The Thematic Trader

  #8. Gold Bullion, Setting Up to Test the Upside in 2023 From the March 2022 highs, short-term gold prices were mainly dictated by investment trading flows dominated by CTA types. Figure 5a in the lower panel shows the CFTC Net Non-Comm gold positioning change on a rolling six-month rate of change to highlight the trading intensity. In our  November commentary,  we highlighted several factors that indicated that gold had reached a cyclical low. As global oil contracts increasingly use the yuan, gold may return as a settlement medium via RMB-gold convertibility in China's new rival economic and monetary system. The need to build sufficient gold for this facilitation is another possible reason for the massive surge in gold imports from China in 2022 and the early days of 2023. As the de-dollarization process takes hold, gold will likely become much more attractive than the U.S. dollar for any country aligned in this new China-led economic sphere due to RMB-gold convertibility and av

  #7. Energy Transition Metals Continue to Outperform Reality Check: Energy Transition Materials versus Other Commodities From a macro and fundamental perspective, we believe the energy transition investment opportunity is promising, but how well have critical minerals performed on a relative basis? We created charts to provide a visual as to their relative performance against standard benchmarks. In Figure 4a, we created an unweighted basket of seven transition energy metals used in an EV battery. We compared this EV metals basket to the Bloomberg Commodity Index (a broad commodity index) and the Bloomberg Industrial Metals Subindex (base metals). Since 2020, the basket of battery metals has been in a steady outperformance trend relative to both the broad commodity and base metals indices. Figure 4a. EV Transition Metals versus Bloomberg Commodity and Industrial Metals Indices  (2020-2022) Source: Bloomberg. Data as of 12/31/2022. Included for illustrative purposes only. Past performa

  #6. Lithium: Battery TINA (There Is No Alternative) Lithium is the critical element of lithium-ion batteries, the predominant battery type used in electric vehicles and many consumer electronics. These deep-cycle batteries are designed to give power over sustained periods and have a high power-to-weight ratio, specific energy and energy density — reducing the vehicle's weight. Lithium demand is expected to have extraordinary growth, rising from 0.5 MMT (million metric tonnes) of lithium carbonate equivalent (LCE) 6  in 2021 to ~ 3 MMT by 2030 (22% per annum growth versus ~3% per annum growth for mature metals), with batteries accounting for 95% of demand. Lithium began as an EV story as various governments announced the phase-out or elimination of new internal combustion engine (ICE) vehicles by 2030-35. The EV story quickly morphed into a security of supply story as companies, governments and policymakers began to understand the strategic importance of securing these raw materia

  #5. Copper: Structural Supply Deficit and Demand Shock Copper is one of the most vital metals powering the global energy transition, especially given that it is essential for electricity generation and transmission. Copper is critical for wind, solar, hydroelectric and thermal renewable energy and electric vehicles, and the amount required as demand for electricity increases is potentially immense. Renewable energy systems require 5-7x the amount of copper versus traditional designs, and electric vehicles (EVs) require 3x the amount of copper compared to gasoline-powered cars. Inventory levels for copper (and all industrial metals) are critically low (see Figure 2). Over a decade of underinvestment followed by COVID-induced restrictions and supply chain issues hampered supply growth leading to structural supply shortages with the tightest supply-demand balance in decades. The surprisingly post-COVID solid global recovery in demand has put copper in a deficit situation, requiring draw

  #4. Uranium: Clean Energy That Offers Secure Power Generation and Enhances National Security Nuclear energy has the highest capacity factor (amount of energy produced) of any fuel energy source (traditional or alternative) with the lowest carbon emissions. 12  Nuclear energy remains the cleanest, most reliable and safest baseload power generation. Nuclear power is essential to complement renewable sources of energy, such as wind and solar, which operate intermittently. Demand for uranium will continue to outstrip supply as countries worldwide move to build new reactors, restart idle reactors and reconsider the closing of legacy reactors. 2022 was a breakthrough year for positive sentiment for nuclear power and an affirmation of the long-term bullish fundamentals for uranium (Figure 1). The fallout from the Russia-Ukraine war has skyrocketed energy prices in the EU, cascading into crises on multiple fronts. But the most important was the realization that national security requires ene

  #3. An Existential Commodity Supercycle as Competition for Commodities Increases Wars (hot, cold or economic) are commodity-intensive, inflationary and capital-intensive. The West will spend trillions of dollars over the next decade or so to restock, build and secure commodity supplies to 1) rearm their militaries to preserve and defend the current world order; 2) ensure industrial security by reshoring supply chains and production after decades of off-shoring; and 3) build out the infrastructure for the energy transition to cleaner forms. This immediate demand shock from these three broad themes will be highly commodity and capital-intensive but interest-rate-insensitive (inflationary). This sudden and massive demand shock is colliding with a woefully inadequate supply situation due to a decade of underinvestment, sanctions on Russia (the world's largest producer of most commodities) and rising resource nationalism spurred by geopolitical tensions. The level of capital intensity

  #2. Energy Markets are Realigning as Oil/Energy Trade Flows are Re-Ordered Since the peak of the last secular bull market in commodities in early 2011, chronic underinvestment driven by cyclical factors and attention to ESG concerns (environmental, social and governance) have created structural supply shortages and tighter supply-demand balances than prior investment cycles. And now, spillover from sanctions has taken a bigger bite from the supply. For example, the U.S. has sanctioned countries accounting for 40% of the world's oil reserves (Russia, Iran and Venezuela), resulting in much of this oil trade flow going to China at steep discounts. Furthermore, China continues to make inroads with the GCC (Gulf Cooperation Council, an economic union of six oil producers, notably Saudi Arabia, UAE, Kuwait, etc.) for long-term oil purchases and investment in its upstream sectors (refining, storage, transportation, etc.). The GCC accounts for another 40% of the world's oil reserves.