Jim Mellon: Why I'm Loading Up On Energy Stocks

0:00So there's all sorts of reasons why gold and silver have gone up, but I did not expect it to go up as much as it did. and it was a four-year call for me. So it's worked out very well. And, you know, sometimes you take your, you don't save for the last dance. And that's my philosophy. So if I said that we have reduced our position in gold and silver exposure by 80%, I think that would be about accurate. Those seven stocks represent about 40 % of the market capitalization of the S &P, which is just a huge and very dangerous concentration risk at a time when they're all doing essentially the same thing.

0:37I wouldn't be playing in that area because there's plenty of... My view in life is that, you know, you don't need to be in the game that everyone else is playing. There's plenty of other things to do, and that's what I try and do. What's the next unloved sector, as gold and silver were four years ago, that, you know, will actually pay you to be part of it and get dividend yields in most oil and gas stocks of any note, that is very lowly represented in the S &P and in other indices around the world. And of course, it's oil and gas. And so we've been loading up, I mean, literally loading up on oil and gas.

1:17Welcome to the Master Investor Podcast with me, Wilfred Frost, where we celebrate and learn from the success of the greatest investors, business leaders and politicians in the world, giving you, our listeners, the edge and a very happy new year to you. The Master Investor Podcast is sponsored by BNY Investments, LSEG and Interactive Brokers. Please do remember the views expressed in this podcast are for general information purposes only. Nothing in the podcast constitutes a financial promotion, investment advice or a personal recommendation. More on that in the show notes. I'm delighted to welcome back to the Master Investor Podcast my good friend and podcast founder Jim Mellon, the chairman of the Burn Bay Group.

2:06And nobody, Jim, I would rather kick off the new year with more than you. Welcome back to the Master Investor Podcast and Happy New Year. Happy New Year to you, Wilf, and thank you very much for having me on and hi from the the wintry isle of man. Well, I know that the weather and it's wintry here in London as well is what's prevented you from being here in person, but great to catch up either way as it always is. So much for us to get to and including some of the most more specific latest developments relating to Venezuela, because I know energy is a big theme you want to touch on. But I wanted to start by talking about gold and silver, which for me were the stories of 2025.

2:49And I know they're a theme that you've been incredibly bullish on for a number of years. I guess the first question is, did you expect quite such a big rise as we saw in gold and silver last year? Actually, no. I mean, to be quite honest, when we conversed at the Master Investor Show last year, I think we kind of came to a consensus that gold over 3 ,000 was a likely prospect, but now it's 4 ,400. And that is significantly higher than I would have thought. And silver was, as you remember, I was kind of rotating a bit out of gold and into silver. The move in silver has been absolutely extraordinary.

3:32And I didn't expect it to go this far. So actually I've been trimming my gold and silver positions and we don't have, we still have quite a reasonable exposure, but we don't have as much as we once had. And, um, I've got new pastures to, to plow at the moment. So, um, uh, yeah, I mean, I, I, I'd be very happy to go through the reasons why I think gold and silver might be overdone, overcooked. Well, if you so wish. No, I'd love to. I mean, I think that kudos for a great call either way over the last couple of years because they've really taken off. Why do you think, first of all, they rocketed quite to the extent that they did?

4:13Because there's a sort of simple argument, which is G7 economies are monetizing the debt. And then there's a sort of bigger fear of is the financial markets going to implode? that the move we saw at the end of the year would almost imply the latter, unless it's just a trading squeeze, and that's why it was such a big surge. Yeah, I mean, they're all good points. And I imagine there's an element to all of them in the recent performance. As we know, central banks, particularly China, have been buying up gold. I think for two principal reasons. One is that they are worried about confiscatory risk, having seen what's happened to Russia and its assets stranded in Belgium.

4:59And secondly, they are, in the case of China, I think deliberately trying to de-emphasize the importance of the US dollar relative to the yuan. And by buying gold at the expensive US treasuries are doing exactly that, which actually kind of neatly leads to one of the factors, I think, why Maduro was captured and the United States took such strong action against Venezuela is that actually Venezuela was selling its oil to China in Yuan, and the US doesn't like that it wants uh dollars denominated oil sales wherever possible um so i suspect that was another factor that went into the what happened in uh venezuela and um uh and then you've got you know massive retail demand i mean there's basically gold and silver are now on everyone's lips taxi drivers to uh you know people in the coffee shop and so forth are all talking about gold and silver Now, I'm old enough to remember when Bunker Hunt supposedly cornered the market in silver in the early 1980s, and people were lining up to melt down the family silver.

6:21In those days, silver was priced at a level which is actually significantly above the current level if you adjust for inflation. So it's entirely possible that silver could go a fair bit higher, although I wouldn't want to be taking that particular bet myself. But you're going to start seeing people cashing in their physical holdings of gold and silver, I think, relatively soon. And that will put pressure on the market. Also, the central bank positions are fairly opaque. We don't really know who has what. We know that there was a significant amount of arbitrage at the time of the tariffs or pre-tariffs when gold and silver was being repatriated to the United States because they wanted to avoid paying tariffs or potential tariffs on gold and silver, which actually ultimately didn't happen.

7:10And we also know that people are concerned about persistent inflation and loose monetary policy, particularly in the United States, until relatively recently. So there's all sorts of reasons why gold and silver have gone up, but I did not expect it to go up as much as it did. And it was a four-year call for me. So it's worked out very well. And sometimes you don't save for the last dance. And that's my philosophy. I don't believe in leverage in markets. I don't want to be leveraged and unable to sleep. And I also don't believe that you should stay till the very last minute, because sometimes you misjudge that and then you really get caught short, you know, caught badly wrong, basically.

7:54With that in mind, I'm interested that you kind of said you've reduced rather than close your position. So it's just relative to 12 months ago. How much gold and silver have you got? Is it halved? Is it much lower than that? Oh, well, my main position in gold and silver was through a company called Metals Expiration, which is a London listed company that took over a company I was the largest sheltering called Condor Gold. And it was a very significant position and it became even more significant. And so I've been producing that and I still have shares in that, but not like a fraction of what I had.

8:29But I've got significant deferred compensation through that company as well in the form of milestones, which are, you know, sort of related to the gold price. And we also have, you know, gold and silver positions through other stocks as well, but not nearly as much. If I said that we're down, we're not down, but we have reduced our position in gold and silver exposure by 80%, I think that would be about accurate. And I found a new place to play, and we've been significantly increasing our positions there. In gold and silver, sorry, or a new theme altogether? In energy. In energy. Yeah. So I want to get to energy because I know you want to talk about it.

9:09But before I do, and there's lots of tangents to go off on with energy, let's pause and reflect on the market overall and AI in particular because I know that feeds into your bull case on energy. As we sit here today, do you think AI stocks are going to correct a bit this year? Are they going to be steady? Are they going to collapse even? And what scale of fear do you have towards their valuations? Well, I've been wrong about, you know, their, well, is it continued upward march? I suppose that they've kind of run out of a bit of esteem recently, but I've been wrong about the fact that they've held up so well, because I think there's a sort of involution, as the Chinese call it, competition going on there, where they're all competing to do essentially the same thing and spending vast amounts of money.

10:01And we know, I know all the arguments about the fact that these companies, and we're talking about the Mag 7 essentially here, are, you know, making lots of cash and therefore they can afford all the build outs. But actually they are building up leverage as well. And one of the companies in particular, Oracle, is actually very stretched indeed, as you can tell from the CDSs, which is the insurance on its bonds that have gone through the roof relatively recently. The stocks are way over owned. It's difficult to know who else is left to buy them. And that's particularly because of the shepherding of investments via ETFs, which are now 50 % of the US market, into the biggest stocks, as that's the way the ETF market works.

10:44And also the remarkable growth. And by the way, there are more ETFs in the US now than there are listed stocks, in case you decide to think is absolutely remarkable. and also the single uh option options which are you know one day options which have become absolutely monstrous in the u.s particularly through platforms like robin hood and um so you know again uh these are companies that are probably in better shape than the big companies were at the height of the dot-com bubble so they may have further to go but frankly speaking, again, it gets back to my thing, leave the party before the last of the punch is drunk and the hangover sets in.

11:27And the valuations, by whatever measure you want to look at them, are extremely stretched. So another way of looking at this is that those seven stocks represent about 40 % of the market capitalization of the S &P, which is just a huge and very dangerous concentration risk at a time when they're all doing essentially the same thing. And they're all selling to each other and all creating liabilities and assets, which may or may not ever get paid off. We just don't know. But I wouldn't be playing in that area because there's plenty of... My view in life is that you don't need to be in the game that everyone else is playing.

12:09There's plenty of other things to do. And that's what I try and do.

12:16This episode of the Master Investor Podcast is brought to you by LSEG, the leading global financial markets, infrastructure, data, and analytics provider. To learn more about how LSEG connects businesses, investors, and markets worldwide, visit lseg.com.

12:39let's touch on energy then because i guess ai is in part driving that call on energy yeah i think it's it's a you know whatever my views on the ai stocks there's no doubt that there's going to be huge amounts of a build of data centers and we can talk about data centers actually later on if you want, because I'm not sure that they will have the same validity in 10 years' time as they do today. But anyway, people are building up these huge, massive, great big data centers, sometimes with their own power grid attached, in other words, independent power grids for the specifically huge data centers, particularly in the United States.

13:21And there just isn't, as we know, there isn't enough grid capacity in the US and there isn't enough energy. So if you believe that by 2030,$4 trillion will be spent around the world, largely in the US and in China, on data centers and their build-out, which is bigger than the UK economy in terms of size, they're going to require an additional 20 % added to the current electricity supply in the United States. China is in a much better position vis-a-vis energy costs and also energy availability. Now, there is not a single nuclear power station being built in the US. There's lots of announcements and talk about it and all that sort of stuff, but there's not one station that's being built.

14:03And China is building somewhere between 28 and 30 nuclear power stations at the moment by comparison. So uranium and nuclear are going to be part of the solution, but not for five to 10 years. In the meantime, it's got to be natural gas, oil, and unfortunately coal that are going to take up the slack. And everyone has been down on energy for quite a while. And, you know, everyone talks about the oversupply. Everyone talks about, you know, the fact that, you know, the world is moving to electrical and all that sort of stuff. But electrical requires power as well. So I just thought, right, OK, I've done very well in gold and silver, what's the next unloved sector, as gold and silver were four years ago, that, you know, will actually pay you to be part of it and get dividend yields in most oil and gas stocks of any note, that is very lowly represented in the S &P and in other industries around the world, and is a super important industry, despite everything.

15:07And of course, it's oil and gas. And so we've been loading up, I mean, literally loading up on oil and gas in November and December.

15:19And I'm very pleased to see the action of oil and gas stocks after Venezuela, because, you know, over the weekend, people were saying, well, they're going to go up or they're going to go down. No one knew because, you know, it shows that maybe Venezuela can increase its oil and gas production. That will take years. But it also shows the unstable environment that we live in geopolitically around the world now, which may cause serious issues for oil and gas sometime this year. So I thought, OK, right, we're on the right track now. The stock's moved in the right way. They are under-owned. And this is going to be the big area of concentration this year in a positive sense.

16:00So I'd suggest loading up on oil and gas, and we've got a big long list of stuff that we've been buying. So I want to get into a little bit there. What are some of the core recommendations there of what you have been buying? I mean, I totally get your point that these are cheap on a PE basis, certainly compared to the Mag 7, and they haven't performed like the Mag 7. But they're not as unloved as they were coming out of the pandemic, for example. So what are the kind of core plays that you've loaded up on? Yeah, so most oil and gas companies don't just make, the majors don't make their money just by pumping oil out of the ground and selling it.

16:45They are making money off refining, they're making money off trading, they're making money off petrol stations, they're making money off all sorts of other stuff. and so they have a relatively stable i mean it you know it does move with oil and gas prices obviously but it doesn't move as much as you would think as for instance with a gold or silver miner which are highly geared to the price of those commodities so there's a generally speaking a greater degree of stability in these stocks and you know in the uk majors for instance you're getting about a five percent uh dividend yield on something like bp or shell uh which is to my mind extremely attractive in the current environment.

17:24So we've been buying, and I've just got a little list here, so I'll look over to the list. We've been buying BP. We've been buying Adnock gas in the UAE. We've been buying Equinor, which is a Norwegian oil and gas company, Santos in Australia. We've been buying Jersey oil and gas, which is a speculative North Sea oil play, because I do believe the UK is going to have to let them drill, baby, drill. I can't believe that the Miliband madness is going to persist for much longer. We've been buying First Trust National Gas ETF, which is a US ETF with a good balance. We've been buying some of the renewable funds, which yield very heavily, actually, and particularly in solar, so Foresight Solar Fund, very high dividend yield, and it looks like it's going to be a winner, internationally diversified.

18:19We've been buying iShares Europe Energy, iShares Global Energy, Renewables Infrastructure, and Vanek Oil Services. And I would add that Shombagé and Baker Hughes look like good buys as well, relatively inexpensive. And those companies will be actively involved in reformatting the Venezuelan oil industry going into the future. So yeah, it's quite a lot we've been buying. It's an impressive and focused list there, Jim, And of course, a reminder to state the obvious, Jim clearly has positions in those stocks, which he's just mentioned. And nothing you hear on the Master Investor podcast should be considered direct financial advice.

18:56A final question then on energy, Jim, specifically Venezuela. I mean, what did you make of that action over the weekend? And I guess, you know, we're two, three days on. It's clear that, I mean, two things I would think for the investment landscape. It's clear that you can't boost production quickly. and it's also clear that removing one leader doesn't automatically drastically change the outlook of the country so what what impacts do you think this will have or is having on that investment call for oil and and other areas i mean as i said i think the venezuelan the reaction to the venezuelan uh action um whatever way you look at it and i personally think it's a good thing to be doing, frankly, as long as it doesn't go on to all the other countries, indicates that there's potential for great instability in the world.

19:50And therefore, one of the great hedges is, of course, always oil and gas. And so the action of the stocks is very encouraging indeed. As far as Venezuela is concerned, my reading of it is it will take at least five to ten years before they can get back up to what they had, which was about three million barrels a day of production, which in the context of over 100 million barrels a day is not massive, but it's enough to change things at the margin. But we also know that it's very heavy oil. The US has got lots of spare capacity for heavy oil. The US is probably at peak shale and is not buying as much oil from Canada, which is heavy oil as well.

20:36So this is a nice bolster for U.S. refining capacity, but about 70 % of refiners in the U.S. can handle this sort of oil. And so, you know, there's a lot in it for the U.S. and U.S. companies here as well, I think, which is why we have quite a lot of U.S. stocks in this particular list that we've been loading up on.

21:02This episode is sponsored by BNY Investments. BNY Investments is part of BNY, a global financial services company supporting investors and institutions around the world. This sponsorship does not constitute investment advice.

21:24I wanted to touch on another topic I know you're hot on. You mentioned it last time you joined the podcast in September, and that's robotics. Since then, you've brought out a book on the topic, specifically on robotics, to flag all of the kind of buy cases, the bull case for this theme. I learned a new phrase reading this book, Jim, Moravec's paradox, which is the idea that computers excel at high-level cognitive tasks but struggle with physical tasks that humans find simple things that we can do with our hands, essentially. and and one of the key arguments in your book is that paradox will go away because ai even if you're not constructive on the stocks ai is drastically changing what what these robots can do that's true in fact this is probably one of the best if not the best use of ai that there is and but it's going to take time i mean i don't know if you know but if you buy a uni tree, which is a Chinese robot, and you're doing a demonstration with it to show off its so-called skills, there's probably going to be someone in China who's telling it what to do, because it's just not good enough yet to be self-referential, to do what is expected of it.

22:46They're just not good enough yet, and that's going to take a bit of time. But in that process, there is going to be massive development and a lot of money made, and probably most of that money will be made in China, because China has really everything that's required for robotics, and it does manufacture at such a remarkably low price compared to the United States. So by preference, if you look at the US so-called robotics companies, Tesla, NVIDIA has announced that it's going to be involved in robo-taxis as of today, or the CES conference in Las Vegas today. You've got Amazon is already in robotics, and Meta wants to be in robotics as well, having given up on the Metaverse.

23:33So I think that, first of all, the businesses of robots in those companies is swamped by their other businesses and by their huge need for capital to build out the hyperscaling data centers. And in China, you've got hundreds, if not thousands, of companies making little bits for robots. And you've got some large-scale companies as well. So if you want to look at the number one area for robots at the moment, that's robo-taxis. They are taking off in the US, but they're also taking off in China in an even bigger way. And the competition now is going to be in London between Waymo, which is the Google subsidiary, which may actually have a separate listing sometime this year.

24:23I read that would be a very interesting stock to look at, actually, I have to say. and then Baidu in China, which is an old internet Yahoo type company in China, but happens to be probably the leader in robo-taxis in China, which makes it very interesting because there is no reason why we won't all get into robo-taxis within five years. Why would we get in with a human driver when the robo-taxis are basically safer? They're definitely cheaper to operate, at least at scale, they will be cheaper to operate. And they'll be much more profitable for the operators because they don't have to pay the drivers.

25:03I'm interested that you're bearish, as you said at the top in the Mag 7, because I don't think that China can dominate the world at robotics. I don't know if the US for sure would let them in. And as you sort of point to, Tesla's kind of the pure, most pure play robotics, both for taxis and other applications, robotics play in the world, probably outside of China? Well, I mean, if you look at Tesla, you know, he hasn't yet got his functioning humanoid. And I can explain that humanoid doesn't necessarily mean taking a human shape, but his human humanoid robots working properly. And in robo taxis, he's been promising the same thing for a long time.

25:53And as yet, Tesla is way behind Waymo. And Tesla may be in some ways cheaper to operate than Waymo because it doesn't use Lidar, it uses camera sensors. But Tesla's had quite a lot of, it's been a bit accident prone. I don't know, maybe he'll pull it off, but you are paying more than a trillion dollars for the benefit of being invested in Tesla, which has got a car division that is under severe threat from the Chinese. I don't know if you saw that Tesla's deliveries were down 16 % in the last quarter internationally. And having a car business which is going down in terms of deliveries, is adding a huge big fixed cost that would drag down, I think, any upside that they've got for the near term in terms of earnings with robotaxis, if they can successfully challenge Waymo, Wave in the UK, Baidu in China, and so forth, for some time to come.

27:02So it's all a question of price. I mean, you know, I think all of those companies are very attractive at the right price, but the right price is probably 50 % below where we are today. And will it get to be 50 % below? I think so. I think so. I mean, I listened to the very interesting Dan Ive podcast he did the other day, and he's obviously mega bullish and all this stuff. and he may be right but you know to me with the whole u.s market at a cape adjusted shiller cape adjusted p-e ratio of 40 times forward and these particular stocks are you know varying multiples but in the case of tesla vastly higher multiples um it's just not a game i want to play when there is opportunity elsewhere now the other thing is that u.s investors typically can't invest in these Chinese companies.

27:49But if you are based in the UK, you have a better chance of investing in these Chinese companies. So we'll find investments in the US, we'll find investments in Europe, we'll find investments in the UK. But we are also going to be focused very heavily on China and ways to play the Chinese situation. I know all the stories about, you know, you can lose your money in China, etc, etc. But there are ways of investing in China through Hong Kong, as an example, Shanghai Connect, or Shenzhen Connect, make it safer to do so. And we're going to be very, very careful in the way that we make our investments.

28:27But that is going to be a major focus for us in the coming year. And I do concur with the investment banks, mostly out of the US, that say that the robotics market will be bigger than any other market in the world, including food, including transport including uh you know apps and all that sort of stuff uh by the year 2040 i think that is absolutely true we will all need robots in our life we'll all have robots in our life what form they take and how they work is yet to be determined but they will work and we will all be avid users of them i can't think to get my first bump i'm not sure i ever want one but i'm will at some point.