Digging Value: Everything Is Bullish Metals

Value investors love compounders, cash flow, and Buffett letters. Commodity investors love pain, suffering, and more pain. Somewhere in between is this newsletter, Digging Value.

Digging Value is a twice-a-week column where I deep dive into markets, mining, and whatever financial absurdity caught my attention.

If you like your investing insights (not advice!) grounded in cash flows, hard assets, and common sense—but also recognize that markets frequently ignore all three—you’ll probably enjoy this.

Let’s explore the wild world of value investing in natural resources together.

Today’s column: Chinese insurance companies can buy rocks, gold is the new crypto, and why gray means gold for mining investors.

“Digging for Value, One Story At A Time.”

Chinese Insurers Can Buy Pet Rocks Now

Insurance companies are probably the most conservative investment managers out there. They buy “blue chip” stocks and bonds in some arbitrary percentage split, harvest dividends, and pray they have enough money to pay out future claims.

So it’s interesting that China now allows its insurance companies to invest 1% of their assets in gold … or as Buffett calls it, “a lump of something you hope someone will pay you more for in two years.”

From Bloomberg:

“Ten insurance firms — including PICC Property & Casualty Co. and China Life Insurance Co., two of China’s biggest — will be able to invest as much as 1% of their assets in bullion, in a program that became effective last Friday. That would translate into a potential 200 billion yuan ($27.4 billion) of funds, Minsheng Securities Co. said in a note.”

$27B is ~400t of incremental demand. Last year’s gold demand hit 4,974 tons. Central banks bought 1,000 of those tons.

So Chinese insurance companies basically become another small central bank buyer if they reach that 1% allocation target.

Back to Bloomberg:

“The policy tweak makes gold the first commodity that Chinese insurers have been explicitly permitted to invest in. China has restricted insurance funds from taking positions in assets without “stable cash returns,” and limits the amount they can put into bonds and stocks.”

Insurance companies are supposed to invest in high quality companies that pay dividends so everyone (the insurance company CFO, shareholders, and the policyholder) can sleep better at night.

Gold isn’t that.

Gold doesn’t generate free cash flow. It doesn’t pay a dividend. It just sits there and … goes up over time? Which, if you think about it, is kind of the same thing as paying a dividend and/or generating free cash flow?

I see three significant consequences from this policy:

This probably won’t be the last commodity that insurance companies will invest in.
Chinese insurance companies are now the Gold Put.
Other insurance companies, RIAs, and investment managers will join the 1% allocation rule.

If you follow this logic far enough, why shouldn’t insurance companies invest 1% of their assets in copper, silver, or some other commodity?

“But Brandon you don’t get it. Gold has always been a store of value. Those other commodities are industrial junk.”

Fair.

But what if copper or silver become “Nationally Strategic” metals? What happens when their underlying value shifts from what they can do in a simple widget to what they can do to protect our country? Can you really put a price on safety?

Humans have fought over less critical commodities before.

Wars between Portugal, Spain, and the Dutch East India company killed 14,000 people over nutmeg and cloves. Two spices I don’t even have in my cabinet.

The second consequence from this policy is that China now becomes the “Gold Put” in the gold market.

There’s an assumption that Chinese investors buy dips while US ~~degenerate gamblers~~ investors buy rips. So having both types of buyers in a market is probably bullish?

And also potentially one of the reasons why gold has stayed in a Bull Quiet trend despite its vertical price action.

Finally, Chinese insurance companies aren’t the only institutions re-underwriting their views on gold.

Jurrien Trimmer, the Director of Global Macro at Fidelity, recently tweeted:

“In my view, gold (and Bitcoin) could have a place in a balanced 60/40-type portfolio if we are entering a new secular regime of higher inflation, rising term premia, and sustained positive correlations between equities and bonds.

With a 100 years of history gold has been quite competitive with bonds. An investment of $1 in long-term bonds in 1926 would be worth $6.5 today in inflation-adjusted terms. That same $1 invested in gold is worth $7.4 today, despite gold not having a yield and not even being a tradeable asset until 1971.”

Fidelity investments manages around $5.9T worth of assets. Allocating 1% of that to gold would be another $59B in demand. Lol.

That would never happen.

But Fidelity is just one investment manager. Imagine the hundreds of trillions of dollars invested today without any gold exposure.

You quickly realize that you don’t need this magical 1% allocation rule to gold, but something much smaller to send prices higher.

All of this is bullish for gold, of course. But I also wonder what will the signs look like for a market top in gold. At what point does it go from practical to “there’s a bubble”?

Maybe if Michael Saylor ditches bitcoin and launches MSTR-for-gold. That’s gotta be it, right?

Or maybe it’s something else.

Backed By Fraud

Okay, so if the signal for the gold top is some Michael Saylor bitcoin-to-gold pump, then what is this?

“Randall Crater obtained more than $7.6 million from at least 28 customers through fraudulent solicitations, including false and misleading claims and omissions about MBC’s value, use and trade status, and that MBC was backed by gold. He spent the misappropriated money to purchase, among other things, a home, antiques, fine art, jewelry, and other luxury goods.”

Imagine you’re one of the 28 defrauded customers telling your wife about this investment.

You: “Honey, I wanted to diversify our investments and gain exposure to gold, so I bought My Big Coin from this guy Randall Crater.”

Your wife: “Can’t you just buy gold from Costco?”

You, embarrassingly: “Yeah, but gold is boring and just sits there. This is on The Internet. It’s crypto!”

Three things:

Never buy something from a company who’s name sounds like a preschool nap-time brainstorm exercise.
If you want gold exposure, just buy physical gold and call it whatever you want, like “My Big Shiny Thing.”
Couldn’t Randall have just said that My Big Coin was backed by a home, antiques, fine art, jewelry, and other luxury goods? I feel like he missed an easy out there (not legal advice).

Everything Is Bullish Metals

I often tweet on X that “Everything Is Bullish Metals.” It’s fun, and kind of true, because you can spin anything to be bullish metals.

Like launching a “Reverse-Engineered Alient Technology” ETF. Seriously.

“Tuttle Capital has filed for the Tuttle Capital UFO Disclosure AI Powered ETF (ticker: UFOD) with the Securities and Exchange Commission, marking one of eight new products it plans to introduce.

According to the filing, the actively managed UFOD ETF will allocate at least 80% of its assets to companies believed to be involved in advanced or potentially classified technology related to UFO research. This includes aerospace and defense contractors rumored to work on groundbreaking developments that could stem from government disclosures about unidentified flying objects.”

I’m not charging mining companies for this, but here’s something worth potentially billions of dollars … tell investors your commodity “is believed to be involved in advanced or potentially classified technology related to UFO research.”

I guess you’re not lying? If you believe copper or silver zinc is involved in advanced alien tech, then you find out its not, have you misled anyone? (Not advice!).

Imagine the PGM price reaction if we find out alien space ships are 40% palladium.

Or what if one of the alien landing gears uses rare earth element magnets? Or the probes are made of 100% copper? Suddenly every copper producer and REE mining exploreco belongs in that ETF.

The point is that Everything Is Bullish Metals if you think long enough.

The Gray Revolution

One value investing principle is to find a pond where nobody’s fishing and fish there.

Another way you could say that is, “find an industry with the most amount of old people and get in while you’re young.”

I can’t find a more appropriate industry right now than mining.

Here’s Anthony Milewski of The Oregon Group:

“Not so long ago mining events globally were rammed with young people looking for opportunity. Not just as bankers and investors, but as executives and entrepreneur[s]. Trying their hand at making a fortune. Today most of these mining events feel like retirement parties. I am in my early 40s and the youngest person at many of these events. Jokes aside, I can’t tell you how many conversations I had last week with guys that are already well passed retirement age. There are few, if any, young mining engineers, bankers or fund analysts. Of course it makes sense why this is the case, you need to be making money to pay them and tech and crypto have been sexy for a long time now. Not to mention, the equity markets have been closed. But as the industry continues to be hollowed out by people aging out and no real pipeline of young people coming in to the industry the set up continues for frantic market – when it turns.”

This isn’t the mining industry’s fault but rather the cards they were dealt. Think about it. Try convincing a young, twenty-something to travel to a remote third-world country to find and dig up some shiny metal in the ground.

Now try convincing them to do that after we’ve spent 20+ years telling them how bad mining is for the environment and how they are the devil for even thinking about going into the mining profession.

Instead, ask them if they want to sip macchiatos in their nap pods while listening to Enya during one of their thirty 15-minute mental health breaks at Google.

But this is why I love the metals and commodity space. I see real opportunity for young investors, entrepreneurs, and college students to make a ton of money doing something nobody else wants to do.

Yes, it will be hard. But unlike what the mainstream media says, mining is critical to our society.

It’s the reason why you enjoy the AC in the summer and the heat in the winter. Why your car has wireless charging ports, Bluetooth capabilities, and WiFi connectivity. Why your food stays cold in your refrigerator.

We’re approaching an Event Horizon where we’ll need mining capital, expertise, and resources more than ever, only to find that we’ve rotted each of them to the core.

The crazy part is that value investors don’t care. I’ll explain this phenomenon and they’ll say, “too bad, all mining companies destroy capital. I’m not investing in that space.”

Which, again, fair. But the Event Horizon drifts ever closer. And that little maneuver might cost us 51 years.