorter term. And we've got some shorter term questions here people want to get to. So if we're in this more volatile situation, that's going to change the way people have to approach these markets, correct? Yeah, I think somebody needs to identify what kind of investor they are. If they're a short-term speculator or a trader, you trade volatility as opposed to longer-term reality. My experience in the resource business is that you either have to be a contrarian or you're going to be a victim.

17:44When you come to realize that markets work, you understand that if the oil market goes up to 150, it becomes unsustainably high because the high prices encourage conservation and they encourage production simultaneously. More production, less consumption means lower prices. So perversely, you become more bullish when prices are weak and more bullish, less bullish, pardon me, when prices are strong. It's difficult for people to do. What I ask people to do is look for circumstances that appear statistically inevitable and worry a little less about time. Accommodate themselves to being willing to wait a little bit for what is inevitable.

18:28understanding that it may or may not be imminent. When we talk about developing shortages over five years, as an example, as a consequence of demand growth, pardon me, supply shrinkage, what we don't take into account as an example is the possibility of a recession. In a recession, you could have some supply shortfalls and destroy some demand, and the prices don't need to move. So investors need to take all of that into consideration. And successful investors need to take – successful investors in natural resources, pardon me, need to take a fairly long time frame. Yeah, that's perfect. So, I mean, so well said.

19:06And I'm always taking notes when we – I keep threatening to have a T-shirt contest for the show. And in the resources, if you are not a contrarian, you are a victim. It's got to be a contender because that is so true. But it's hard to do, right? It's hard to be that contrarian. So to that point, David is asking, do you trade around the price of gold while holding for the long term? And how do you stay patient when the price is down? I do not trade around the gold price, particularly with regards to the metal itself. The metal in my own portfolio is insurance against my government, which I feel I need.

19:46The consequence of that is that I buy it just the way I'm paying an insurance premium. I will trade gold stocks, although not normally based on the price of gold. I trade gold stocks because in my own mind, I have a range of values. And when they get towards the top end of that value, particularly if I see too many buy recommendations from generalists, I tend to trade. I tend to sell. By contrast, when the conventional analysts, as they occasionally do, don't remember how to spell gold, I'm inclined to be on the buy side. I guess the contrarian coming out in me again. But with specific regards to gold, the metal itself, for me, it fulfills an insurance function in my portfolio, and I'm unlikely to trade it.

20:36So for anyone who may not be familiar with Rick's past when he says generalist versus his understanding of value, I encourage you to go look up the My Life and Four Trades we did together because that will give you a good background on just how well Rick knows this area. So he does have insight that others don't. So he is talking as somebody who specializes in this area, which I think is important for those who may not. And you know, you always feel more comfortable with what you know. So just take that as a sort of cautionary note, as well as a compliment to Rick. So Oliver is asking, what levels are you watching for gold and silver?

21:16So even though you buy it like an insurance premium you're paying, are there levels you're currently watching for those precious metals right now? Not on the gold itself. But if gold perversely were to fall to$1 ,500, I would be buying the gold stocks with every spare farthing in my existence. In the near term, were the gold priced to handily exceed$2 ,500, and I began to see gold on the cover of Investor's Business Daily or something like that, I would likely trade out of some gold stocks. As I say, with regards to gold, I don't have levels. I guess there would be a point at which I wouldn't buy property and casualty insurance where the premium would be too high relative to the payoff.

22:09But as I say, I don't regard gold myself as an investment asset. I regard it as wealth and I regard it as insurance. So I don't have levels there. I'm an old fashioned gold bug. I'm not suggesting that the rest of your audience adhere to my point of view. So I'm merely answering that question. We're going to take another quick break to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

22:38Absolutely. We always say that all the guests who come on are not dispensing investment advice. They are simply talking about their thoughts on this, on these issues. We always want to remind people of that. Trillian X asking, what do you think of platinum supply, which is concentrated in Russia and South Africa, two countries having their specific issues? So this issue of political risk against this is another thing we're talking about the general geopolitics. But anytime you're talking about commodities, there's an element of understanding what's happening in the country that you're operating in, which, you know, a thing or two about Rick.

23:12I own platinum and palladium for precisely that reason. I note on the demand side that irrespective of the big thinkers wish to do away with the internal combustion engine, it's going to be with us. And platinum and palladium are the catalysts that reduce automotive industrial internal combustion engine smog. People don't like smog. So there's ongoing demand for platinum and palladium. It only costs$125 to provide enough platinum to sell you a Mercedes-Benz for$90 ,000. If the price of platinum went up, if it doubled, it wouldn't change the price of a Mercedes. The supply side is what's really interesting.

23:53As the questioner points out, platinum comes from three places, really, Russia, South Africa, and Zimbabwe. If you wanted a sort of collection of political risk for connoisseurs of political risk, You couldn't get a better collection than that. South Africa experiencing extraordinary internal political constraints, power supply shortages, corruption. Zimbabwe, I mean, historically, it almost hasn't been a state. It's been a place on the map. and then the paragon of stability until recently, Russia, where suddenly the supplies and perhaps even the internal sociology is challenged. If I had to find a metal that had the potential for a real exogenous supply shock among every other commodity I follow, it would be platinum and palladium.

24:51Wow. Okay. We've got some people who are also bullish on that on the chat. But Charles asking, and I'm going to I'm I'm limiting what I'm saying and getting to the questions because we have so many of them. And that's what we do on the show. Charles asking, can the Saudis attempt to cut the U.S. off in order to increase short term prices in oil? I'm jumping around a bit here with commodities, Rick. The United States, as a consequence of the Permian Basin and a history of free market attitudes, is effectively self-sufficient in energy. The Saudis have very little leverage over us. But the Saudis have much greater leverage over emerging and developing countries, over China, and over Europe.

25:38So if the questioner's question specifically regards the United States, the United States, particularly in conjunction with Canada and Mexico, are amazingly insulated from what the Saudis might be able to do to our domestic market. But the Saudis do have the ability to impact the world market and impact it substantially. And we are connected to a much greater degree than many people realize. Are you surprised? We had that move a while back where they decided to go it alone without their OPEC plus partners. Did that surprise you? What did you make of that? I thought it was amusing. I think it might be for internal political discussion.

26:18I think the Saudis have come to understand over the last 50 years that it's not too hard to manipulate the oil prices up when they're going up anyway. It's not too difficult to manipulate them down when markets are working. But the Saudis and the rest of OPEC have learned that markets work. Markets end up being bigger than governments. Governments can impact markets in the near term. But the truth is when the oil price gets too high, we produce more and we consume less. And the Saudis, I think, have come to understand bitterly that markets work. Do you know, we we saw that reversal in energy prices.

27:02There had been an expectation that we're going into recession. But you just pointed out, U.S., we're not seeing it yet. Everyone keeps pushing it back. Are you surprised we haven't seen more of a response? Or is it just that the market still thinks is the market telling us that despite the analysts pushing it back, they're still convinced there's trouble ahead. They're looking at China. They're worried about a slowdown in China. What is the oil market telling us? I think that the oil market is being schizophrenic as a consequence of policy. I think that the fairly strong economy has surprised everybody, but in particular the oil industry and perhaps myself.