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Gold Miners and Energy Alternatives

The reflation trade is still alive, gold miners may provide an outsized opportunity, and the low carbon emission economy is becoming an important long-term economic driver of prices


  • The reflation trade is still alive, but it has been somewhat under threat lately. Yields have been correcting, US Dollar has trended higher, and Commodities have been weaker.

  • It’s time to be conservative and potentially take some risk off the table. Gold miners could potentially be the conservative opportunity to look into right now.

  • The transition towards a low carbon emission economy is one of the most important long-term drivers of commodity prices. Wind, solar, and EVs won’t be the solution we want them to be.



Yields have broadly continued to move higher in the last month, boosted by:

  • The recovery of the US unemployment rate to 2014 levels of 6.2% and the increased likelihood of

  • The Federal Reserve’s signaling no rate hike until 2024 (despite upgrades to US GDP growth expectations to 6.5% from 4.5% previously), the passing of the $1.9 trillion stimulus package and the ECB’s decision to step up their bond-buying program.

  • Better than expected corporate earnings.

Equity allocation now accounts for 50% of US households’ assets, the highest since the Tech Bubble. Oh, and (as pointed out by Otavio Costa at Crescat Capital) consensus now expect earnings for the Russell 2000 to be 40% higher than its previous high in 2018.

Smile and wave, boys. Smile and wave.


This week marked the one-year anniversary of the March 2020 market bottom. Since then, the S&P is up north of 70% (up 16% vs pre-pandemic market top) as a stark reminder that one of the most important things to do, as a non-professional investor, is to simply be long the market as you can trust it’ll take care of yourself in the long run.

That being said… we’ve received several emails over the past weeks commenting on how extreme positioning is right now. Again, this doesn’t imply the market is about to collapse. One should also be reminded that should the market collapse, there is infinite will from Central Banks and Governments to come in for the rescue (especially when so much of household wealth is now tied to the performance of capital markets).

Anyways, it should serve as a cautionary tale for those of you who want to put some hedges in place (or take some risk off the table). We certainly have (props to Tim for his great call on XOM and his decision to realize those gains… premium wine on its way?)

The first signal comes from yields, which have started moving lower in the last sessions (the US 10 year is down from 1.74% on Friday to 1.62% on Wednesday). Oil has also been weak since the second week of March, and the Dollar Index is now up almost 3% YTD (remember to always have an eye out on the dollar, as it is the key driver of the current reflation). Lastly, buybacks will only come back on April 23rd as S&P500 corporates are in the blackout window. These are all risk-off signals.

On the other side, Goldman points out that the last time money market rates were this low in 2016, money market assets were around $3 trillion. Right now, there’s $4.9 trillion sitting in there and a good portion of it could find its way to assets like equities (they estimate c. $500 billion). That is a HUGE amount (unlikely to rotate all at once), but that could fundamentally set a base level of demand that could help support prices. This market is much more about flows than it is about valuations. Remember that.

Additionally, as flagged by our friend Michael Nicoletos:

  • Global Equities had +$68 billion worth of weekly inflows in the week starting on March 10th, the largest on record.

  • Margin Debt continues to increase to record levels (albeit at a slower pace).

Flows and price action are telling two different stories. What to make of this? In our view, conservativism makes sense, especially after such a strong start of the year, and at least until we hear back from Roger on the macro side.


Speaking of conservativism, 4Q20 earnings confirmed the amount of cash gold miners are currently generating, with major names trading at attractive Free Cash Flow yield valuations (5-10%, or even higher, depending on how much risk you want to take) which should be of interest to investors ahead of market turbulence.

Gold miners are using that Free Cash Flow to increase dividend or share buybacks, especially after ensuring that their leverage is in order.

The average all-in sustaining cost (simply put, the total cost of production) for the industry in 4Q20 was c. $980/ounce, with gold north of $1,700/ounce now. The higher the spread, the more attractive these companies will look.

Gold continues to be significantly under-owned (it’s 0.15% of institutional portfolio’s asset allocation) and gold miners sound to us like the kind of conservative allocation decision we look for given the current macro set up.


In the last quarter of 2020, corporate America turned the page on their Hindenburg-esque earnings calls, returning to sales and earnings growth after three quarters of contraction, beating consensus expectations, which called for another quarter of lower sales and negative earnings growth.

In 4Q20, the number of companies missing their earnings estimates reached near a record low. One should note though, this has as much due to with higher sales and earnings as it is to CFOs downplaying sales expectations in order to deliver a beat (this has especially been a reality in the US, where a larger share of companies have beaten expectations when compared to Europe, EM or Japan, for the last 60 quarters).

Let’s also not overlook most Wall Street analysts’ complete lack of ability to accurately forecast earnings (don’t worry, we’re allowed to say that, Tim used to be one of these crystal ball-wielding excel monkeys). It’s not that they should be doing better, but more that exact forecasts are very hard to achieve.

Interestingly, this was also the quarter in which stock performance, post announcement day, was the worst for companies who beat consensus and almost the best for companies who missed consensus since 2000. This helps frame how much price action is currently being driven by corporate fundamentals – none.


One of the clear reflation winners has been commodities, which had been doing well until a couple of weeks ago (as pointed above).

We still believe that commodities have many reasons to revert back at performing well in the longer run, and whilst we remain cautious in the short term, we will likely take advantage of any overextended sell-off in this segment of the market.

Within commodities, energy transition is one of the fundamental drivers of value. On one side, we have the “green” narrative, which favors all “green” commodities that are necessary to build a low-carbon emission economy based on wind, solar and electric vehicles. On the other side, there is oil (still accounts for a third of all energy consumption), natural gas and overlooked commodities like uranium (fuels nuclear plants). In their latest quarterly commentary, Goehring & Rozencwajg (probably the only names out there harder to pronounce than Lykeion) have covered a lot of ground in breaking down how one should split the difference between energy sources in a world that wants to decarbonize.

Whilst clean energy gets most of the headlines and the funding of SPACs, the green movement started underperforming “old energy” since the reflation trade became mainstream.

Let’s explain why we would expect this to continue, with a great deal of support from Goehring & Rozencwajg (we can’t recommend them enough).

The whole “green” energy narrative is based on the need to lower carbon emissions, which the IEA estimates will come down by 60% by 2040. That decrease in CO2 emission is driven, according to their estimates, by lower energy demand (-25%) and lower carbon intensity (-50%), partially offset by population growth (+20%).

Goehring & Rozencwajg have a significantly different opinion than the IEA for several reasons.

Firstly, energy demand will be higher than what the IEA implies in their forecasts.

  • “Few people are aware that most climate proposals [like the IEA World Energy Outlook] are based on consuming 25% less energy. According to the BP statistical review, there has not been a single 20-year period since their data begins in 1965 where per capita demand has fallen by more than 0.1%, making this assumption untenable”.

  • “Since 2000, non-OECD countries have grown their primary energy demand per capita by 65% compared with a reduction of 10% in the OECD world. Even following two decades of strong growth, non-OECD demand is still 70% below OECD levels suggesting more growth is yet to come. Non-OECD real GDP per capita is expected to double over the next 20 years, suggesting these trends will continue. Instead, the IEA projects emerging market per capita energy demand will fall by 20%. Simply put, this is impossible. Over the last two decades, real GDP doubled, and energy demand rose 60%. Even if this relationship is cut in half, the next doubling on GDP would result in energy demand growing by 30% by 2040, not falling by 20%.

  • According to Goehring & Rozencwajg, if one assumes that demand from OECD countries decreases by 10% (instead of decreasing by 30% as implied by IEA estimates, which would bring energy demand to 1955 levels, when Pelé was just about to start playing professionally) through 2040, and that non-OECD demand increases by 12% (vs decreasing by 25%), this leads actual demand to be 50% higher than what IEA estimates. A big difference.

Secondly, carbon intensity (the amount of pollution per unit of energy consumed) is unlikely to fall by the amount implied by IEA’s forecasts.

  • “Over the past two decades, Germany has aggressively pursued its renewable-centric “Energiewende” plan, taking renewables from 2% of all German electricity to nearly 40%—by far the most aggressive renewable push in the world. Over the same period, carbon emissions per unit of energy fell by only 12%. Not only is this reduction a far cry from the projected 50% reduction in most energy transition plans, but it is also no better than those countries that did not adopt a renewable energy push.”

  • Electric vehicles will likely not deliver the necessary carbon reduction either. In Norway, electric vehicle sales have gone from zero to nearly 60% penetration between 2010 and 2019. Despite such a dramatic shift away from oil, Norway’s carbon intensity has declined by 10% compared with 11% in the US where EVs remain less than 2% of all vehicle sales.”

What does this all mean? Likely, that oil will continue to be an important energy source in the mid-term. More importantly, that the way to think about energy transition is less about solar, wind and EVs and more about Natural Gas, Nuclear, and innovative products such as Carbon Allowances.

Consider this:

  • Wind and solar have poor Energy Return on Energy Invested (EROEI), which basically means that they need a lot of energy to generate output. Within renewable systems, about 25%-60% of the energy generated in wind and solar is consumed internally (vs 3% for a natural gas plant).

  • Historically, new energy sources are successfully adopted if they have higher EROEI than previous energy sources (i.e if they use less energy input to generate output than already existing technologies). “Wind and solar would mark the first time we have seen a widespread shift into a much less efficient source of energy conversion. It has never happened in the past, and the only way it can happen in the future is if governments subsidize wind and solar (as is being done right now), or outlaw old hydrocarbon-based technologies”.

  • According to Goehring & Rozencwajg, the batteries required to build the EV fleet estimated by the IEA by 2040 (15% share of total fleet) will require almost 15 billion barrels of oil equivalent to produce (c. 2% of annual global oil demand will need to be allocated to that).

The IEA’s proposal of (1) wind and solar making up 50% of all electricity and (2) EVs making up 15% of all the automotive fleet by 2040 is expected to save 18 billion tonnes of CO2 emission per year, but getting there (i.e. building the necessary infrastructure) will generate 45 billion tonnes of incremental CO2. Instead, replacing coal with natural gas would save 14 billion tonnes of CO2 emission per year at a significantly lower carbon cost (they don’t disclose it though).

“We believe there is an even better solution that would reduce emissions much further. Any serious proposal to reduce the carbon intensity of energy needs to have several characteristics: it must be very energy efficient as measured by EROEI; it must be able to supply baseload power and avoid intermittency; it must be scalable to meet ongoing global energy demand growth; and it must be low-carbon or carbon-free. The only source that meets these criteria is nuclear fission”.

This narrative should help reframe the Energy Transition discussion around the need for Nuclear Energy. More on this soon.