Listen to the show here:
Description:
Drawing charts like orange juice and cheese futures might be fun, but there’s an important underlying influence that soft commodities have on inflation. Even if you don’t trade commodities, there are useful things to learn.
And of course, when we get to the hard commodities that are actively traded every day, we move from jokes about the cheese spread to very real analysis around the drivers of the platinum price and what this is doing for stocks like Sibanye-Stillwater, where our resident Ghost is looking forward to finally breaking even after a long and painful period in the PGM cycle.
Join us for a fun show that is ultimately an ode to commodities and the sheer breadth of opportunities available on the market.
This podcast is for informational purposes only and is not financial or investment advice. Please speak to your personal financial advisor.
Transcript:
The Finance Ghost: Welcome to episode 231 of Magic Markets. I am your co-host, The Finance Ghost. I feel like a ghost. I don’t know how bad my voice really sounds, but it sounds pretty terrible to me. So I don’t know what’s going on here, Moe. I feel like maybe a little bit too much work over the past few days has taken its toll, but luckily the show must go on and even more luckily, you’re doing most of the talking this week, which is quite exciting because we’re talking about stuff that is close to your heart – and I’m just going to keep asking you questions that are close to your heart so I can avoid talking! So if you hear very little in the way of company insights and lots of gold and Moe being bearish and macro, that’s my disclaimer, this is what’s happened here. I can’t put up a fight because I have like three good minutes of talking left and I have to spread them out now over the next 20 minutes. So, welcome!
Mohammed Nalla: It’s a pleasure doing this with you. I think you need to boost your immune system, right? I think you need lots of vitamin C. You need to drink lots of orange juice. And the reason I’m telling you this is that if you look at OJ futures, that’s orange juice futures – yes that’s a real thing. They trade that up here in the US. That’s down 53% on a year-to-date basis. That’s telling me you’re not getting your vitamin C there, Ghost. I think you’re going to move the needle there and hopefully we’ll see some sort of stability come through in terms of OJ prices.
What are we talking about this week? You said I’m going to wax lyrical. I’ve spoken a lot about gold. I’ve spoken a lot about oil. We’ve done that on several shows recently. But this week you actually said to me, Moe, what’s going on with the platinum price? We see it’s up like 48% on a year-to-date basis, can we do something on commodities in general? And I said, absolutely, let’s do that. So that’s some of the backdrop of the show this week. I mean, we’re going to – we can touch on gold, of course, we can touch on oil, but, but let’s look at platinum. Let’s look at what’s happening with copper. Copper is so important. A lot of people, if you follow the markets closely, there’s a saying, they call it Dr. Copper, right? It’s Dr. Copper because it’s a leading indicator…
The Finance Ghost: …as opposed to Dr. Orange Juice, which is clearly…
Mohammed Nalla: Dr. Pepper, Dr. Copper and Dr. Orange Juice.
The Finance Ghost: No. I can’t believe you’ve made me draw an orange juice chart to start this podcast. I’m feeling better already because that’s so daft. I’ve never drawn an orange juice chart. Now I can’t stop looking at it and trying to figure out why it looks this way, Moe. Anyway, back to copper.
Mohammed Nalla: It’s amazing how large the market for orange juice actually is up here in North America. I mean, it’ll blow your mind because down in South Africa, if you’re trading softs, you’ve got maybe white maize, you’ve got corn, you’ve maybe got wheat, but there’s not a lot going on there. Up here in the US you can trade anything. You can trade OJ, you can trade coffee, we’ll talk about coffee as well. And then sugar, soy, the usuals.
Right, so let’s jump in. I’m going to jump in and let’s maybe start off with my favourite, let’s start off with gold. That’s an easy one. It’s a quick two-minute plug. We’re going to – we know what’s driving gold. There’s been massive central bank purchases. We did a whole show. I did a webinar with Mesh, our partners. You can go and have a look at that, discussing gold.
The demand that comes through there is because we’ve got massive geopolitical tensions. We’ve got global central banks increasing their purchases of gold and then you’ve got investor demand from Moe Nalla, from Ghost, all of these people are out there and that contributes to overall strong demand that has really driven the price. I’m not going to spend too much time on that. Gold 25% year-to-date. Slightly off its highs, but over the last 12 months, 41%, in five years, 85%. That’s pretty decent. And that’s been a strong, strong rally. I don’t know if I chase it at current prices. I do have a large-ish position in gold.
What’s actually happening in Copper – I mentioned Dr. Copper and the reason I want to touch on copper next before I even go to platinum, because we’ll spend a lot of time on platinum, is that copper tends to be a leading indicator in terms of global economic growth. Now why is this the case? Copper is used in construction, copper is used in telecoms. It’s got a lot of uses, it’s got use in the EV sector coming through as well. And so all of these are contributing to effectively longer-term demand. Now, what’s important is copper that I haven’t mentioned, up 25% year-to-date, last 12 months, only 16%, but five years close on gold, 87% on copper. And what’s actually been driving that more recently has been the fact that we’ve had supply disruptions come through from several key geographies. There was a big mine closure in Panama, for example, there were protests in Peru. And all of this actually tightened near term supply. And then against the backdrop of fairly stable demand, maybe even slightly more sluggish demand because again, the world economy other than the US has kind of been bumbling along and that has contributed to this backdrop in terms of global copper prices.
Now, Ghost, I can see you chomping at the bit there and I know you want to ask me some questions around platinum…
The Finance Ghost: …I actually wanted to comment on the cheese chart that I’ve been drawing while you’ve been talking because now you sent me – you see, this is the problem you’ve now sent me and my ADD to tradingeconomics.com in the commodity section and now I found a chart on cheese. And cheese hasn’t been a great investment, rather eat the stuff, very sideways Moe, despite certainly my best efforts, and I suspect some of yours as well. Let me check cocoa, and then I’ll let you get back to talking about real tradable, useful commodities.
But I guess the overarching point here, and you know, much as we’re having a bit of fun, which I must say is quite welcome at the end of a long day, is these soft commodities are a big part of the inflation basket, right? So as much as it’s funny to go and draw charts of orange juice and cheese and cocoa, it’s also not. There are entire frontier economies that depend on stuff like cocoa. This actually has a huge impact on food basket prices. These soft commodities are there for a reason. And it’s because there are players in the market who want to hedge their exposure by trading this kind of stuff. So, a bit of fun looking at the cheese chart, but there’s a serious undertone to it.
Mohammed Nalla: I’m chuckling because you’re saying cheese is the one chart I probably didn’t look at. Right. I’m just picturing these massive wheels of Parmesan or Parmigiano and I haven’t looked at cheese. But I’ll tell you what I have looked at – I’ve looked at coffee because coffee has been remarkable. It’s been so interesting. And if you just look at a year-to-date chart, it’s down 5%. So you’re thinking, hey, my Starbucks is a little bit cheaper. No, just actually extend your timeframe and you can see that over the last 12 months, that’s a year, coffee’s up 33%. Now, that sounds like a lot, but take a guess Ghost, take a guess. What is coffee up? Don’t cheat. I can see you Googling. What is coffee up over the last five years. I told you, gold is up 85%. What’s coffee up?
The Finance Ghost: I’m not cheating. I’m just resisting every bit of temptation to make a joke about trading the cheese spread! But no, I don’t have a guess for you on coffee. I just have terrible dad jokes at this time of night that you’re making us record this on Moe because it’s Canada Day this week, so it’s very late in South Africa and cheese spread jokes are really all I have.
Mohammed Nalla: Okay, well, I think you need a cup of coffee just to help the prices up on a year-to-date basis…
The Finance Ghost: Clearly!
Mohammed Nalla: …196% over the last five years.
The Finance Ghost: That’s a lot.
Mohammed Nalla: That is massive. Now, what’s actually driving it is a lot – I know last year, I think late last year, we are talking because we’re actually discussing how coffee prices are becoming a bit of a choke point. You saw a similar thing on cocoa. You mentioned frontier economies. An economy like Cote d’ Ivoire or Ivory Coast as it is called, is almost entirely dependent on cocoa. So these niche commodities are very important to specific regions.
And let’s talk about coffee, because I love coffee, right? What’s been happening in coffee is that demand’s been fairly stable, so it’s not a demand story, it’s actually been a supply story. You know, you had Brazil where there was some weather-related issues in Brazil. I know some African economies, also large coffee producers there and unfortunately the harvest wasn’t fantastic. It was a supply-driven rally in the price on the back of steady demand, no major shifts there. And that created what I would call a weather shock in the system. And that’s resulted in this massive upside pressure that came through. Now that that’s eased back – I mean if I look at Brazil, recently they had a strong harvest, so that’s leading to an easing in some of those supply concerns and that’s contributing to that decline of 5% that you’re seeing on a year-to-date basis. So that’s just in terms of some of the softs Ghost before we actually move into some of the harder commodities.
If you’re looking at coffee, if you’re looking at sugar, very similar dynamics, right? Sugar, maybe you’ve got some weakness that comes through from demand. We just covered PepsiCo for example quite recently in Magic Markets Premium, maybe GLP is having an impact on sugar prices, I’m not quite sure. But remember then you go down an entirely different rabbit hole. If you look at sugar, you’ve got to actually look at what is the demand for conversion into ethanol or fuel. So, what’s happening with oil prices? It becomes a very complex market and perhaps less complex than that would be platinum, because I know platinum is close to your heart. Platinum is very important with South Africa having some of the world’s largest platinum reserves. So Ghost, maybe before I actually jump in there, I’m going to catch a quick breath. What’s your view on platinum? Because that’s up 48% on a year-to-date basis, but it has been a laggard for such a long time.
The Finance Ghost: And my view on platinum is what it’s always been, which is that it is a scary thing that has been quite the widow-maker, I’ve got to tell you, as you well know in the South African market, and it has finally caught a bit and I’ve seen a whole lot of interesting different theories about why that might be and I’m never quite sure which of them to truly believe.
I only have a position in Sibanye in the space. It is the last time I think I will ever own a platinum stock. It’s also partially gold, but it’s mainly platinum. Sibanye definitely has been incredibly good at attracting just an extraordinary amount of bad luck. You know, they go and buy a business in the US then it deals with – I think there were huge floods there and then the thing is called Stillwater, so those jokes write themselves even worse than the cheese spread.
It’s just been hard. They’ve had gold strikes. It’s been very ugly. But if this platinum rally continues, I might even actually get my head above water in my Sibanye position. I mean, it shows you – and I didn’t buy in the hype phase, or at least I didn’t think I did. I waited for it to come off and then it came off again, and this is why I’m done with those very cyclical commodities where demand is so hard to gauge.
But I guess so much of it is just the supply/demand lag, right? The price has been bad for a long time. Not a lot of additional supply comes on stream. And then people change their demand expectations and up goes the price, even though it’s not like you could visibly see it every day. There aren’t suddenly tons and tons and tons of new cars rolling out or anything like that. And that’s part of what makes these commodities so difficult, right?
Mohammed Nalla: Indeed. That’s why I generally like to get a pure play on a commodity, either directly or you can go through an ETF, you can play the commodities futures. I really don’t like the miners because the miners are always faced with these operational challenges. And we talk about jaws in banks, right? But it’s also jaws in miners in that you’ve got this margin compression, you’ve got labour pressure in South Africa, you’ve got energy security, which becomes an issue. And then you’ve got to superimpose on that this highly cyclical demand that comes through even for a commodity like platinum. Then remember the other markets, platinum is still a good market in that there’s price exploration, it’s well traded – you’ve got more obscure markets like rhodium, some of the other PGMs that come through where there isn’t really great price discovery. And so I think that lends a little bit of opacity that comes through in terms of some of these players, certainly in the platinum sector.
I’m going to spend a lot of time here, Ghost, actually, just unpacking platinum, because I think that was the original brief from you. And then I got sidetracked looking at orange juice, and you got sidetracked looking at cheese. If you break-even on Sibanye, you might just be able to go and buy the cheese spread. I’m going to leave it there…
The Finance Ghost: …I’ll do it just to celebrate, just for the gees of it, I will spend that money on cheese. Happily.
Mohammed Nalla: There was some time ago Ghost, a South African politician who I shall not name, actually said that he would ask his supporters to walk from Alexandra across the Jukskei into Sandton and take the cheese. That was a real quote, I’m not making that up.
The Finance Ghost: I do not remember that. I feel like this whole reference is lost on me. That’s incredible.
Mohammed Nalla: Let’s pivot from that. You can Google after the show’s done.
The Finance Ghost: I will!
Mohammed Nalla: Let’s look at platinum because there are a couple of drivers here, right? And the drivers are – you’ve touched on some of that. There’s the auto sector recovery. Remember, platinum is used in auto catalytic converters. And with the decline in internal combustion engines, I would say that’s a long-term decline in demand. But what’s happened is that recently, over the course of the last year, certainly the Trump presidency, the focus on EVs and electrification of vehicles has actually taken a backseat. And when it took a backseat, you saw the rise again of the demand for hybrids, the demand for internal combustion engines. So that’s partially reversed some of the drag that you had seen on platinum, certainly over the course of the last several years.
So that’s one point on the demand side of the equation. But what’s actually happening on the supply side? Because South Africa has massive amounts of platinum, it’s the world’s largest platinum reserve. And if we look at South Africa, I don’t have to tell you, you live down in South Africa – you’ve had supply disruptions that range from labour issues to power issues to the ability to get goods to port and actually ship that to international markets. And so all of that contributes to an erosion effectively on the supply side. You’ve got demand that’s strong, you’ve got supply that’s actually been constrained. Remember, you’ve got South Africa, you’ve also got Russia. Very important point. People forget this. Russia is a large portion of platinum production globally. And so with all the pressure, the wars that you’ve seen – Russia, Ukraine – that has also compromised some of the production that has come out of Russia. So that’s a supply impact.
And then some of the other stuff that we haven’t spoken about is given the fact that platinum has lagged for such a long time, it’s been a market that has been in structural deficit for a long period of time. Now, don’t quote me on this, I think it’s probably the last three years, or so – but the most recent data actually shows that total platinum supply – remember, this is not just mining, it’s recycling all of that stuff – the total platinum supply is expected to fall below 7 million ounces in 2025, which if you look at, for as long as the data’s existed and the World Platinum Council’s out there, it’s actually the lowest level in the data series, barring what happened in Covid. That’s telling you that the market has a chronic or structural deficit that comes through. Now that is important because you don’t just flick a switch and all of a sudden you’ve got a platinum mine tomorrow. So that chronic supply deficiency is likely to persist. And that gives you a nice underpin on the platinum price.
Then another point on demand, which I found interesting, something I learned is that platinum is actually used in the glass manufacturing industry. Did you know this Ghost? Because I didn’t. I wasn’t aware that it’s got a use case in glass manufacturing.
The Finance Ghost: No, that’s news to me. I did not know this.
Mohammed Nalla: So I went and I was like, what could you possibly use? Are they like lining glass, platinum, all of a sudden? And it’s actually not that. It’s when you’re building a glass manufacturing facility, a factory that manufactures glass or glass panes and that kind of stuff, they actually use platinum in the building of the tools that go into creating the glass. And that’s because of its properties, the glass doesn’t adhere that well to platinum. And so it makes it actually very good to build the tools with which glass is produced. So that’s part of the use case.
The other part of the use case is that there is a use case for platinum in the manufacture of LCD screens. And again, that would come through in terms of are we seeing pressure on demand for smart goods, Apple iPhones – I don’t know if you’ve upgraded your phone recently, but look at those kinds of industry trends. Because, yes, whilst it is slightly tangential, it does actually have some sort of bearing on overall demand.
Then Ghost, I’m going to actually raise one last point, and that is investment and jewellery demand. Because if you’ve ever travelled to Asia, you go to China, platinum jewellery is actually very popular and you see a lot of it in the windows. You go to Hong Kong, they’ve got this entire street with lots of fancy jewellers. You see lots of gold jewellery, but you see a lot of platinum jewellery. And you’ve actually seen a massive uptick similar to gold, not just in jewellery demand, but also in terms of investment demand. So people buying coins, people buying little gold bars or platinum bars and ingots and that demand has actually come through and has exacerbated that structural shortage that we’re seeing in the platinum market.
So if we wrap all of that up, slight improvement in the fact that EVs aren’t front of the agenda, steady demand in terms of other industrial use and then probably a surge in demand in terms of just safe haven metals. PGMs fall into that safe haven type of space. All of that contributing to what I would say is slightly more of a demand story on the backdrop of a supply story that just cannot react fast enough to supply platinum. And I remember when platinum went through $2,000 an ounce a while back, this goes back into the mid-2000s, unfortunately at that point in time I remember this so distinctly because it was the first instance of load shedding in South Africa. I think it was under Thabo Mbeki as president. So that does go back quite some time. It was the first instance of load shedding. And I remember because I said it’s such a shame that you’ve got record high platinum prices back then and South Africa sitting with the world’s richest platinum resource was unable to monetise that. And unfortunately now for similar but also slightly evolved reasons, it’s still unable to take direct advantage of the surge that we’re seeing in near term prices, Ghost.
The Finance Ghost: So I had to do some wild Googling there, including finding a story from the Mail and Guardian many years ago about someone who tried to walk the entire Jukskei river, which sounds like quite an extreme sport, but eventually I found the cheese quote and it was exactly who I guessed it might be, which of course was Julius Malema, who ironically now lives in Sandton, Hyde Park last time I checked, so I doubt…
Mohammed Nalla: He took the cheese!
The Finance Ghost: Yeah, yeah, I doubt he has the same view on walking across the river and just taking the cheese because he now has some of the cheese. But anyway, he probably doesn’t trade the cheese. We digress.
That was a very interesting little chat on platinum. And I guess the point is for me, honestly, when my Sibanye position, when it feels like it’s kind of starting to roll over, I’m just watching the momentum now, then I’m out.
And I think what’s so important is – and this is something you can only learn by actually being in the markets and seeing how it goes and what you enjoy and what you find that you have success in – there’s a lot you can buy out there. If you really want to, you can trade cheese, you can trade platinum, you can trade technology stocks, you can be just a long term investor in FMCG. You can do whatever you like, but just find something that works for you. And what I find is a lot of these commodity plays just don’t really work for me because I’m too interested in figuring out the strategy of the underlying business – and these commodities where the business just relies on these external cycles, that’s just not what makes the money, it just isn’t. So for me it’s not a good fit. Moe, how much do you actually dabble in cycles or cyclicals rather? I know you buy the commodities but you kind of avoid the mines, hey?
Mohammed Nalla: I avoid the mines because I’ve just never had a good feel for it, I don’t like mines in general. A friend of mine up here in Canada was actually saying, what’s the best pure-play platinum stock you can get exposure to? And this was actually around a month or two ago. So, I hope he got that exposure. I said to him, look, I don’t even know, I don’t watch the stocks, I’ll go get platinum futures. And then he tells me, you’ve got roll risk and he’s right. You know, there are lots of complexities to when you trade this. I think he actually found, I’ll have to go and dig the name up, but he found one Canadian company that actually operates as a pure platinum plate. Remember, Canada has a good gold resource endowment. We’ve got some platinum up here. So I was quite surprised by the fact that we have such a small exposure to platinum, certainly in the listed space.
That being said, I don’t play a lot in the miners. I do trade in some of the commodities, but again, you’ve got to be really on top of a lot of these things. I don’t do the softs because I just don’t understand weather. I don’t understand geographies. That supply/demand dynamic is not one that’s intuitive to me. Where I do play, I understand – precious metals, so gold definitely, platinum on occasion and then oil. But I mean, geez, that’s been such a mixed bag recently that I’ve actually put it to the side. And you know, in this kind of macro backdrop, even understanding how this works, trying to figure out those cycles is a lot more challenging. If you’re playing cycles, if you’re a macro trader, there’s a lot going on in the futures space, in the global space, certainly interesting, but does require a lot more work, Ghost.
The Finance Ghost: Yeah, absolutely. Moe, thank you for doing the show and being willing to talk through platinum and some of these things that I don’t necessarily have a great handle on, I don’t think. I definitely learned some cool stuff. All the jokes around cheese, I genuinely had no idea there was a cheese index. So thank you for that and a lot of other great insights.
To our listeners, if you’ve got specific things you want us to talk about and cover on the show, please do let us know. It’s always good to get your feedback. Otherwise we will of course try and continue to just have good breadth of coverage in terms of things you can look at in the markets and what you can learn and try out. So do let us know if commodities are something that you actually play in or if you do actually prefer to buy the miners, if you take a different route to Moe.
And Moe, we will do this again next week.
Mohammed Nalla: Indeed. We hope you’ve enjoyed the show. Give us your feedback, hit us up on social media. It’s @MagicMarketsPod, @FinanceGhost and @MohammedNalla, all on X or go and find us on LinkedIn. Pop us a note on there. Until next week, same time, same place. Thanks and Cheers.
The Finance Ghost: Ciao.
This podcast is for informational purposes only and is not financial or investment advice. Please speak to your personal financial advisor.
