Something that continues to challenge our thinking.

Are commodities coming off by the right amount in line with our expectations about the impact of tighter financial conditions (e.g. rates, USD, global growth) and supply chains de-bottlenecking (freight rates, COVID absenteeism, right workers for the right job)?

Or are commodities still very overvalued and what little they have come off hasn’t been remotely enough?

Either? Both? Neither?

Is it the case that cash costs of production have risen, thanks to inflation, by so much that cost curve support is simply a much bigger number now?

Looking at the Australian producers of gold, for example, we know that cash costs have climbed to at least $1000-1200, a far, far cry from the days of $600 an oz (in USD). Perhaps $1670 an oz for gold isn’t “crazily mispriced” in that context.

I should note that we own NCM, a gold producer, in our direct equity portfolios. Buying it at $18 seemed like reasonable compensation for a) the above points about cost curve support, b) to hedge copper-to-the-moon risks, c) to hedge “dovish pivot” risks, and d) it’s lowly geared and no one likes it, reducing the odds we are overpaying for it and e) sold a rates sensitive REIT that had outperformed, leaving our rates + value slot available for an unloved name.

So far, like everyone who has ever bought a gold stock, that trade hasn’t worked, but we remain optimistic.

Anyway, the broader point about commodities remains.

Is it also the case that the US dollar is about to peak, that we’ve hit peak inflation, and now commodity prices might find some macroeconomic support?

Is it the case that China’s COVID zero policy is set to end, and that politics, domestically, forces developers to restart stalled property and infrastructure related projects, supporting prices.

When it comes to commodities, it is alarming at how little one can be certain of.

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