Bloomberg Audio Studios, Podcasts, Radio News. Welcome to Merin Trucks Money, the podcast in which people who know the markets explain the markets. I'm Merin Sumset Web and today I am speaking with Michael Haig, Managing director and global head of Fixed Income and Commodities Research for Society General R.
Well.
It has been a fairly eventful start to the year, to say the least. In a move that's stunned most of US US forces carried out the audacious seizure of Venezuela's president, Nicholas Maduro. Now, given the Venezuela holds the largest proven oil reserves on the planet, this has major implications for the oil markets, or rather a lot of people think it has major implications for the oil markets.
We're going to get into that with Michael. But also, of course we are not going to let them go without talking about gold and silver and how we can make even more money im precious metals. Michael, Welcome to Merin Talks Money.
Great to be here, Thank you.
Okay, Now, I just I said that at the end about making even more money and gold and silver. Because Marin talks money, listeners I think are quite heavily invested in precious metals, so we will get to that, hopefully we'll have quite a lot of time for that. But I think we kind of got to start with Venezuela, haven't we. I said in the introduction about the massive
oil reserves, the largest on the planet. But of course, at the moment, Venezuela produces very little oil, well under a million barrel today, and this move doesn't really mean that they'll be producing much more in the near future, so maybe there aren't really any implications for oil markets at all.
I think there is something a little bit technical that we have to just bring up before we get into how this affect the global markets. So when we talk about the largest oil reserves in the world, this is what Venezuela says that they have. And actually when we talk about reserves, we talk about proven reserves, and that has to do with the geology, how likely it is that we can extract this easily, and the economics behind it. So unless the economics makes sense, it's not considered to
be proven reserve. So when they announced they had three hundred and three billion barrels of oil in reserves, this is when oil prices were roughly one hundred dollars a barrel. Now they're at sixty, so I don't know the exact proven reserves that they would have, but it's certainly less than three hundred and three billion barrels in reserves, but it's still massive.
Hang on, Michael, can I can I just stop you there? I want to go back to your definition there of proven reserves. Do you mean if it's not economic to remove it extracted at the current oil price, it doesn't count as a proven reserve?
That's right? Yeah, okay, interesting, these things aren't audited all the time. It's kind of a little bit you know, the beauty is in the eye of the beholder. The SEC actually has very strict definitions as to what's considered to be a proven reserve. But price is forty dollars lower than when we had the three hundred and three billion barrel number being released to the market is a bit high, but nonetheless it's still massive. Even eighty billion
barrels would be massive. But we have this number of reserve out there, as you rightly point out, that doesn't match what they produce and certainly doesn't match what they export. So you're right, they produce about nine hundred thousand barrels a day right now and export nine hundred minus two hundred and fifty ish, because that's what they consume locally. Now that difference, that export number has even dropped further
with sanctions. The other thing to point out, of course, is that not all oil is equal, and Venezuela is in a very special place in the sense that it's oil isn't just heavy, it's what we call extra heavy. So it's almost like goo coming out of the ground, and that means that you need to add dilutant or condensate or as we keep an eye on napther, so you need to add that into the solution. It comes out of the ground, and you even need it to refine.
So even if you could manage to change the entire refining industry in the world to use just Venezuelan oil at three hundred and three billion barrels, that would satisfy eight years worth of consumption. Now that's not what's going to happen. But just to give you some context on the size of their.
Reserves, okay, can I just check with you? So where does that additive come from? I think, as I understand it, comes from Russia into Venezuela at the moment, but could also be imported from the US.
Yes, right, yes, So back in the day, about three hundred thousand barrels of naptha was being imported into Venezuela from the United States. That match is about three million barrels a day of production. So right now nine hundred thousand barrels a day is being produced of crude oil and about one hundred thousand barrels is being imported of which in the last month that we had observation it came from Russia and Singapore actually, but normally it comes from Russia and China.
Okay. So with Venezuela can only be a major oil producer and exporter of it has a symbiotic relationship with an exporter of sorry, what's it called again, napthera naphtha. You could only do it if it has a symbiotic relationship with somebody who produces naptha.
It for its very extra heavy oil. It doesn't have just extra heavy oil. It has the majority of it is extra heavy.
Okay, thank you. And just for context, if we talk about Venezuela producing at the moment under a million barrel of oil a day? How much do the really big producers, So the top producers in the world of the US, Saudi, Russia, and they're all churning out well over ten million, right, yeah, twenty.
For the US thirteen million barrels a day. Saudi is roughly nine, but they're cutting back on their production on purpose. They could go up to eleven, Russias around ten, so they're pretty small by all accounts.
Yeah, and then after that you get down to Iraq, Iran, Crea, etcetera, all three, three, fourish and Norway a bit below that exactly, etcetera. So it is possible in theory for Venezuela to get up to sort of two three is right there with three peak?
Oh yeah, for sure. I mean the question is how long that would take?
That's my next question. How long if everything went well for Venezuela. We can argue about what well means, but in this context, let's have well becoming a country that people feel is politically stable and financially stable enough to invest in, and the oil infrastructure is gradually built out as President Trump would like, using the big US oil services companies. How long would it take for Venezuela that are producing much more.
So, if we think about getting to between two and three million barrels a day, most industry experts would say, without rushing the situation, that would take between five and ten years. If you listen to Donald Trump, he said that his ambition is to actually get these things moving
in the next eighteen months. Now, it could get moving, but it's certainly nothing to be excited about in terms of barrel But if we wanted to go back to where we were back in the days of the peak three point four million barrels a day, I'm going to guess ten years.
Okay, So I suppose the answer to the original question, does the political change of Venezuela mean anything for the oil market? The answer is kind of know.
It doesn't mean anything from a barrel perspective. It definitely means something from a sort of a geopolitical perspective, because within Venezuela you have China that is very much part of its industry. Russia is very important in the context of supplying that naptha, and also it's important in the context of because Venezuelan oil has declined over the years, Russian oil has replaced it. Because they're quite similar kind
of gravity levels, viscosity. So if you change the Venezuelan makeup, you change the outlook for Russia, you changed the outlook for China, and then you might get responses from them, which creates some sort of more geopolitical term or potentially and that then could as a second order, affect the oil market.
Okay, And there are other things that may affect the oil market and at the moment as well. I mean you say that OPEK has been restricting output, but there is political shifts in Saudi right which may change that. Yeah.
I mean, OPEK does what it has originally set up to do, which is to manage the market, reduce the volatility, and by doing that, it's essentially cutting its own production or bringing its production back online. Right now, they are still cutting. They were bringing back a lot of oil barrels last year in twenty twenty five. They have cut because they see surpluses rising, demand being quite low, so they have refrained from bringing back their barrels until April.
In my own opinion, they're going to have to reevaluate their strategy in April because we're very, very oversupplied, and that's even ignoring Venezuela. So yeah, there's a few dynamics at play here. There's another dynamic, of course, which isn't real demand. Its Chinese strategic petroleum reserve buying. So that's them putting oil into their commercial as well as government
stockpiles for quote unquote energy security. That has been absolutely rampant over the last six months, maybe even the last nine months, and that is part of the reason, if not the majority of the reason as to why oil prices haven't dropped yet.
So, Michael, let's talk more about this Chinese strategic reserve. Why are they building this? What's the plan?
Well, China imports roughly twelve million barrels a day of oil eleven twelve million barrels a day. They're not a significant enough producer so that they don't have to rely on the international markets. Most of that oil is obviously coming from the Middle East and Russia, some of it a little bit comes from Venezuela. But obviously they're in a very sensitive situation, so they have been building out their spr strategic pratronium reserve and they combine that with
their commercial reserves. Actually that belong to the state owned oil companies and we guess that they have roughly one point four billion barrels in SPR. Compare that to the US, which has probably about four hundred million barrels. So it's gigantic and some people believe, and I think it's a little bit extreme, that this could go to two billion barrels by the end of twenty twenty six, but probably
more like one point five to one point six. If you divide that those billions by their daily import numbers, they're covered for not just thirty days, they're covered for hundreds of days should anything go wrong. So you have a lot of conspiracy theorists that think, okay, well, what if they invaded Taiwan and the West cut off their supplies of oil? How long could they survive for? Who knows what the motivation is. They'll say they're building their
SPR for energy security. There's no rawl in place as to how much they must accumulate. But these numbers are gigantic. But at some point they'll stop buying and that's what will affect be all.
Market slight side question, how do you store that amount of oil?
Well, I mean it depends on where you are in the world. There are natural caverns in the US. For instance, they're called salt dome caverns. They're along the Gulf coast, so these are natural caverns with very thick salt that has been solidified, so it's a natural storage facility and it's very cheap to store it there. But generally speaking,
you're building these facilities. These could be above or underground storage facilities, which by the way, is very metal intensive, so these are basically large storage facilities.
Huh okay, amazing. Well, I mean, it seems perfectly sensible for China to do that under circumstances, wouldn't you say, And obviously they must have much higher reserves than the US if they're going to do it, because the US is such a big producer in China is not. So exactly, this makes sense in not necessarily a scary way.
It does. It's just that we've never seen these kind of builds we have in the past with China, which leads to the question of why they're doing it. But without trying to get too deep into that, it's about energy security.
At the end of the day, let me ask you about the long term outlook for oil. I know you wrote an interesting article the other day, not the other day a while back about comparing whale oil to oil and about how long it took, even even once crudel was discovered started to be used, how long it took for people to stop using whale oil. So you say it was about fifty years until it was only negul
little supply coming into the US. And of course you could argue that's because there weren't very many whales left, or it could just be the gradual shift from waleil to crude oil. And I think the point you were trying to make there was that if an energy infrastructure is set up for one type of energy, it takes a very very long time to shift it to using a different type of energy.
No, that's exactly right, And by all accounts, back in the eighteen sixties, seventies, eighties nineties, where we saw this decline in whale oil imports into the US and the growth of the crude oil industry, you know, the infrastructure was a lot more simple. Let's say, in the world wasn't addicted to oil. Now the entire world is set
up for oil. In fact, you know, if you did want to transition away from oil, that's certainly likely to happen within the developed markets, but I don't anticipate it happening in the emerging markets. In fact, that's going to continue to grow.
Yeah, I mean, one of the unusual things about the whale old story, well, it's very interesting, is it is one of the few examples of a source of energy stopping being used, whereas everything else has been not a transition but an addition. Right, It's exactly more, we use more word, we use more coal, we use more oil, et cetera, et cetera. Everything we add on is simply an addition. So with that in mind, the idea that long term demand for oil will actually fall is that for argument, isn't it?
It certainly is.
That would be very unusual in the history of the world, Very very unusual.
That's right. And if you look at projections from US oil majors, from European oil majors, from industry associations like the International Energy Agency, for example, the EIA out of the USA, the path of oil demand out of twenty fifty is just so wide in terms of opinions as to where we go. Some think it continues to grow,
some things, it declines dramatically from here on out. My own opinion on this matter when you look at the vast array of paths that oil could go, is that I anticipate that we peak at about one hundred and thirty million barrels a day of demand for oil, and then we get a gradual decline starting around twenty thirty five twenty forty.
What is total demand now.
So that one hundred and thirty million barrels a day compares to total demand today of around one hundred and three hundred and four million barrels a.
Day, okay, and then a decline from twenty thirty five as we shift to what or as global population peaks in declines the.
Population angle wouldn't really have a big of an impact there. I think what's replacing oil at that point is natural gas. Obviously, we see a lot of investment in liquefication and regasification facilities around the world. Natural gas is most certainly the transitional commodity that can be shipped around globally, and there's a lot more oppeiing than say something like coal. But yes, I mean the vast majority of what declines for oil by twenty thirty five and twenty forty is coming from
the developed markets. And that switch to natural gas and alternatives, renewables, et cetera. But you know, as I mentioned, if you looked at the growth of demand the developed markets, you'd see it coming down in twenty thirty five. You'd see the emerging markets still increasing beyond twenty thirty five. But the decline in the developed mildly offsets the increase in the emerging markets, and that's why you see the decline.
Interesting. I'm getting briefly back to whale oil. You know, there was there a supply problem there, right, and I don't know if you if you remember, I certainly do, the stress over peak oil a while back, where everyone was convinced that we were actually going to run out of oil, that there'll be no more discoveries, there'll be no more reserves, and we had to make the transition to other sources of energy, not because of climat or environmental worries, but because we were going to run out
of the stuff. That no longer seems a risk at all. We constantly seem to be new discoveries. And did peqil just disappear as an idea?
Yeah? I think so, because you know, we went through in fairly recent history and call it the two thousand to twenty fifteen period of time where technology really was developed to extract oil that we didn't think we had before, at least we didn't think we had assets access to. And what I'm talking about there is shale oil, which is a US story. This was not part of any conversation before the year two thousand. Now, I know, I'm going back twenty five years, but that is relatively recent
and is still an incredibly part of the equation. So that wasn't part of the discussion when we were talking about peak oil back many many decades ago. But it just goes to show, you know, when you're running out of something or prices getting too high, technology has a way of fixing the problem, and high prices have a
way of fixing the prosblem. So even without delving into technological advancements, if prices start to go up because you're thinking about running out of something, this incentivizes the oil companies to invest more in places where you weren't extracting all before.
Yeah, well, as they were saying, commodities, right, the solution
to high prices is high prices exactly. We could leave oil now but stick with energy and move maybe to talking about copper, because a big part of the idea of transitioning into a more electrified world is one in which we upgrade our grids, we make everything run off electricity, and we use renewable sources more, etc. Now, everyone who listens to this podcast, in fact, anyone who reads the newspapers, will know what a problem that is and the huge
infrastructure demands that we have going forward, and that of course has affected the i s of various industrial commodities. And copper is the classic right for the electrification of the world, and we've seen it at new high after new high after new high. Is the solution to high prices? There high prices or are the dynamic different? Today?
Copper does have a very unique outlook actually, because you know, we can talk about electrification of the world and need for copper and other base metals in energy transition. But you know, before we started, let's just step back, before we started talking about energy transition, the whole premise behind copper's rise or demand was purely about urbanization and population growth.
That became less of a subject because we're all pretty much aligne that China has peaked in terms of its use for copper, incremental demand for copper for urbanization needs and population growth. And the question then became, ten years ago, would the incremental demand from electrication demand for copper way the decline that you would get from copper through demand declines from traditional demand, And the answer to that is yes.
So if you go country by country and you look at what they're planning to do their stated policies for electrification, and you add up what does that mean in terms of tonnage of copper, and you compare that to the declining copper through traditional needs, it offsets it. So it always had this kind of bullish story. And we've been talking about this for four or five years. Even before
COVID COVID hits, we didn't talk about anymore. We had lots of other things to worry about, including energy security, in the cost of living crisis, etc. But a couple of things have changed in the last two three years for copper and it's given it an extra leg up. So the first one, of course, is AI and data centers. Right, we talk about data centers and we talk about how energy intensive they are, but let's imagine you go inside
one of these things. It's all about copper wiring, So the demand for copper from AI and data centers even talked about two three years and now we're talking about
substantial amounts of copper needed for that. On top of that, we have to take into account the unfortunate geopolitical situation we're in right now where everybody is basically trying to increase their defense expenditure, and actually that is incredibly metal intensive because you think about aircraft carriers, bullets, tanks, it's all metal and copper is in everything.
So well, it's even just the building of the factories, isn't it. I mean, you know, let alone the products themselves, but the building of the factories requires large amount.
Copper is literally everywhere. If I took a part of this room we're sitting in, I'd find it pretty much in everything that we're touching or looking at. But you're exactly right, it's the building of factories as well, and you have to add into account, of course, hopefully successful resolution between Russia and Ukraine, and then we have to
rebuild Ukraine, and that's incredibly copper intensive. If you look at countries in the past that have had to be rebuilt, the amount of copy that you need to do that is enormous. And you can look back even in World War Two where we had to rebuild most of the world, and that was incredibly copper intensive. So there's lots and lots and lots of things going on in copper that
are supporting its price, not just one thing. So I'm not sure that the cure to high prices is high prices, which we generally say is the way that prices are going to drop. I have a hard time seeing how all of these things lose momentum in the short term here for copper, and I see it continuing to rally.
Okay, and how could the supply of copper go up fast? Well it can't, Well what could we can't? It actually can't. There is no way to. I mean, obviously it's verging on im possible to open new minds anywhere anymore, isn't it because of environmental regulation, et cetera. And so if you get one big mind that goes offline for a short period or whatever, there's no way to compensate for that.
Well, we have we do have inventories within Shanghai, the London Metal Exchange, the comics market in New York. There are inventories and buffers there, but you know that's just what they're there for as a moderate buffer in case
there's a short term shock. Really, but if we're talking about long term needs for copper to cater all these things we're talking about, defense, AI, rebuilding countries, electrification, you need more copper to come out of the ground, and it takes ages to start a new mine, as you mentioned, for environmental reasons.
So should everyone have a couple of existing copper miners in their portfolio.
I don't think it's a bad idea. I mean, this is going to likely go on for quite some time. Obviously, nothing goes up in a linear bottom left to top right hand graph in terms of price performance. But it's one of these things that I'm having a hard time finding reasons as to why it would collapse other than a recession or even a depression. But there's too many things that are supporting it.
Yeah, although even in a recession there's defense facility. Is it's just going to keep being rebuilt, aren't they That's one thing, or recession is not going to stop.
Yeah, and let's get a bit macro here. You'd mentioned, well, copper is one of my favorite commodities because we call it Doctor Copper. It's the one thing that can forecast macroeconomic outlook. It's very very good at that, but it's also very very good at predicting a negative macroeconomic outlook if we were running into a recession. You look at copper prices historically, and we can go back hundreds of years, actually, well at least dozens in the futures market. In the
spot market, we can go back hundreds of years. The copper market is the one that collapses before anything else when you're running into a recession. So I keep an eye on that for that reason. But it's very resilient right now.
Okay, let's talk about the other industrial metals briefly. And one of the things I mentioned earlier was that in this geopolitical environment, on top of the idea that everyone is rebuilding their defense industries, people are also attempting to rebuild their well in the West anyway, their manufacturing basis to rebuild the infrastructure that maybe they've lost it over the last twenty thirty years as a result of relentless globalization.
So if we've got that rebuilding and we've got people slightly concerned for all sorts of geopolitical reasons about all sorts of things, maybe stockpiling various metals. Is it the case that we're not just talking about copper, We're talking about the entire industrial metal base being in a fairly intense ballmarket over the next few years.
Minimum, Yes, some of them more than others. Nicol has always been a favorite as a potential ballmarket metal on the back of electrification. Of course, Donald Trump and the US administration right now kind of backing off from that has made that market a little bit less exciting. Also, nickel was previously losed a lot in primarily in building
as a component in the steel manufacturing. That's less exciting right now because of the decline if you like, or the slow down in China, So they're not as exposed to all these very bullet elements as say something like copper. So that's a bit of an outlier. But having said that, you've hit on something very important because another aspect of what is driving some of this bullish momentum, and maybe we can get into silver a little bit later.
Is oh, we are definitely on our way to talking about zilver. I'm literally gearing up for that right now.
It's about stockpiling, right, critical material stockpiling. So you know, to go back to oil, what countries generally do with oil in terms of stockpiling is that they collect import ninety days worth of oil, put it in storage, and that's called their strategic petroleum reserve. That's how much they're supposed to hold in case something goes wrong. We don't
have things like that for base metals. And so if one was to look at the countries that import things like nickel and zinc and lead, aluminum, copper, et cetera, and you said, okay, well, what if they decided to do the same thing with those metal that they do with the energy complex, notably oil, and by ninety days worth of cover of what they normally import, you'd be talking about a tremendous amount of material that would put these markets in big deficits and that would would increase
the prices. So we're not there yet in terms of critical material and the impact on things like zinc and lead, these smaller markets, but definitely copper and silver come up in this conversation.
Yeah, okay, well let's go on to silver. That one of our favorite topics on this podcast. My co host John Steppek is mildly obsessed by silver, So I'm sorry he's not here to talk to you about it, but let me do it for him. So, given everything we've just said, but also given these stunningly sharp rise in the silver price, is that sustainable? Is this a bubble? And if it is a bubble, is it a rational bubble? Or is this not a bubble at all?
Well, it's fascinating you say that. We try and be very quantity in our analytics at SOB. We've got a model for almost everything, including bubbles. Is a particular market in a bubble? So I test these things out all the time, and a couple of weeks ago we ran it through our silver complex and it churned out the fact that we were in a bubble. And I thought, well, hang on a second, have we been in a situation like we're in right now for silver compared to history?
And the answer is no. What's going on there is the fact that silver, we have to remember, is basically fifty percent industrial and it's fifty percent precious. It doesn't move up and down with gold, but it can't move in a separate direction in the long term. So the gold silver ratio is fairly volatile, which means that they do have different paths. But generally speaking, silver does do
what gold does. It's the market is ten times smaller than the gold market, which means it's way more volatile. The way I explained the silver market, it's it's just like gold but on steroids. Basically, if gold's going to go up, it's going to go up more. If gold's going to go down, it's going to go down with gold, but buy more. But I have to add on top the industrial complex. Now, what's going on with silver, of course, is the fact that we've been running into three years
of deficit. Now, before we got all excited about investing in precious metals and de dollarization, central bank buying, etc. Nobody really cared about the small deficits in silver. But once you start getting a leg up in silver prices and ETF buying and movements of silver from one location to another because of fears of tariff impositions, then all of a sudden, the inventory of silver becomes incredibly important.
And when you're in the market of deficits and you're expecting to have more deficits going forward, that's the support behind silver Now, silver's very volatile. Is it going to come off? Yes, of course it will. Will it continue to rise? I think it will.
Okay, that's what we want to hear.
And gold gold I have actually more conviction on because it's a much more solid market in terms of liquidity. And of course central banks don't really get involved in silver at all, but they're very much in the gold complex. So I took a very interesting experiment because nobody really knows how much more central banks are going to buy, how long this de dollarization story is going to continue.
But if you take a list of all the central banks around the world and you look at see which central banks are holding lower amounts of gold relative to their total reserves. So some central banks, like the US has eight thousand tons of gold, China has two three hundred tons of gold. So these are pretty big. But the really important question.
And we're sure about those numbers, are.
We No, we're not sure about the China number. These are self reported by China to the IMF. We keep track of imports into China from London. We look at what they say they've bought, etc. So we go with the stated number, but knowing there's a little bit of probably uncertainty there, But I think the important thing is is that even if you take that two thousand and three one hundred ton number for China, that is roughly
six percent of their total reserves. So if you're off by another two thousand tons, you're still below twenty percent of total reserves. And that's what most central banks are
aiming to accumulate. So if you take the top, say fifty central banks, and you rank order them by the amount of gold that they're holding as a percent of total reserves, and you exclude the ones that are holding a lot of gold, and you're left with the remainder, and you ask this one question, what if those central banks moved one percent of their total reserves that are not gold into gold, just one percent, And you looked
at all these different countries, whether it's the Philippines, Japan, China, et cetera. These are the countries that have low relative reserves, and you assume that they all did that, then you'd
be talking close to one thousand tons of gold being demanded. Now, remember, in any given year, normally central banks by about seven hundred tons, So if they made this incremental shift to one thousand tons, in addition to the seven hundred that's normally being purchased, that mechanically would lift gold prices about one thousand dollars an ounce.
Okay, which would make the share prices of the miners go even more berserk than they've gone already.
Even more berserk. And by the way, we look at the cost of production of all the different miners, and they are all making money. There is not one gold mine that is making no money anymore.
Makes a pleasant change, doesn't it. It does so from your point of view, it is not too late to buy silver, to buy gold, or indeed to buy the silver or the gold miners.
I don't think it is. I mean, our house view is that by the end of this year, gold is going to be at five thousand dollars an ounce. Now, of course, we said that when gold is at four thousand. Now we're up to almost four thousand, five hundred. I have a feeling, but I'm not sure when this will be that I'm going to have to adjust that up again. If I adjust gold up, I'm going to have to adjust silver up.
Can you see any point, any point in time in which the central banks would hold bitcoin as a reserve asset.
That's a fabulous question. I have devoted a bit of time and attention of going to a variety of different central bank websites and looking at what their policies are on this, their statements, what they say they have, what they might do. I found two central banks that made a statement last year, the Czech Republic and Kazakhstan, that said they might consider holding bitcoin or crypto in their
portfolios alongside gold. But the key question was might, and I think it was the Czech Republic central Bank that said if they did that, it would be a maximum of five percent. So it's a good question, but so far I don't I'm not I'm not concerned about.
That, Okay, So that is not a risk to your outlook for gold. What is the risk to your view on gold? What would turn it around?
A month two months ago, I was asked the question, you know, obviously with higher prices, central banks are going to stop buying because it just is just way too high. And so I looked at sort of elasticities of response of prices to demand across jewelry, across central bank buying, across etf buying, and it's all basically broken with the exception of jewelry demand elasticity, meaning if prices go up, people buy less jewelry. That is a very strong relationship.
It's broken with central banks and ETF buying because those are the reasons why gold prices go up. So it's hard to think about an elasticity response when that is the reason why it goes up. So they are the causal influence. They have a positive elasticity, which means gold prices they buy more. But so far central banks have not reversed course on their statements as to how they accumulate their gold. They still say that this is a very strategic thing. It's not really about the price of
gold right now. That's my concern is if we see a reversal in central bank buying. I do check on it every month using HMRC gold export data out of the UK into places like China. It has slowed down, I will admit that compared to say this time last year. I think if I see another one or two or three months of central bank buying decline, as proxied by exports out of the UK, then I'm going to have to reevaluate my thinking on the role of central banks
and gold demand. For twenty twenty six, but so far haven't seen that. The other thing that people often ask about is what if we saw a massive reduction in reduction in uncertainty around the world, geopolitical uncertainty, because those things are very highly linked to ETF flows. So the average person on the street, like you and I, we don't go out and buy massive gold bars like the
central banks do. The easiest way of us access in gold is to buy gold ETF that's backed by gold, and the relationship between uncertainty and ETF flows is through the roof. So uncertainty is measured in a variety of ways. There's lots of indices out there, trade uncertainty, geopolitical uncertainty, et cetera, et cetera. You can go on the web and find these things everywhere. My favorite is Economic Policy Uncertainty. It's an uncertainty index developed by some professors at the
University of Chicago. You get daily versions, weekly versions, and if you plot it alongside ETF flows, they go up and down together. So the question is is uncertainty likely to come down? And my answer is no, not at least in the next three years.
I can see where you might feel like that. Yes, listen, let's go back if you if you don't mind too energy And how is it best for an ordinary passing to invest in the energy markets at the moment? I mean it feels like it's very very hard to forcast the oil price. I mean you said that forecasts are all over the blaze and nobody even knows whether the demand is going to be up or down over the next decade, etc. So if you want to be invested
somehow in energy, where do you go? I mean, honestly, obviously copper is a good answer, but an answer it isn't copper.
Yeah, well, so for you know, the simplest way, simplest I use inverted commas on that is to access the energy complex through things like ETFs or even if you're a little bit more sophisticated, buying or selling futures or options on futures.
The problem, you know, we don't want to do that. We absolutely don't want to do that. We are simple people here with simple people. We want to buy an equity or we want to buy any ETFEA and we want to buy a straightforward, properly exposed to the physical ETF nothing else with Yeah.
I mean this is this is probably the most sensible way of accessing these markets. Now, I do have to be bearish on oil going forward in case. I didn't mention that before, so I wouldn't.
Probably you weren't quite clear enough on that. That was pretty much what the question was. You were totally clearly there.
Is yes, So I'm not sure I would. I would recommend that to people, But if you were in the interest of getting access in that, I think going through the energy companies themselves, or at least an ETF link to those companies the most sensible. But I would stay away from the actual flat price of energy through futures and options because we have funny shaped curves the forward curve, and if you invest in the front, you're going to lose money as it rolls down the curve, et cetera.
So stay away from that.
We don't do that. What about the oil services companies in the US? Now they for this for this very reason things we were discussing Eliot with Venezuelan and they had bit of a pop after the incident. What about those.
I'm not an equity analyst, so I tend to stay away with making judgments on particular sectors. Within energy and particularly the companies themselves. But you'd have to imagine, you know, aside from Venezuela and potential opportunities there for using US
energy services companies. You know, if you're talking about a market that is going to go through some sort of bearish cycle, which is what I think it's going to do in the next year, at least maybe two years, is I'm not sure I would look at those sectors, Okay.
And the bet can we just go back briefly to the bear's cycle, because I don't think we completely cover up and we will talking about oil that is based on what because we don't expect demand of all off over the next couple of years.
But you yeah, well, we don't expect demand to come off. It's not going to go negative, but the rate of growth is slowing every year, and it will slow all the way up to one hundred and thirteen million barrels a day, as I mentioned before. But it's about the supply side. So OPEK has been cutting oil production slash exports to keep prices at a high enough level so the cost of extraction in the open members is fully covered, but also the social costs within each country is covered.
But at some point they've given up and they've said, Okay, we're going to produce more because we want more of the volume that we've been holding back on, which enables places like Brazil, Guyana, the US and Canada to enjoy that incremental demand growth by adding that supply. So they've reversed course and said we're not doing that anymore. We're
bringing back oil into the market. So when you add in what the develop market is producing, when you add in what Opek is putting back into the market, and then you subtract from that the incremental demand that we might get next year, we end up with a surplus of about three million barrels a day of on one hundred and four million barrel a day market, which is gigantic as a percentage. And because of that, that means that inventories build around the world. They swell up. We've
got plenty of oil, and prices collapse. The reason why they haven't collapsed right now is because China has been buying all for its strategic petroleum reserve, which is a whole different conversation in itself. But when they stop, that's when inventories kind of grow rapidly, and that's when prices come off next year.
Okay, so this is absolutely fabulous news if we think as we do that, you know, all activity is energy transformed. The cheaper energy is the better for everybody. And we know so many horrible recessions have been prompted by high oil prices. Seeing oil prices go lower and exactly high in historical context at the moment, seeing them going lower will be absolutely fabulous for global economic growth.
It totally well. I mean, you know, I'm not talking for a collapse in all prices. Our official forecast as it goes for Brent anyway, which is the more global market, to go to about fifty dollars by the end of the year. And we're at sixty right now. So we're not talking about a twenty or a thirty percent decline. And if I turn around and I tell my economists, hey, I've got some good news oils coming down, what does that mean for inflation? What does this mean for GDP growth?
They don't get overly excited by the level that I've just explained there, but obviously at the margin, this is very positive for people's pockets.
Excellent, brilliant, Thank you, Michael. See how we are ended there on a positive note, see how that works.
We're done.
We are Thanks for listening to this week's Marrying Talks Money. If you like us, show, rate, review, and subscribe wherever you listen to podcasts and keep sending questions or comments and Merrin Money at Bloomberg dot net. Also follow me and John on Twitter or x I'm at marinsw and John is John on The Scorest Effect. This episode was hosted by me baron Sunset What. It was produced by Samasadi and Moses and sound designed by Blake Mabels and
Aaron Casper. And special thanks of course to Michael Hay