← The HC Commodities Podcast
The HC Commodities Podcast
Copper & Gold: Pricing the physical vs the narrative with Grant Sporre (Episode 300!)
00:51:37
In Episode 300, we take two metals - copper and gold - and compare and contrast their price journey. How does the physical supply and demand story compare to the investor narrative that drove prices to an all-time high? And how has the conflict in Iran test or confirm that narrative. In other words, to coin a term, have we seen the “goldification”of copper and other metals? Our guest is Grant Sporre, a senior commodities and equities analyst at Bloomberg Intelligence. He has had a long career in commodities, both on the sell-side for banks, as well as in operational roles in mining. This is part one. Part two will be recorded live in Geneva on April 22nd for an HC Commodities podcast live event hosted by Bloomberg Intelligence. This is our 300 episodes of the HC Commodities Podcast. Six years of weekly shows undertaking deep dives into the trends and topics with the commodities trading sector. A huge thanks to all of our guests and supporters who have helped us on the journey....
Loading summary
Transcript56 lines
- [00:00]
A
Foreign.
- [00:06]
B
Welcome to the HC Commodities Podcast, a podcast dedicated to the commodities sector and the people within it. I'm your host, Paul Chapman. This podcast is produced by HC Group, a global search firm dedicated to the commodities sector. Today we're taking two metals, one an industrial metal, copper, and the other gold, traditionally a store of value, trying to use their price journey to understand what is physical supply and demand and what is investor narrative to give us some sense of both where these markets are at, what the future might hold and where the world is at. Our guest is Grant Spora, a commodities and equities analyst at Bloomberg Intelligence. He has a long career in commodities, both on the sell side for banks as well as in operational roles in mining. This is part one. Part two will be recorded live in Geneva on April 22nd for an HC Commodities podcast live event hosted by Bloomberg Intelligence. And I can put links in the show notes, although seats are invite only and very limited. As always, you can really support the show by leaving us a positive review on the platform you're listening on. And as always, I hope you enjoyed the episode. Grant, welcome to the show.
- [01:22]
A
Thank you very much, Paul. Yeah, looking forward to a good discussion.
- [01:25]
B
Yeah. So this is part one. We are meeting in person and part of a panel for Bloomberg Intelligence in Geneva on 22 April for an invite only live podcast event which is sort of part two of this discussion. Both of which are trying to take two emblematic metals, one gold, one copper, one very much a store of value, the other very much at the center of the energy transition and trying to sort of do a bit of your high school compare and contrast. And I think what we're doing today is very much sort of digging into the, the physical supply chains of both and then trying to come to some understanding of, of how they price and then start that discussion of where we're seeing some similarities. And obviously this is the role of these metals as an asset class in and of themselves and sort of really pricing the physical against the narrative. So you've, you've kind of got your work cut out, but you are the right man to do the job. And bear in mind, we're recording this, we're recording this sometime mid March, March 24th to put a pin in it and so go out, I don't know, in a week or two. So prices might be double, triple or half what they are today, but we're trying to lean away from the immediate to the, to the sort of, the broader conversation. So that's just a caveat. Long intro. My apologies let's start with copper. Can you set up the physical supply chain for us in copper? Can you just get us all on the same page, how it's mined and how it's processed and what are the sort of the tradable units?
- [02:57]
A
Sure. In its basic form it's got a very, very simple supply chain. So we start off, let's say we start off in a mine in Chile and you get two types of copper. You can get oxide and sulfide. Sulfide you have to process it gets processed into a concentrate, which is effectively a gray powder of, let's call it 30% copper content, which then gets shipped mostly to China and gets firstly smelted into what's called an anode, which is around 99% pure copper. And then it gets refined into 99.9% copper, which is your first, which is also called a cathode. And that's your first saleable product. That's what you can, you can stick onto the, the alamy as part of the stocks or the inventory. So that's the very simplistic route for the sulfide or the concentrate route. In the 80s solvent extraction, electro winning was developed. So what this allowed you to do was essentially take low grade oxides which typically sit on top of the sulfide and you have to mine them anyway to get access to the sulfide you stick it on, you basically create this big heap and you pour sulfuric acid onto it and it leaches out all the copper oxide and directly on the mine you can produce cathode and that gets sold as a saleable product. So there are effectively two routes at which copper is made. And globally it was at the point, the height of the SXEW revolution. I'd say it was about between 25 and 30% of global production was directly produced at the mines. And that weighed on the price at the time. This was in the 90s. That has dwindled because as these oxide caps, if you want, have been mined out, we've had to revert more to sulfide, which has got a longer supply chain and relies much more on China's smelting capacity. And we're down to around about 15% oxide, 85% sulfide globally. That's very simplistically. That's your supply chain in copper.
- [05:10]
B
I feel like there's a sulfuric acids podcast in and of itself. Well tied up in that one totally.
- [05:18]
A
I mean, just as a slight aside, I mean, you know, the country that is most exposed to sulfuric acid, sulfuric acid prices is the Congo. So DRC numbers vary. So it's between somewhere between 40% depending on whose numbers you believe. Some, you know, as high as 70% is basically oxide or sulfuric acid based production. So they are very, very dependent on imported sulfur. So you don't really transport sulfuric acid, it's more sulfur and then you create the sulfuric acid as they build more smelting capacity in the drc. And when you smelt the concentrate and as your, your ore bodies mature, which is kind of what's happening there now, you will have a lot more domestic production. But as of here, right here, right now, that is a region that is, is short and is likely to struggle with the Iran war ongoing.
- [06:13]
B
Can you give us some sense of volumes and locations both for mining and processing? You've obviously already mentioned that China has, has captured that bit much like it has other critical minerals. I want to kind of come on to the sort of the tradable units and that sort of the downstream, if I can use that phrase, trade. But can you just give us some sense of volumes and locations to start off with?
- [06:35]
A
Sure. So yeah, let's put it so refined copper demand and supply, you know, in 2025 was around about 27.5, 27.8 million tons. Total copper demand, and that includes direct use scrap is, you know, around about 9, probably 9 million tonnes higher than that. So now we're starting to get to roughly around 36 million tons. That's your total, you know, total copper demand globally in terms of mine supply. Look, Chile is still the biggest producer and that accounts for around about 30% of mine supply. And then Peru and China itself sort of are second and third with the DRC catching up very, very quickly as well in terms of volumes. So that's, you know, those are your sort of four biggest regions and account for roughly 45% of global supply in terms of smelting and refining because the two tend to go hand in hand. It's about 55% is China based. So you know, that's where your bulk of your smelting and refining capacity sits.
- [07:50]
B
Yeah. And then from a trading perspective there are both concentrate traders as well as the cathode or fine traders. When we talk about the price of copper on the LME and you know, it's going to whatever hundreds of thousands, you know, it's 10,000 right now, you know, what are we talking and kind of what are the, how does the global trade happen? You know, how does that piece figure in?
- [08:11]
A
In many instances the miners will, will supply into the will supply directly to the sort of either the smelters, if it's concentrate or the downstream metal bashes that will produce your wire rod or your cable or your foil which are then used in the downstream applications. So there's a good proportion of direct B2B business to business sales. But what the mining companies will do, and indeed some of the smelters will do, is they will often sell a proportion of their, let's say, their output to traders. Traders typically are more aggressive and in terms of pricing and need to compete for volumes. And by the way, that's why a lot of your traders like Glencore Trafigura want captive supply as well. So they can guarantee certain volume and they had, then they're happy to bid for let's say the spot cargoes at the margin if you like. So that's now the proportions. I'm not, you know, it's rough rule of thumb, it's somewhere between, you know, 10 at the very low end, 20% at the sort of high end, particularly when it comes to concentrate of the market is spot based. The rest is pretty much contract based. So it's actually certainly in concentrate. The spot market is a lot smaller than the overall market.
- [09:51]
B
So that's the supply picture. And just before we move on to demand, one of the challenges here on the supply side is it takes quite a lot of time to go from new resource discovery or indeed known resource to, to exploitation. Right. Can you just give us some sense of how long it would take to set up new sources of supply? Kind of. Because that does play into this, the narrative piece that we're coming on to.
- [10:16]
A
Yeah, totally. The, I mean the sort of timeline or the project timeline for a mine. I mean very optimistically if you've got, you know, if everything goes to plan, it's, you know, it's, you're lucky to get everything done from let's say from first discovery to first metal in sort of under 10 years. That would be, you know, an absolutely fantastic outcome if you've managed to do that. Typically it's sort of, you know, 17 years is the average and you know, I've seen other estimates where over 20 years is kind of from first discovery to first metal. So I suppose it depends on, you know, and it depends on where you want to sort of take your, take your starting point from when you first do the first drill hole or when you have your reserve and you have your resource and you've got a good idea of what is there and then you want to take it to let's say a bankable feasibility project, there are a couple of sort of aspects you can't really rush. One is typically you have drill campaigns. So you will go and you know, you will have a whole series of drill rigs and you will drill a lot of holes in your ore body. You'll take away the core samples, go and analyze them, put them in a model and that'll give you some sense of what your ore body looks like, you know, scale and quality in terms of grade and let's say the geometry of the ore body as well. Now you know, the judgment you have to make as somebody who owns the project and wants to develop it is do I have enough information, quality information to move to the next step. And you know, it's obviously a risk, risk decision. And more often than not, because these, these, these projects are so capital intensive, you know, we'll, we'll do another year of drill, drill holes just to get our confidence levels up. So that's something that you know, companies don't really like to rush. And then the next bottleneck is all, is all the approvals and you know, and often it's an environmental impact assessment which can be done very easily. Again, you can't rush it because often what will happen is, let's say the authorities will come back and say okay, we need more data. And then you have to wait typically a year to collect rainfall data, you know, water hydrology data, etc. And you know, there's just no way you can rush it. So that's, that's what takes the time to get you approval to actually mine the ore body.
- [12:58]
B
Yeah, and there's nothing ultimately is really changing on those approvals despite sort of lots of stated goals by governments. But let's, I mean the, let's talk about the demand you've given us kind of the current state of demand and maybe I can kind of, you know, I think it's a pretty well trod story in terms of energy transition, the electrification of everything and you know, aging and certainly in the west to store it. So in the, in the, in the global south and developing nations, it's obviously probably building more likely to be building grids than building gas stations is some of the theory. And in the west it's, even if there weren't a story of electrification, the smart, modern, modern grid technology requires upgrades across the board of existing grid infrastructure and wholesale replacement. Sort of Those things last 50 years and everything's coming to, to the end of its lifespan. And copper so therefore has become Emblematic of kind of the future world. And then people line that up against that 17, you know, 10 year to 17 year average story and suddenly people start seeing a big gap. And this is where you kind of get this, we're starting to see this narrative. Can you just give us some sense of demand today and kind of where the, you know, where sort of the, the most conservative estimates are at and can that be met and then we can come on to that narrative?
- [14:14]
A
Yes, just to put it into context, I mean, and you know, it varies from let's say decade to decade, but since the, you know, the second end of the Second World War and we had the reconstruction of Europe up to today, the average refined copper demand growth is around two and a half percent. So it's a, you know, in rough terms about GDP basically. Yeah, 0.7 times GDP. That would be the multiplier. It's not quite one, it's not quite a half, it's somewhere in between as a sort of a very, very rough rule of thumb. So I suppose coming into, let's say the end of the 2018, 2019, the narrative was okay, China is maturing, so 2.5% is not sustainable and copper demand growth is going to go through a decade where or two of sub trend growth of, call it one and a half to 2%. So that was quite a sort of a, let's say a negative, quite a bearish sort of view of the world. And then we got adoption of EVs and a lot of renewables which are a lot more copper intensive than let's say the old infrastructure or internal combustion engines and fossil fuels. And then the debate became okay, well what's, what's, what's the growth going to be? Is it going to be around, you know, is going to be three and a half percent? Is that going to be the, the trend growth for the, you know, the 2010s and into the 2030, sorry, the 2020s and into the 2030s or how are we going to, you know, how's this going to shake out? So, and my sort of overarching thesis will be that you are going to get some maturing of China's demand and that has been the growth engine for the last two decades and that is going to slow. So if that slows to around 1 1.5% and we have electrification which goes on top of that. Yes, potentially you get slightly higher than trend, so you get 2.5% to 3% demand growth. Now the reality is over the last, let's say, you know, since we had the recovery from COVID demand is or refined demand has actually been growing at around 3%. So again higher than trend. And you know, last year was actually a particularly strong year. And you know all the numbers that I can sort of triangulate is it's around real demand was growing at about 4%. So that's a very, very strong number. Given the backdrop, especially last year we had a lot of the tariff uncertainty which one would have thought would actually hit demand and it didn't really. So now, I mean going forward obviously we've got a lot more disruptive forces in the world and we did see China slowing quite dramatically towards the end of the year. So my sort of forecast is that for the next two years we probably see growth 2 to 2.5% demand growth and that's actually not particularly bad. So even in an environment where I'm a little bit more cautious on the outlook for copper demand growth, I'm still roughly at or just slightly below trend. And I contrast that with mine supply which has been struggling to grow at that rate. I think last year it grew around about 1% and probably is going to grow less than 1% this year. So you know, the mine, the, you know, even in a, in a relatively cautious environment mind supply is struggling to keep up.
- [18:10]
B
Yeah. Is there as you sort of map out that sort of somewhere between 2.5%, you know, 4 being that very aggressive number. Is there a percentage growth? And I recognize this is sort of a two sided equation. There's also of, of the GDP and GDP might slow significantly what's going on around the world, global recession. Is there a number as a percentage at which sort of it's kind of panic stations because perhaps you could weave into this, you know, how, how elastic copper demand is, you know, and what percentage growth you really start to see a sort of a 10 year Delta grow, a massive gap between what even the most optimistic mining forecast and recycling forecast could achieve.
- [18:52]
A
If you go into, into a recession then demand typically contracts and it will contract 5, 6%. So quite dramatically because it's always difficult to really tease out the difference between real demand and apparent demand. So there's a compounding effect when you have a recession or a dramatic slowdown is that people destock. So your actual demand number looks worse than it actually is. But again from trying to dig through the numbers it's not very easy to okay what's destocking and what's actually a decline in real demand. You can make some good guesses but to get exactly right is quite challenging. The work that we've done, I've done previously, was actually looking at industrial production. And if industrial production slips below 2%, typically that's when we start to see copper demand struggle to stay in positive territory. So anything below 2%, industrial production, that's when copper struggles. So that's the number that I would keep an eye on. It's a bit difficult because it's not as widely reported as gdp. And if you have to go onto the, let's say the Bloomberg terminal, there's no consensus number for ip, it's all gdp, but that's getting slightly closer to the action if you use industrial production. The energy and resources sector is experiencing unprecedented changes. To help navigate this change and capture its opportunities, HC Group launched Enco Insights, a global advisory network dedicated to the sector providing senior advisors and subject matter experts to investment and infrastructure funds, law firms and corporates. Enco Insights leverages HC Group's 20 years of connections in energy and commodities to give clients the expertise they need when the stakes are high and insight matters. Learn more@encoinsights.com Gold we're going to come
- [20:56]
B
on to is is quite elastic, right? Whereas. Because it is, you know. Whereas. Well, you can challenge that, you know, where, you know, copper demand seems like one of those essential things that if you, you know, you need a grid come what may, and governments are going to pay, utilities are going to pay come what may for it. How inelastic is copper demand? And secondly, you know, can you. Is what we're trying to lead up to is this sense that you've seen incredible price rises in copper and obviously there's been this narrative building around it and we're going to come on to what that's meant for sort of the fast money, you know, in, you know, asset managers coming into the space with that narrative in mind. But can you just give us some sense of kind of, you know, is. Is do is mine is supply growth. At what point does supply growth really start to give everyone a real concern? Alternatively, when copper demand, let's say is at 5%, does that suddenly we're in a new realm of what copper could cost?
- [21:53]
A
Yeah, totally. So on the flip side, I mean, this is. And you just left to look at the price action that we saw last year. So there was a series of three fairly big mine disruptions, the last one being Grasberg. And that was really the catalyst that sort of boosted the copper price to well above $10,000 a ton. So, you know, so on the supply side that's, you know, it's the supply shock that drove it, but against a backdrop of pretty robust demand. So, you know, I've seen where we have supply shocks against a very anemic demand environment, you know, sort of, let's say 0 to 1% and the market has totally ignored that. So that, you know, it is against the, you've got to look at those two factors in conjunction. But certainly if we get to sort of consistently so we've had two years, 2024 was 3.5%, 2025 is 4%. And I think we saw that rally in copper towards the end of last year. But what that precipitated was a bit of a buyer strike, particularly out of China. And we saw a lot of hidden stocks make their way to the lme. So all the hidden stocks became visible again. And part of it I think is effectively produce or downstream producers saying, look, we're just not prepared to pay that amount of copper. So there is a feedback loop and we have seen some demand, I'm reluctant to use the word demand destruction because you're right, it is elastic and ultimately buyers will have to come back to the market because grid plans are going to get executed, renewable build out is going to, it will be executed because it's typically government driven, particularly in China where we will see some, some, some, let's say some elasticity, elasticity of demand will be in vehicles, will be in sort of air conditioners, things like that. So the consumer end of the end of the market. But again, it's not, you know, the actual copper price or the actual copper value in these downstream items isn't particularly onerous. So it's got to be particularly high and really impact the price along with a lot of other factors before we start to see demand destruction. So I think there is a certain resilience. But you know, there's no doubt that if we have a recession and GDP contracts, you know, certainly, you know, my experience is that copper demand contracts as well and that we can't get away from, I don't think.
- [24:42]
B
No, no, but I'll ask sort of the final question here because this is sort of weaving in that kind of pricing, the physical, where we focused on and then kind of this narrative piece. One of the, one of the interesting factors is of course at the beginning of this year copper going to an all time high, huge, you know, demand from a, you know, security of supply, you know, critical mineral piece and the energy transition and all that good stuff, irrespective of concerns over China's economy to Iran. War starts and copper prices, you know, drop precipitately and same as gold and almost identically as gold. And suddenly that introduces the narrative that can, you know, this isn't about sort of industrial, you know, this isn't. And well, let me raise my question correctly is that that would seem to me more of a story of a flight to safety asset managers getting out of that narrative than necessarily concerns over worldwide recession. And I guess that introduces this idea of trying to tease apart what is kind of the how much is copper being affected and price to global money flows buying into that energy transition narrative and the AI story that's sort of even more predominant.
- [25:57]
A
Yeah, it's massive question. Yeah, no, it's a big question, but totally you just have to look at the price of all metals at the end of last year. So from about August we saw big rally in gold, big rally in copper and the sort of minor precious metals, if I can call them that, silver, platinum, palladium, also caught a massive bid in terms of their prices. So they rallied significantly. And I think that is definitely indicative of a lot of, I wouldn't, I don't know if it's hot money. Well, it may seem to be given that, you know, the sell off that we've seen, but a lot of, lot of lot more investor interest, so interest in the commodities more as an asset class portfolio for portfolio diversification reasons. And it was led by gold. So gold was actually the sort of lead indicator and it pulled all the metals up. And we just have to look at silver as well, which is probably sits somewhere in between gold and copper as a quasi industrial, quasi precious metal. So I think there was a lot of interest and the last, I think if I have to sort of try and tease out what the, what the sort of hot money versus fundamental price is we saw when we had the initial supply disruptions in copper, we saw the price go to above 10,000 and it fluctuated between 10 and 11,000 and then it rallied to well over 13,000. And I think that last, you know, in my view that last sort of at least $2,000 a ton, $1,500 a tonne is more indicative of, of investment flows as opposed to fundamental, fundamentally driven, you know, supply, demand price.
- [27:58]
B
That's been fascinating. Let's move on to gold and use that as our segue because that sort of ties up nicely with where actually suddenly we're in a very, a different realm of, of this is largely about sort of as an asset class. And investor sentiment and so forth. And I was just actually reflecting with my colleague this morning who I was in Dubai with, you know, what, a month ago or something, two months ago Valentine's Day. And so we both decided that we buy our respective partners a gold bracelet, you know, nothing. But we were both a disappointed with how small they looked for the money. And now looking back it now I think I bought gold at the very peak you bought the top in the history of humanity. So it says that, you know, I shouldn't be anywhere near sort of both trading or making investment decisions for our family. But let's, let's tell that story before we get onto it because obviously this is a very fascinating story from a sentiment and a demand and this weaves in inflation as well and all those different stories that we've kind of been tracking around de globalization, de dollarization and inflation. Just before we get there, what is the physical supply chain of gold?
- [29:15]
A
So the physical supply chain of gold is actually a lot more convoluted. And you know, here I'm not an expert on this as much as I would understand copper, but certainly again it starts at the mines. You know, this is, let's call it new gold. And the miners will typically produce a, an intermediate product if they don't have a cast house on site where they will produce, you know, pretty much 99.9% gold or they will produce a Dora, which is, you know, it's a mixture of copper, sorry of gold and silver or gold and copper, it's a bar, but it's, you know, typically 90% gold. And they will then send it to a refinery. You know, my experience is South African. We used to send it to the Rand refinery. When I used to work on a gold mine, every sort of Friday, a helicopter would land and take the bars from the cast house and fly them over to Rand refinery under heavy security. And the Rand refinery would refine it into, you know, typically bars which would then be sold for investors, you know, be it investors, retail investors, institutional investors, or in some cases central banks. So I mean that's the very simplistic supply chain. But of course there is all of this gold that has been mined over the centuries that still is with us that people have hoarded and collected in coins and bars typically or various bits of jewelry or ornaments. And that infrastructure is a lot more opaque and that some investor classes will prefer the bars, some will prefer coins, and a lot of it will be, let's say in the vaults underneath the bank of England will be stored there Typically that's more of the global central banks, but how that flows and moves, that's a little bit more difficult. You've got to be an industry insider to really understand how the sort of the store of physical gold moves around.
- [31:37]
B
It's kind of the, the feature, not the bug. Right. I mean, what the, the goal is the, just in terms of industrial applications, I mean how, you know, I think sort of some 7 to 10% of gold is used in industrial applications, particularly obviously in electronics. Is that growing like what's that bit of the equations before we sort of move on recognizing at the moment it's relatively small?
- [32:03]
A
Yeah, no, it is small and arguably that is pretty much. It's been shrinking, to be honest. So if I look back, let's just go from 2010, the industrial demand or technology industrial was around 420 tons. That's dropped to around about 300 tons annually. Okay. We saw a little bit of a rebound. So with a lot more electronics, particularly some of the data centers wanting, you know, high end electronics, it's bounced to 320. But essentially, you know, I would say that as we've seen higher prices, you've certainly seen demand for jewelry and any sort of technology or industrial applications. You know, we've seen demand destruction there because of the price.
- [32:54]
B
Right. So if anyone comes to you and there's a gold bug because they think it's the, you know, the crucial element in chips.
- [33:01]
A
Yeah, no, no, that's definitely not going to be the case.
- [33:05]
B
You surely shouldn't listen to that particular TV advert. Okay, so this is very much a story then of a store of, of value against, you know, fiat currency to use. Yeah, the lingo. And one that unlike Bitcoin, there's no on ramp or off ramp that's necessarily going to get tracked by a government that is about to, you know, take control or whatever, whatever, whatever you're listening to. And in time, it would strike me, I remember precisely in 2008, you know, having a series might just, just arrived in the US and had a series that. I'd never really heard the term gold bug before, but there was definitely some gold bug commodity traders who were, you know, encouraging you to do everything you could to buy bars of gold and bury it in your garden. Not that I hadn't a garden in my apartment, but can you, can you, you know, can you just tease apart the demand for gold and, and essentially trying to, you know, governments versus people and kind of jewelry versus store of value and kind of, you know, a hedge against crisis Basically.
- [34:08]
A
So, yeah, I mean, gold is quite mercurial, so I would say it's not a. It behaves more like a currency than a metal itself. But in terms of, you know, demand, we've got, we've got jewelry demand, which is around, give or take, is the biggest sort of component, single component. And obviously investment demand is bigger. But if I break it down into the various categories, so, you know, jewelry demand is probably around, is around 2,000 tonnes a year that has been falling, I must say. It's, you know, it's only around about. Well, I think around about 1.5 this year because of the price impact. You know, it's just gold isn't that affordable for. From a jewelry perspective. Now, particularly in places like India, the jewelry will effectively be a store of value. But in many, many other cultures and countries it's. It's less so. And even in China, it's becoming less and less so. People want, you know, will want the bar as a store of value, not a jewelry piece. Bars and coins, you know, just round numbers. Around 1.2. Yeah, 1.200 tons and then eat one.
- [35:33]
B
And this is where that's like that sort of 25.
- [35:36]
A
Yeah, yeah.
- [35:37]
B
Jewelry sort of 50 bars and coins. 25, is that, you know, 30?
- [35:43]
A
Yeah. So. So we're talking in terms of total demand around, let's call it 5, 5. 5,000 tonnes. Jewelry demand, okay, has shrunk from, let's call it 20%. It's down a little bit lower now, just below 20%. Bars and coins slightly less. That's about 15%. Central banks, which are now, you know, have been a big driver. They are now, you know, from being sort of almost like 10% are now, you know, nearly 20%. So they've really stepped up their allocation and then the swing factor has been ETFs. So this is a relatively new feature of the gold market. And when I say new since the mid-2000s, where you've had physically backed ETFs, and the reason for ETFs is simply that, you know, if you buy gold, you've got to store it and insure it and make sure it doesn't get stolen. And if you're going to hold a lot, you probably don't want to hold it in your house, in a safe, because you're vulnerable to theft. So you'll probably pay somebody to store it for you. And that carries a holding cost. So that's why ETFs were born. It's an easy way for you to own physical Gold. So yes, it's a contract, but it has to be one to one backed up by physical gold. So that's where you see the ETFs and that has been a real swing factor over the last couple of years in the gold market. So we saw ETF outflows up until last year. And then last year the key thing, the key swing factor in the gold market is we suddenly saw big inflows into ETFs, particularly in China, as that sort of investment avenue gained a lot more traction.
- [37:42]
B
Hello, I'm David Hunt, founder and managing
- [37:44]
A
director at Hyperion Search. Founded over a decade ago, Hyperion Search
- [37:48]
B
has helped organizations from major utilities to
- [37:50]
A
startups recruit their leadership teams and key individual contributors to accelerate both their growth
- [37:56]
B
and the energy transition.
- [37:58]
A
Our three main verticals are renewable power, energy storage and the mobility. The energy transition and the talent that delivers. It has been our passion since day one. To find out more, visit hyperionsearch.com or listen to my Leaders in Clean tech podcast. Available on all platforms.
- [38:15]
B
By the way, on those ETFs, they, you know, these are set up as such that they're just centralizing warehousing. But you, you, you, you do have that physical share backing the, the etf.
- [38:26]
A
Yes, totally. I mean you get other exchange traded products where it is purely a financial contract. And in theory that doesn't have a direct impact on gold supply demand. In practice it does because some of those contracts will be backed up. Somebody will then go out and buy gold. If they're going to sell a contract, they will buy the gold to ensure that they are hedged and only clip the margin on the contract. But you know, they don't have to, they can do it through other financial instruments. So you know, when we look at the gold market in terms of demand, we look at it purely on the physically backed ETFs, just because, you know, we know that we can account for it. You've got to have the gold physically being stored if you're going to issue a contract.
- [39:14]
B
Yeah, okay, so let's tell this story in one of. Okay, you can see gold running up, right? You can. There's the narrative about that and correct me if I'm wrong, is essentially a story of U S Government fiscal irresponsibility, dare I say, and concerns over the dollar and you know, and d in inflation devaluation and so forth and, and then at the same time that dollar being we've covered on this podcast being, and I'm saying it not you, but weaponized to an extent sure, sure. And, and so forth. Then gold is as I'm, as I'm in the Dubai gold suit buying my sadly small bracelet. Gold is at an all time high on that narrative. And then the US and Israel attack Iran and gold prices go from 6,000 to 4,500 or whatever it might be, which seemed, I think, very counterintuitive based on that narrative of one of protecting against sort of de. Globalization and digitization and so forth. Can you help us understand kind of what's, what's going on there? And from an investor standpoint and from
- [40:25]
A
a central bank standpoint, sure. So look, I mean the central banks, they have very much programmed buying, so they wouldn't have caused the sudden, you know, they wouldn't have suddenly dumped a whole lot of gold onto the market, particularly at the, you know, at a time of elevated risk. But you know, the way I think about it is that is effectively an insurance policy against bad things happening, particularly bad geopolitical events that will spill over into financial consequences. So, you know, I think the run up in gold towards the end of last year was partly momentum, a bit of a FOMO trade as well. But if you want to sort of let's, let's take those factors out of it. In part it was anticipating a geopolitical event happening in the world. It's like an insurance policy. Once you buy a whole lot of insurance and once that bad event happens, you cash in your policy. So to a certain extent, I think that's what happened with gold is it was pricing in very elevated geopolitical risk, U.S. policy uncertainty. And we run these, we call them regression fair value models. And we try and sort of say, well, you know, where is gold being priced relative to a whole host of other financial yardsticks? And gold was looking particularly expensive versus almost everything. And even when we took a basket of these things and we bundled them together in a regression model, gold was screening us, you know, almost at some points $2,000 above what we would sort of say was fair value according to these models. So it was pricing in a pretty bleak world. Now, as I say, a lot of that I think was momentum trade as well. So in a sense it is counterintuitive. As the world gets more scary, you buy more gold. But I think in this instance, gold had already priced that in and it was a classic market case of buy the run up to the event and then sell it, sell it when it happens. So I think that was certainly one component and the other one was when you have a tussle for safe havens. The dollar and gold often compete and I think in this instance the dollar won out. So the dollar sort of dollar went up and gold went down and that kind of made sense as well. And then there's also the factor that if we saw the global financial crisis as well, gold did go down in the first instance in, in terms of, if you have to cover margin calls and you need some, you know, you need some cash, gold obviously done very well. And, and that was the funding trade as well. Yes.
- [43:14]
B
You can't, you can't buy an airplane ticket with gold, basically.
- [43:17]
A
No. So you needed cash, so you needed,
- [43:20]
B
you needed dollars to get the hell out of Dodge and to buy a 1911. As one of our previous guests pointed out, when you do those regression models, just to understand that a little bit, you know, that is, are you, you're sort of looking at all of these dependent possible variables and figuring out which one is the most salient in that or the big driver. And you know, that essentially was pointing at kind of the fear of global con, of this particular conflict coming out was kind of the, that $2,000.
- [43:49]
A
Yeah. So I mean, look. Oh, you know, we'd run, you know, we have a number of different sort of, let's call them variables that we can put together. And for this one we use, you know, we would use things like the 10 year tips. So obviously gold being a hedge against inflation. Yeah, a hedge against inflation and a non yielding asset, typically. But look at the, you know, the inflation expectations as well. And then there are these great indices that we have on the terminal. So there's a US Policy uncertainty index compiled.
- [44:25]
B
What's that at?
- [44:27]
A
Yeah, no, that's been, that's spiked up to, it was, you know, really spiked on, on, on a few events. One is when Covid hit. So then there was massive uncertainty and also when Trump was inaugurated it spiked massively. And now with, with the Iran war, it spiked massively. So you know, slightly counterintuitively, you know, and typically gold has been pretty much positively correlated to when we have these spikes. But you know, it's compiled by some economists, Baker, Bloom and Davis and we, you know, we put it on the, on the Bloomberg terminal and we use the, the output. Then there's also the geopolitical risk index and that's done by, you know, so we. Matteo IO Caviello and again that spiked massively with the, with obviously with the Iran conflict and it almost got to similar levels as when Russia invaded Ukraine. So we use those indices and we create a fair value out of that. And we try and it's not trying to, how can I say it? It's not trying to sort of say this is where the price should be if it's above this value you sell. Where it's, if you go below this value you buy. It's more just to say let's get a sense of where gold is being priced versus a lot of other sort of financial yardsticks. And as I say certainly from August last year up until very recently when we had the sell off, gold was looking very, very expensive. Actually by the way, just while I chuck in Chinese, China's property prices as well. Because in China, you know, the go to investment was, was property and you know, as property prices have been falling, gold has you know, gained in popularity as another place to go and you know, preserve your wealth because property's not doing it for you. So you know it's those kind of
- [46:29]
B
sort of where they don't have also the sort of the shadow banking world has also been closed off as well. So you've actually got very, very few options over there with, with what's going on. The, the sort of the, I mean this has been a wonderful sort of part one, the part two. I mean what has happened in that big run up in gold and that narrative has been that the trading houses have added gold desks to complement their base metals desks.
- [46:55]
A
Right?
- [46:57]
B
That has been a big trend of the last year and a half. I think as we've seen from this, you know there's a. Copper is much more rooted in an industrial world and that fair value would, and tell me if I'm wrong here would be sort of easier to divine or get some sense of. There are fewer, fewer variables kicking around. So, so the kind of like you know the, the what does that mean and why are they doing that and, and how will gold tracker long term? Because and, and, and I guess at the same time is the kind of the, the goldification of copper, if I can use that phrase as well and some of the other industrial, you know, critical minerals in general, tungsten you and I were talking about, you know, off air, you know, how much is this the narrative that's out there in general in your mind is is has complicating matters or inflating values and also amplifying the swings as, as these minerals sort of enter the have gone from kind of being obscure columns in the back of the Wall Street Journal to front page of the Wall Street Journal and front page of the, of the ft.
- [48:05]
A
So I must be honest, I'm a little bit, you know, sanguine about, you know, about the sort of, let's say the, let's say the copper being perceived as an asset class akin to gold. And for me the copper price by and large was underpinned by fundamentals. So if I look at my supply demand balances, copper has been in a deficit since 2023 and I think it's going to stay in a deficit for this year. Obviously depends on the duration of the Iran war. The longer it drags on, the more likely we, we're likely to flip into a surplus. But let's just say if we have a quick resolution, I know that's looking less likely, but if we have a quick resolution, copper is probably going to be in another year of deficits. So, you know, I'm very happy. Well, I do think that the price is fundamentally justified by, you know, industrial supply demand. There may be a little bit of froth on it where we've seen a, the narrative of, you know, the whole sort of thematic investment on AI and decarbonization add a little bit to the price, but I think that's always been the case and we've seen the, you know, I've seen that in the, in the sort of late 2000s when it was, you know, we had the China investment theme and copper prices rallied particularly hard and some of it wasn't always justified by fundamentals. The copper wasn't as tight as the price would have suggested and there was a bit of investor interest, but in my experience it tends to peter out quite quickly. So I don't see the risk that copper is really going to suddenly turn into this metal where. Akin to gold. I'm not in that camp and you know, lots of others sort of will disagree with me, but I think it is ultimately it does revert to fundamentals.
- [50:16]
B
Yeah. And every time I go to the FT conference I sort of walk out thinking that, you know, copper is going to go to the moon because there is, there is, you know, that narrative is very much, as you say, underpinned by some, some pretty GDP independent events that need to happen, not least just replacing and upgrading the grids around the world to meet the new technologies. And yeah, gold, gold is, is, is a much more finickity beast when it comes to some of these things. I think we've, we've done our job in part one and look forward to our panel meeting in person in, in Geneva on April 22 and hosted by, by Bloomberg Intelligence. And you know, we'll see what state both markets and the world is in by that point. But you know, Grant, it's been a real, real pleasure having you on and, and look forward to continue the discussion.
- [51:11]
A
Thank you very much for having me, Paul. And yeah, look forward to seeing you in Geneva.
- [51:21]
B
Thank you for listening. To find out more about HC Group, our global offices and our expertise in search within the commodities sector, please visit www.hcgroup.global.