July Fund Performance & Market Commentary
On the back of significant geopolitical headwinds for the global commodity complex, the Delbrook Resource Opportunities posted a negative 2.7% return for the month of July.
Metals prices declined across the board, led by base metals (-8.0% zinc, -5.8% nickel, and -5.5% copper) and precious (-3.7% silver and -2.3% gold). The U.S. dollar, as measured by the DXY, continued its march upwards and has now gained +6.1% since January, proving to be a significant factor in lower metals prices over the past few months. With the dollar roughly back to levels last seen in late 2017, we believe calls for its ‘upside breakout’ are unwarranted given the US fiscal situation as well as monetary policy considerations (specifically later in the tightening than most G20 members). Dollar strength based on global trade stress appears to be more than adequately priced in and we believe that the current administration has significant motivation to ease policy well in advance of the November mid-term elections.
Turning to the portfolio, our favored long ideas (base metals) has not changed and we believe the recent decline in copper (stretching into August) represents a significant long opportunity. With deficits forecast into mid 2020’s, we believe prices will rebound to $3.20 - $3.50/lb in the next 6 – 12 months. Pure play producers and late stage development companies will benefit most from a return to normalcy. In the copper complex we like names like First Quantum Minerals and Trilogy Metals, both of which are prime acquisition targets by majors looking to backfill production declines.
The number of investors piling into the ‘short gold’ trade has now reached the first net short position since 2001. We are watching this crowded trade closely and feel it represents the ultimate contrarian indicator to shift to long gold exposure. The market will be closely watching Fed Chair Jerome Powell’s speech at Jackson Hole on Friday for signals about the Fed’s plans for future rate hikes – something that will weigh heavily on the yellow metal.
One of our highest conviction near term ideas centres around U.S. uranium producers. We have dedicated significant research capacity to understand the impacts of the Section 232 investigation into whether imports of uranium threaten the national security of the United States. U.S. production of uranium has dropped from 49% of annual U.S. uranium requirements in 1987 to only 5% in 2017. We believe prior to the mid-term elections, the U.S. administration will announce a quota system requiring that U.S. utilities consume 25% domestic origin uranium. If anyone is interested in viewing our research report, please get in touch with the office.
As always, please contact our office at 604.229.1450 with questions or comments.