In a distant land, on the lesser-known London Metals Exchange (LME), during the tranquil early morning hours in the spring of 2022, the nickel market suddenly broke, skyrocketing in just 18 minutes. Few individuals in the western world took notice, except for a handful of enthusiasts like myself.
Nickel’s value surged by over 250% in the blink of an eye, plunging the nickel industry into absolute chaos. This gave rise to headlines such as the following in financial publications like Bloomberg:
“The 18 Minutes of Trading Chaos That Upended the Nickel Market”
The nickel market was exceptionally tight (traders were complaining beforehand that nickel hadn’t been moving higher given the supply/demand imbalances), setting the stage for this sequence of events. As one thing led to another, an epic short squeeze unfolded, bringing substantial gains to those holding long positions in nickel.
The losses suffered by short sellers were so severe that the LME had to halt nickel trading, marking its first halt in over three decades. This move was made to prevent complete devastation and bankruptcy among the shorts, one of which was the largest nickel producer that was backed by China. The shorts were caught with their pants down.
Nickel’s ascent marked the initial breakout in the natural resource bull market, but now, a secular bull market is unfolding for one undervalued and undersupplied commodity after another, showing significant upside potential.
Both oil and uranium have made strong moves compared to the broader stock market, and considering the robust underlying fundamentals, this represents a long-lasting secular trend that is expected to span multiple years.
Regrettably, most of the world is likely to overlook the emergence of this new bull market in natural resources (but you don’t have to) until its already had a substantial run, along with the margin-of-safety opportunities it presents today.
What’s even more surprising is that nearly every financial advisor and investor fails to recognize the interconnectedness of energy CAPEX cycles and its influence on market cycles, which, in turn, influence secular trends and ultimately shape the entire market.
It’s ironic that even disciples of Warren Buffett miss these profound shifts in trends, even though their idol, Mr. Buffett himself, excels at capitalizing on it.
Today, if you’re not investing in critical natural resources, you’re essentially short in your personal life (inflationary costs) and in your portfolio that is ripe to be disrupted like the Chinese backed nickel producer that almost went belly-up.
In my previous note, I highlighted that the last bastion of oil production growth in the United States is in the Permian in West Texas. Like all the other shale fields in the United States, which have already reached production plateaus or have started to decline, the Permian is not far behind. In August, for the first time in 15 years, the number of rigs in the Permian decreased despite rising oil prices. This was a pivotal moment.
The world relies heavily on oil and diesel, serving as the cornerstone of our intricate global economies. In my view, August marked the beginning of a lengthy and bullish secular trend for critical commodities and their producers following the developments in the Permian. Oil prices have thus swung back under the heavy influence of OPEC and Saudi Arabia, who require WTI Oil prices of $90+ for their extensive economic endeavors.
The oil and natural gas producers FMT have invested in offer free cash flow yields ranging from 13% to 28%, with average returns on capital employed exceeding 20%. Warren Buffett’s mentor, Benjamin Graham, would be quite pleased with our portfolio. Our holdings meet Graham’s stringent investment criteria.
There is simply no other sector that can genuinely compete with these holdings in today’s environment of higher interest rates on a cash-on-cash basis. Additionally, these companies prioritize shareholder returns, and given their impressive free cash flow yields, we should expect to be more handsomely rewarded.
The only remedy for high inflation caused by expensive petroleum inputs is an enormous bull market for oil and natural gas producers. The set-up is about as compelling as I’ve ever seen over the next few years.
The energy CAPEX cycle also has a heavy influence on the secular trends in gold and silver. Looking at an intermediate to long-term perspective, silver boasts one of the most substantial margins of safety among all assets worldwide. FMT holds the belief that silver might have the potential to go vertical like nickel in a very short period, providing robust downside protection for investors with an intermediate view.
In summary, as carefully chosen natural resource investments are likely to exhibit significant upward movements in the coming years, it’s crucial not to be unprepared for potential challenges in your personal life, such as rising inflationary costs. Instead, consider pursuing a strategy that involves taking substantial long positions in undervalued critical companies that form the cornerstone of our society. This approach is likely to be the winning choice for optimal investing.