A Comment -- General Comments From an Expert (A Commentary)

We saw in the aftermath of the Arab oil embargo that higher energy prices acted as a non-governmental tax on other investment arenas and also on the consumer. That left less capital for other sectors of the economy. Proved to be very negative for the economy and contributed to higher inflation during the 1970s.

If the crisis is prolonged (and he’s not suggesting it will be), the potential for a shock in the economy and to inflation is greater than people recognize. He’s not trying to be a harbinger of doom, and you don’t have to rearrange your life. He’s not a geopolitical analyst. But it’s a contingency that people have to consider.

One outcome of the Gulf conflict is that (at least in the near term) it will tip the worldwide economy into some form of recession. Seeing weakness in the copper market now as a consequence of higher interest rates wreaking havoc with copper speculators. Also seeing weaker worldwide demand for all kinds of inputs (at least inputs that aren’t being transported through the Gulf), and copper is one of those. 

There’s a dichotomy between his very near-term outlook (weak) and his 5-year outlook (extremely strong).

Loves the whole space. It’ll do surprisingly well over the next 5 years. The way that copper mines are financed includes selling byproduct streams on gold and silver. The really big transactions are still ahead, and the market doesn’t recognize that yet.

It wouldn’t hurt his feelings to see Canadians have 10% or slightly more in energy. Traditionally in Canada, oil & gas has constituted about 4% of retail portfolios. So most Canadians are woefully underweight Canadian energy and need to top up. The industry is very efficient and offers high yields.

People who have been listening to him on BNN for the last year are probably already at maximum allocation.

For those investors willing to do the work to understand metals markets, he’d like to see portfolios have at least 5% in base metals. Three years from now, he’d probably like to see that number come up to 10%.

As a consequence of decades of underinvestment in productive capacity, we’re coming into a period of having to ration base metals by price. It’ll be very different from where we are today. He suspects we’ll have a bit of an economic reckoning between now and then. So there will be time to enter the base metals space.

In 3-4 years, base metals will be in the same position that oil was a year ago.

Holy cow, what a ride! We've had a country taken over, we're still in the midst of a major war, now there's stuff going on in Iran, the Fed is in discombobulation, tariffs are on, tariffs are off.

He can't recall having gone through anything like the last 3 months in terms of geopolitical volatility.

Unquestionably, it's this Middle East conflict. We still can't even begin to think about the unintended consequences (second- and third-derivative effects) of what's gone on over the last 30+ days.

Ships that were moving crude, nat gas, and fertilizer and left 37 days ago are now in ports. But there's nothing coming behind them. What's that going to mean for global crops and production of all kinds of things? Gasoline prices in small and emerging economies? They're really hurting.

We can estimate how much this will take off global GDP, but we really don't know at this point.

This ceasefire is very fragile. He wouldn't want to handicap an outcome.

As an investor, it's easy to get caught up in the noise. But when you think about it, what has happened?

Everything else being equal, oil prices are going to be higher moving forward. Insurance won't cost the same as it did in February and before. Will there be tolls? We don't know. They're talking $2M per ship that goes through. That'll just increase the price.

Put all this stuff together, oil prices are now higher. That has an impact that will carry through, but we don't know to what extent.

Take the semiconductor industry. They need helium. What is that going to mean?

It's really hard to know the exact impact but, basically, global costs have gone up. So growth implications have to be ratcheted down. The market hasn't factored all that in yet.

Hard Assets, Low Obsolescence. 

In this kind of environment, cashflow is king. Best cashflow comes from hard assets -- you can look at them and determine their value in terms of what they're producing in terms of revenue/cashflow/dividends.

Low obsolescence means that they have somewhat of a moat (as per Warren Buffett) around themselves. Nobody can replace it in the near term. It's not going away. 

Those are the kind of assets you want to hold at certain times, get paid with that dividend. If growth comes, that's great. But it's going to be there 5 and 10 years from now. You're not worried about 5 days, 5 weeks, or 5 months.

These things survive all kinds of uncertain times. And we're in one now.

Precious metals should be in every portfolio as an insurance policy. It's a diversifier. He uses bullion as that play. Then you have the leverage on bullion, which are the shares (for all practical purposes).

In between, you have something like SII that runs an ETF. Or you could have a streaming company that collect royalties off of the operating companies.

There's a hierarchy -- bullion, miners of bullion, royalty companies, then a Sprott who's an asset manager. He's owned them all.

His position today is that he's trimmed back his gold position dramatically by reducing names. For example, AEM was a 10% holding but today it's at 6%. Same thing with all the names in the portfolio.

Gold hasn't performed over the last 35 days, but it did its job over the last 2 years. He'd be a buyer today. His clients should be at 10% for the insurance component; today they're not quite there at 8%. The equity component is about 7%. So 8 + 7 = 15% in golds today. His gold plays are AEM and FNV.

Preferred shares have been spectacular fixed income investments. At his firm, they look at how much cash is generated for returns and at the growth profile.

There are so many options out there, so he's hesitant to recommend a specific one. His portfolios have held Enbridge preferred shares in US dollars for a long time. Wonderful yield, better than the common shares.

If you can buy a preferred share at a discount ($22-23), you have some upside potential should it be taken out. A lot of preferred shares have been taken out.

You can do an internet search to look for names. In the space, he owns pipeline and financial names. Yields can be 5-6%.

His clients have about 10% in producers, all with a gas bias. Natural gas is a long-term solution to all the green problems in the world. Stability comes from market demand from data centres, etc. Perfect intermediate fuel between today and nuclear power.

As an investor, your head will spin trying to figure out what the price of oil is doing today. First thing to look at is the futures contracts. Specifically, look at December -- price has gone down for the last 2 months. It's not discounting a high price going forward. When an investor values companies, they're valuing them off that long-term price than off the spot price.

His team likes hard assets, low obsolescence. So they both fit. They think longer term. Natural gas is a long-term play, and Canada really benefits from that. If he were to "bet", he'd guess oil is going to $80. If it goes to $120, all bets are off everywhere.

Gold is an interesting play from an insurance perspective against geopolitical concerns. Those tend to be more financial-related -- interest rates and deficits. Hard to handicap. His "bet" would be that the next move for gold is higher, not lower.

His portfolios are 15% gold exposure, and a little under 10% in oil & gas. Hard to tell what's going to happen in the next 3 months.

Can't yet, but it's coming and it'll be hot. Need a good broker to get access to it. He can't get a fundamental handle on what Elon's done. Not sure he'd want to pay the valuation it will attract. 

Looks very expensive. There are other fish out there.