Checking in on Commodities

GoRozen's Latest Views - Article #96

In this 14-minute article, The X Project will answer these questions:

• I. Why this article now?

• II. How does GoRozen View the Valuation of Commodities Today?

• III. What are Their Thoughts on Precious Metals?

• IV. What is Their Position on Gold Mining Equities?

• V. What do They Think of the State of Nuclear Energy?

• VI. And What Does That Mean for Uranium?

• VII. What is the Paradox in Energy Markets?

• VIII. What is Copper’s Divergent Trajectory?

• IX. What does The X Project Guy have to say?

• X. Why should you care?

Reminder for readers and listeners: nothing The X Project writes or says should be considered investment advice or recommendations to buy or sell securities or investment products. Everything written and said is for informational purposes only, and you should do your own research and due diligence. It would be best to discuss with an investment advisor before making any investments or changes to your investments based on any information provided by The X Project.

I. Why this article now?

Goehring and Rozencwajg, an investment firm dedicated to researching and investing in the natural resource industry, published their latest quarterly market commentary, Copper and Uranium: The Coming Divergence, on Friday. I have long considered Goehring and Rozencwajg’s (GoRozen’s) commentaries as essential and required reading, and I have written about their two previous quarters’ market commentaries in these articles:

• Generational Opportunities: A Summary of "The Norwegian Illusion," GoRozen's Latest Market Commentary

• “What is the Cost of Being Early?” A Summary of GoRozen’s Latest Quarterly Market Commentary

In addition to the report just published on Friday, I also reviewed these recent interviews with Adam Rozencwajg:

• Investors Will Be Shocked How High Commodity Prices Go in Historic Bull Cycle on VRIC Media (29,406 views Sep 17, 2024)

• The Next Commodity Super Cycle | Global Macro 70 on Top Traders Unplugged (9,152 views Sep 23, 2024)

Here is a summary of the top takeaways you should know.

II. How does GoRozen View the Valuation of Commodities Today?

GoRozen emphasize the cyclical undervaluation of commodities relative to equities, tracing historical instances such as 1929, 1969, 1999, and 2020. Each period shared common precursors: prolonged bear markets in commodity prices, excessive monetary expansion, and speculative financial market frenzies.

In the current cycle, commodities remain undervalued despite post-2020 recoveries, particularly in natural resources and energy equities. The disparity is underscored by measures such as energy and materials stocks occupying less than 4% of the S&P 500—a stark contrast to historical averages. GoRozen suggest that monetary regime changes, such as shifts away from the U.S. dollar's reserve status, will likely catalyze a commodities renaissance, as seen in past cycles.

The interplay of tight capital flows into the sector and depletion-driven supply deficits support this outlook. Declining investment in new projects exacerbates supply shortages, leading to sharp price increases when demand eventually outpaces available resources. This dynamic mirrors classic commodity cycles, where boom phases are driven by supply constraints rather than speculative exuberance.

III. What are Their Thoughts on Precious Metals?

GoRozen highlight a significant shift in the dynamics of the precious metals market, particularly gold, as Western investors and central banks reengage with the asset class. Historically, Western demand for gold and other precious metals has oscillated, often driven by macroeconomic conditions such as inflation, currency devaluation, or geopolitical uncertainty. After decades of relative disinterest, recent trends suggest a resurgence in gold's appeal among Western investors, marking a notable shift in global market sentiment.

Central banks, especially in emerging markets, have been net buyers of gold for over a decade. However, the recent reentry of Western central banks into the gold market underscores broader concerns about the stability of fiat currencies and inflationary pressures. GoRozen point out that gold's role as a reserve asset and inflation hedge is becoming increasingly relevant as fiscal and monetary policies remain highly expansionary. Western institutional investors, who previously favored equities and bonds, are also revisiting gold, attracted by its low correlation to other asset classes and its potential for capital preservation during periods of financial volatility. This renewed interest could create a structural tailwind for gold prices in the coming years.

The implications for the precious metals market are profound. With central banks and institutional investors strengthening demand, gold and silver stand poised to outperform in an environment of heightened economic uncertainty. GoRozen emphasize that this re-engagement is not merely a short-term trend but a broader realignment of investment priorities as traditional financial instruments face mounting risks. This presents an opportunity for investors to capitalize on an undervalued market relative to its historical role. By understanding the macroeconomic forces driving this shift, market participants can position themselves to benefit from what could be a prolonged and robust bull market in precious metals.

IV. What is Their Position on Gold Mining Equities?

According to GoRozen's historical and discounted cash flow analyses, gold stocks are currently among the most undervalued assets. Despite strong margins and supportive fundamentals, the broader market remains indifferent to the opportunities in gold equity.

Their valuation model incorporates "real option value," reflecting gold companies' operational potential as contingent on higher future gold prices. Such a framework demonstrates that current gold stock prices rival or undercut historical lows like those in 1999 and 2015. This discount persists despite central bank purchases and increasing Western investor interest, suggesting a disconnect between gold's intrinsic value and market sentiment.

Moreover, with gold prices at $2,500 per ounce and robust demand, risks appear asymmetric—return potential is vast, while strong margins mitigate downside exposure. This makes gold equities a compelling contrarian investment, poised for a significant rebound as investors eventually seek safety and value in gold.

V. What do They Think of the State of Nuclear Energy?

Nuclear energy, long overshadowed by concerns over safety and high capital costs, is undergoing a transformative renaissance driven by technological innovation. GoRozen identify molten-salt small modular reactors (SMRs) as game-changers, likening them to the Boeing 707, which revolutionized aviation with superior efficiency and scalability. These advanced reactors address many of the limitations of traditional nuclear power, including high construction costs, operational risks, and waste management challenges. By operating at atmospheric pressure and utilizing HALEU (High-Assay Low-Enriched Uranium) fuel, SMRs offer enhanced safety and efficiency, with the potential to double the energy return on investment (EROI) compared to conventional reactors.

The implications of this innovation extend beyond energy markets. SMRs have the potential to redefine the global energy mix by providing a scalable, reliable, and low-carbon alternative to fossil fuels. GoRozen note that adopting SMRs aligns with the growing demand for sustainable and secure energy solutions, particularly in energy-intensive sectors like data centers. As regulatory frameworks evolve to support these advancements, the barriers to widespread adoption will likely diminish, paving the way for a nuclear revival. The firm views this shift as a critical inflection point, positioning uranium as a cornerstone of the energy transition.

VI. And What Does That Mean for Uranium?

The uranium market has experienced a transformative bull run since prices bottomed in 2018, fueled by structural deficits and a resurgence in nuclear energy adoption. Kazatomprom's reduced production estimates for 2025 highlight ongoing supply-side challenges, with geopolitical and logistical hurdles compounding the tightness.

GoRozen argue that this cycle has a "huge leg" remaining, driven by increasing nuclear demand, notably in China and Europe. Despite a pullback in uranium equities, fundamentals remain robust. The lack of near-term supply growth, coupled with the inability of other projects to meet demand, underscores a bullish outlook.

They emphasize uranium's unique position as an indispensable energy source for reducing carbon emissions. With fuel buyers relatively insensitive to uranium price fluctuations, the market appears primed for further gains, presenting a rare opportunity for investors seeking asymmetric returns.

That concludes Section VI. I have hit a new paid subscriber threshold, so you must now be a paid subscriber to view the last four sections:

• VII. What is the Paradox in Energy Markets?

• VIII. What is Copper’s Divergent Trajectory?

• IX. What does The X Project Guy have to say?

• X. Why should you care?

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VII. What is the Paradox in Energy Markets?