Words on Where Commodities Go Next

In this episode of Words on Wealth, CIO Tim Rocks is joined by Adam Rozencwajg, Co-Founder and Managing Partner at New York-based natural resource investment firm Goehring & Rozencwajg, to unpack the outlook for commodity markets heading into 2027. They explore what really drives commodity cycles and what the surge in AI investment could mean for the resources sector. Adam also shares his perspective on energy, industrial metals and gold, and where opportunities may be emerging. Tune in to find out more.

This episode is also available on Apple Podcast. 

Tim Rocks: Hello, this is Tim Rocks, Chief Investment Officer at Emerson Partners. This is our Words on Wealth series, with a particular look at important issues that might play out in 2027. Our one today is with Adam Rozencwajg of G and R Funds Management. He’s a commodity specialist, and as you might know, we’ve been following movements in commodity markets very closely over the past couple of years. We think we are in the middle of a super cycle, perhaps midway through, but we’ll ask Adam that. So what we thought we’d do today is assess where we are, what the issues are for the moment, and how this might play out in 2027. But I’ll start by welcoming Adam. Thank you very much for your time.

Adam Rozencwajg: Thanks for having me.

Tim Rocks: Perhaps let’s just start with that super cycle question. Are we still in a commodity supercycle? Why is that the case? Where do we think we are? Are we halfway through, near the end, near the start?

Adam Rozencwajg: Well, I think it might surprise you to hear my answer, but despite the relatively strong performance in commodities and natural resource equities, you can make the case that this cycle has really not even yet begun and it has a long, long way to go. I’ll tell you a little bit of the reasons we think that. At GNR we like to look back through market history. We’re deep contrarian and value investors. A number of years ago, we decided to undertake a really significant research process to understand what drives commodity cycles. That might sound foolish, but these cycles last 10 to 15 years in both directions. When you have a cycle that long, most people find they’re in one part of the cycle for the majority of their career. No one really looks back and thinks about why these cycles happen and where they are in them. If you’re in a cyclical industry like ours, I think you’d better make sure that you understand what drives it. If you understand what drives it, then you can begin to measure where you are in it. And what drives the commodity cycle? Everywhere and always, it’s capex. It is a capital cycle first and foremost. I’ll be brief because I know we don’t have too much time today. Imagine we start at the bottom. Commodities are cheap, they’re out of favour, companies struggle to make money. I’m from Canada originally, and in Australia, Canada, Houston, we all know these commodity boom and bust cycles, and they’re pretty grim at the bottom. Then all of a sudden the market begins to shift, the surplus goes away and a new deficit comes, and prices scream higher. First, investors really aren’t convinced. Then they start to see it and say, well, maybe this has legs, and they start to invest money. And what happens the next year? The short answer is nothing, because no new supply comes online. It takes 10 or 15 years for a new project to come on, and that is extending, not contracting, because of things like permitting, because we’re going deeper, and because we’re going into other parts of the world that really need infrastructure. So that time to market is getting longer. In year two, year three and year four, prices keep moving up and capital keeps getting deployed. But all it does is start the stopwatch on a 10-year period until that new supply comes on. Eventually you’ve brought in just the right amount of capital to balance the market at some date in the future. But of course, it’s still not there yet, and prices keep moving up, and everything from that moment on is excess capital. You bring on too much, and now you’re at your 10 or so years, the production starts to come online. What had been a deficit eases into balance, and what do you have behind you? A tsunami of new projects still to come online. That pushes the market from deficit back into surplus, and prices collapse. Anyone who has told you that you have to own resources in that last stage of the cycle is now told it was a stupid decision, their predecessor goes out the door, and the industry decides it will never invest again. It’s a very poetic, dramatic part of the market. It’s either the solution to all of your ills or it’s a bunch of fraudsters who should never be trusted. It’s never anything in the middle, as far as investors are concerned. Money pours out, no new projects come on, and again, in years one, two and three of that part of the cycle, nothing changes. But eventually, when you don’t invest in new projects, depletion starts to take hold quietly. People don’t realise it because there’s usually still a very bearish narrative in place.

Tim Rocks: This is what happened in the nineteen nineties. I remember it, because in the nineteen nineties, everyone was focused on the tech industry, so there were large industries, including commodities, that were totally starved of capital. The entire commodity complex, through the entire nineteen nineties, suffered underinvestment, and then China comes in and there’s no supply, and it took 15 years to almost catch up.

Adam Rozencwajg: That’s exactly right, and we saw it. That was a perfect cycle. We then saw massive investment in shale in the US, coal in Indonesia, and iron ore here in Australia, and it ruined the party. So that’s where we like to focus: those bottoms of the markets, like the late 90s or 2020. We weren’t managing the strategy then, but if you went all the way back to 1971, you can see the setup forming again and again. So that’s where we are. We had a huge underinvestment from 2010 to 2020. Depletion started to take hold pretty much everywhere. Maybe not so much in Western Australia and iron ore, because that’s a longer-lived asset, but if you look at the shales, they’ve rolled over now. If you look at copper mines, they rolled over even earlier. And now we’re into the bull market. So where are we in that bull market? Well, the short answer is we’ve seen no capital come into the space. It might be shocking, but even though this has had leadership for the last five years now, we haven’t seen any new investments be made. Take the oil companies. If they get any type of supernormal profits, they buy back their stock. They don’t invest in a new field. Really, the only exception where we’ve seen capital start to come in and new projects start to come online has been in copper, which has been in a bull market for 10 years, all the way since 2015, when it bottomed. Frankly, that’s part of the reason we don’t have as much in the copper space: while everyone is bullish and money’s pouring in, new projects are coming online. That’s not the part of the cycle we’re interested in. We like the parts that are really at the bottom, where investor sentiment is very negative. If you look at energy and mining in the S&P (I don’t have the numbers for the ASX, which is obviously a bit of a different composition), energy is right now at four percent of the S&P. Believe it or not, that’s lower than it was when we started the firm 10 years ago. It was 7% 10 years ago, and it’s four percent today. We’ve seen no new deals come into the space and very little capex. At the same time, you have the biggest source of growth, the shales, rolling over, and two kinetic wars being fought, both very central to global energy. So I think you’re very early. You haven’t seen any investor enthusiasm yet. Even gold stocks last year (and we can talk all about gold): most gold fund managers were up a hundred percent last year and they didn’t see their assets grow by a hundred percent. That means they had net outflows for most of the year, which is shocking. You’re not seeing capital being committed in the space.

Tim Rocks: Perhaps going back to that nineteen nineties analogy, there’s so much capital being deployed into AI data centres, three trillion dollars or so over the next few years. Does that mean that, even if people wanted to invest in commodities, the sector is just being starved of capital because there are so many other demands for capital out there?

Adam Rozencwajg: I think that’s exactly right. We make an estimate, and we probably don’t have time to get into it, but it’s a fascinating study. The upstream E&P industry today spends about five hundred billion dollars in capex globally, and we estimate that needs to be in excess of a trillion just to offset depletion and meet demand. So we’re nowhere near that number, and most of the capital, like you said, is going to AI. Now here’s something that’s different between now and the late 1990s. In the late 1990s, you saw money leave resources and go into the dot-com stocks, and that constricted capital in our space. That part is the same. But this time around it’s going into a tech sector that’s incredibly energy intensive. So you might actually get it on both sides: not only are you constricting capital in our space, but you’re putting it into demand very directly. I think that’s going to have a huge impact.

Tim Rocks: Okay. So if I was to divide commodities into three buckets (perhaps you wouldn’t agree with this): energy, industrial, precious. What are the pros and cons of each going forward?

Adam Rozencwajg: Well, I think right now the energy space is the mispriced asset. I think very clearly we’re not spending enough in energy, and the reason is again the capital cycle. We’ve really been in an era of plenty these last 15 years. The US shales, and the reason I harp on them so much is not because we’re based in the US, were about 90% of all non-OPEC oil supply growth in the last 20 years. 90% from essentially seven fields and, more recently, really from three counties in West Texas, which have been supporting all of global demand growth and all of depletion. They’ve been so prolific. If you add the oil and the gas together, it’s essentially like having brought on two and a half Saudi Arabias in a decade, in a country with good capital markets and, we can maybe debate this, still pretty much a good rule of law and good political structure. The industry just got after it, and that dislocated the market for about 10 to 15 years, and no one really worried about energy. So right now, to me, that’s the most mispriced asset we have. Industrial metals are a little bit later in their cycle. A lot of these commodities will move together, and the reason is that the thing that attracts you to one commodity group is essentially a long volatility play. It’s essentially an inflation hedge. It’s essentially a bet that something is going to change in the capital cycle. So what draws you into one will draw you into all, and you do see most commodities move together in a big decade-long cycle. But within that, there are sub-cycles and there are winners and losers. The industrial metals moved a little sooner. They bottomed in 2015, and for a while, particularly with ESG concerns, you could take a copper investment to your IC and call it the picks and shovels of the green revolution. So we saw money start to come into that space a little earlier than some of the others, and I think we’re a little longer in the tooth in that capex cycle right now. Copper mine supply is actually growing. It’s one of the few commodities where we see strong growth. It’s universally loved. Everyone loves copper. Real and nominal prices are both at all-time highs. You can make huge money mining copper or developing a new copper mine. And remember how I said that the duration for new projects is extending? There might be one exception to that, and that’s Chinese SOEs investing in Africa. They’ve been able to compress their timeline a little bit, through probably most of the ways we might imagine, shortcutting certain processes and environmental studies.

Tim Rocks: Less environmental concerns.

Adam Rozencwajg: Absolutely, and we’re seeing it. Even though everyone’s bullish and thinks supply will never grow, we’re seeing copper mine supply grow, and we’re seeing inventories of copper begin to move higher. That’s always a good telltale that your market is not quite in deficit, but rather in a surplus. So we’re a little more cautious on the industrial metals, and remember, we like to be contrarian. That has to be the most contrarian call there is. The third, and this is going to be threading the needle between the two, is precious, and obviously that’s a very near and dear industry to Australia’s heart. We were very, very bullish on gold from the bottom in 23. We got it pretty well at the bottom. It took about a year for the stocks to work, and I remember I had to write an impassioned letter to investors as late as the fourth quarter of twenty-four, saying you guys have to trust us, this stuff is going to be getting [gangbusters?] pretty soon.

Tim Rocks: You’re right on that. And then when they turned, they turned sharply. Was that about the start of this year or so?

Adam Rozencwajg: That’s right. The gold stocks were creeping higher but doing nothing compared to what the metal was doing. Then that changed in late 24, and the gold stocks had a great run last year. And actually in January of this year, about three days before the peak, we decided to sell pretty much all of our gold stocks and roll it into energy. That was a good call. Those of you that might follow us will know our research is very good and our big calls are very good. Our timing, I would say, is average to slightly early. But that one we nailed. We don’t do it all the time, but that call we got really, really right. And now I think we’re in a classic retracement within a bull market.

Tim Rocks: Is that for the stocks, or for gold itself?

Adam Rozencwajg: I think for both. And one question I get, it’s amazing how things have changed: in 2024, gold was making new all-time highs and the stocks weren’t moving, and I had to convince people to buy gold stocks. Today, gold is falling and everyone says, “Well, can’t I still hold gold stocks even when gold falls?” And I say, well, you must never have bought a gold stock before, because the short answer is no. If gold’s falling, it’s not going to be a great time to own gold stocks.

Tim Rocks: Perhaps as an aside on that, is your view that the gold stocks are kind of high beta to the gold price?

Adam Rozencwajg: Traditionally, that’s exactly right. They have a lot of operating leverage, so if the gold price doubles, their earnings might go up eightfold. And of course, that works in both directions. They have fixed costs. So I think the issue with gold right now is that we’re in a classic retracement period within a bull market. I think eventually gold gets to $10,000 an ounce plus by the end of the decade, by the end of the cycle.

Tim Rocks: Okay. We’re at four thousand-ish now.

Adam Rozencwajg: That’s right. My analysis is based on relationships between all the world’s financial assets and all the world’s gold. If you look at it like that, gold is awfully cheap relative to all the paper in the world. But if you look at it relative to housing or labour or any measure of a good or a service, gold is awfully expensive. And of course that shows the gap between financial assets and things like wages and housing, right? It’s all been accruing to financial assets like stocks and bonds. So I do think gold will make a higher high, but I think there’s some pain to be had. The reason we think that is that we got a very good sell signal. It’s actually worked every time since gold and silver became freely traded in the early 1970s, and it’s the silver sell signal. When gold rallies and silver lags (people will often say, well, to have a good bull market you need silver to outperform, and that’s actually not true), gold will outperform silver for three years or more. Then silver catches it all up just like that, in a matter of weeks or months. And when that happens, it’s your sign to get out of both for a little while.

Tim Rocks: Okay, right. And typically, does it mean it was just overbought? Was there just too much hype and too many flows, and it just has to settle back down?

Adam Rozencwajg: I think that’s exactly right. I think it was overbought come January. I think there are a few things working against gold right now. I think inflationary pressures, mostly due to energy, will persist. We got a very strong US payroll this week or last week, so I think the natural speed here is for rates to move higher. That’s not going to be good for gold.

Tim Rocks: So generally that view is that higher interest rates are not good for gold because the opportunity cost is kind of high.

Adam Rozencwajg: That’s exactly right, and we’ve definitely always seen that. Every time rates, real rates particularly but nominal as well, have risen in the West, we’ve seen fairly large liquidation of gold, both gold stocks and gold equities. The one thing that can offset it is the central banks, which became big buyers in twenty-two and twenty-three.

Tim Rocks: Do you want to expand on that? How important is that? It’s very noticeable, the big picture of gold: central banks sold for twenty years and now they’ve been buying for what, five, maybe ten? How important is that in all the things you think about as a driver of gold?

Adam Rozencwajg: I think it’s very important, and I think the idea of central banks on the margin looking to diversify away from their US dollar treasury holdings towards gold, just to have something that’s outside the purview of US foreign policy, is not getting less. I think it’s getting more. So that’s going to continue. But the problem is that right now, central banks have bought an ample amount of gold, though they’re not back to where they used to be. Notably, it’s been countries that never had gold reserves buying it. It’s not been the Europeans buying back their gold; it’s been China, emerging markets, Turkey, Poland even a little bit. A lot of those countries right now find that they don’t have quite the same liquidity, because they’ve been devoting a lot of money to suppressing the fuel price for their domestic consumers. It got so bad that Turkey actually sold gold in the first quarter in order to raise money to fund a price cap on retail gasoline and diesel. China has kind of stepped away from the gold market. They haven’t sold anything, and their data’s a little bit murkier, but they also have a widespread program of capping prices to retail consumers for fuel. So I think in general…

Tim Rocks: And India as well, that would normally be big gold buyers. They’ve been big gold buyers at the retail level.

Adam Rozencwajg: Yes. India obviously, and China as well, have a big cultural affinity for owning gold as a store of wealth at the retail level. And there too, of course, consumers are now spending more on fuel, so they have a little less to spend on gold. So we’ve seen a slowdown and a more choppy nature to central bank gold buying. I don’t think that story’s done for the cycle, but when I look to 2027, I don’t see them having huge ample supplies of US dollars with which to buy gold, so I don’t think that’s going to save you. When we get one of these retracements following a silver sell signal, the typical retracement is 40% in two years, and so far we have 20% in 11 months. So I think we still have further to go, and nothing to me points to why this would be a particularly shallow or short retracement. As of right now, our base case is a median retracement, which is 40% in two years. So if you think from here gold could fall another 20%, that means the stocks could probably fall another 40. If you’re okay with that, if you have it in a long-term account where it’s a ballast and you like it because it makes you sleep at night, by all means I think you should hold it. I own some gold personally for my family and I haven’t sold that gold. But in the portfolio, I think there’s better opportunity, certainly right now in energy, and that’s why we rotated out of precious and into energy.

Tim Rocks: Okay. And if you’re looking for a catalyst for gold bottoming, would it be something in interest rates? The end of a Fed tightening cycle, or global bond yields peaking out? Something like that, or something else?

Adam Rozencwajg: I think it would be all of those things. There are three things that have worried us a little bit. The first is this rate hike cycle. The second is the central banks, which seem to have their hands a little more tied than they did before. And the third is how much metal has accumulated in Western hands, which could be easily sold. The West is fast money. Obviously, if gold went to 8,000 tomorrow, the ETFs would accumulate, and if it went to 3,000, the ETFs would sell, right? So it’s pro-cyclical. All of those things still flash yellow or red. I don’t see any sign that those are over. And one sign to watch for, which has been a good indicator in the past, is the commitment of traders. That’s all the futures traders, and they categorise them as either speculators or commercials. Commercials are typically short, because they’re hedging their actual physical inventories, and the specs are long. When the gold market bottoms, you typically see a situation where the specs actually turn short and the commercials, even though they’re holding inventory, actually turn slightly net long. Basically, they remove their hedges entirely. That’s a really good sign for when gold is about to take another leg higher, and we’re not there yet. So those are all the things that we watch for, and I suspect it’ll be sometime in the next 12 months.

Tim Rocks: Okay. Well, let’s bring this all together. So precious, you’re waiting for those things we just talked about. Energy is your preferred exposure. Perhaps dig a bit deeper on that. You say that’s shale rather than conventional oil? And is it the commodity versus the producer?

Adam Rozencwajg: In entirety, we invest in the equities. We don’t invest in the commodities, and there are some good reasons for that: the term structure of commodities, I think, in general makes it a lot better to be an equity investor to get that exposure. And what do we like in oil? The way to understand it is that we start first with a top-down view. Our top-down view is that supply growth is slowing. The big source of growth is now turning neutral. That doesn’t mean it’s going to go to zero. We’re not running out of oil. But oil markets don’t rally when we run out of oil. We’ve never run out of oil, and we’ve had three examples of oil prices going up 10x. It happens when the big growth driver begins to slow in terms of supply, and that’s happening now. Then we look for stocks to express that. So shale, yes, but we’re worried that shale is slowing, so it’s becoming harder and harder to find good shale investments. Where we can find them, we invest in shales. We have huge experience in the shales. We’ve been building deep neural networks, which is essentially the same architecture that the LLMs all use today, since 2018 to analyse shale dynamics, and our view there is as good as any. We’re very proud of that work. But it’s becoming harder to find good investments. We’ve gone back to some oil sands investments, in Canada, which have the benefit of being hundred-year long-lived assets that you essentially mine, taking the oil in the form of bitumen, and then you process and refine it. The bad side is that it’s capex heavy, all up front, though that capex was already spent decades ago. It’s also considered to be some of the dirtiest oil there is. But the analogy I like to use is this: when people have ESG concerns, one of the ways they’ve alleviated it is to say, fine, we’re okay owning a certain amount of oil, but let’s buy the cleanest oil we can find. Realistically, I think that’s a little like smoking filtered cigarettes, because all of the CO2 that comes out of the barrel of oil comes when you burn it in the form of gasoline, diesel or jet fuel. If you care about how dirty it was to produce, my analogy is the filtered cigarettes: if you’re really worried about your health, the best thing is probably not to smoke at all. Maybe it’s helping on the margin, but it doesn’t do much. It’s the same thing here. When ESG was in vogue, the oil sands companies were sold entirely, but I don’t think it ultimately matters, because all of that CO2 comes when you burn the barrel, whether it came from shale, deep water or oil sands. What’s nice about it is that it’s long-lived and it’s not depleting, and they’re wonderfully run companies. So we have about 10% in oil sands, and then the rest we have in offshore drilling stocks. Remember, the thing that was unique about the shales is that no one saw them coming. Typically these projects, like I said, take 10 to 15 years to come online. Shale was different because we knew where the shale was, but we couldn’t get that oil out of the ground. As soon as we figured out how to get it out of the ground, we developed the shales almost immediately. We developed seven fields pretty much simultaneously, which is almost unheard of in the world of oil, and all those projects jumped to the front of the queue and displaced what the next big project was. That next big project was basically deep-water offshore. So now you’re starting to see people asking, what’s going to come next? I think what’s going to come next is what we had planned to bring online almost a generation ago. At the same time, all the deep-water offshore vessel companies, all the rig companies, they all got restructured during COVID. They all have clean balance sheets and nobody owns them. Those assets traded at 10 cents on the dollar. It’s not a direct one-to-one with the oil market, but obviously if we get an exploration boom and a development boom (and we’re already hearing the companies all say the next thing they’re bringing on is offshore), that’s going to immediately accrue to the benefit of the owner of those rigs.

Tim Rocks: That’s very interesting. Well, look, thank you so much for your time. It’s a very clear outline for 2027: energy now, waiting for gold, and industrials always there, perhaps a little less now but still very much a space we’re watching. Overall, a very bullish outlook still.

Adam Rozencwajg: Absolutely. We’re still very early in the cycle. Like I said, the one exception there, I suppose, is lithium. We don’t own any lithium. It had a huge capex boom a number of years ago and it’s still working off that hangover. We brought on a lot of lithium, and at some point maybe it’ll be time to look at that. But overall, a very, very bullish outlook for probably the next 10 years, because even if the capital comes in over the next 12 months, or starts to, that’s only going to start the stopwatch. So I would suspect we’ll be looking at some of the cycle peaking about 10 years from now. The one area we didn’t talk about, which we remain very, very bullish on, is uranium, which is in a long-term cyclical, structural bull market. The problem there, for those that read financial histories, is what they call the Minsky moment, which means that when something is steady, it becomes volatile because people start to speculate on it. Uranium is a long-term steady bull market. We just don’t have enough uranium mines today to meet reactor demand, and that’s why the term contract price, where people actually buy uranium, moves up and up and up. But it’s been such a stable bull market that the specs have come in and whip it around to the upside and the downside, and the hedge funds love to play it. Right now, I think every indication is that speculators are maximally short, which is always a great time to either hold your investments or double down, and the fundamentals just get better and better. The last time I recall the specs being this bearish on uranium would have been April of 2025, when I incidentally was in Australia, meeting a lot of the uranium producers and clients. We doubled down on our investment there and had huge performance for the next nine or ten months. Now they seem to have turned bearish again. When the pain is over, I’m not sure, but I certainly wouldn’t be selling uranium stocks, and if anything, I would be considering adding substantially here.

Tim Rocks: Great. That’s a very interesting thing to leave on, particularly in the Australian market, where there are plenty of opportunities to play that. Anyway, thank you very much for your time, Adam. Really appreciate it.

Adam Rozencwajg: Thank you.