Branzan Advisors Commentary | May 2024

The first quarter of this year provided little clarity on where the equity and fixed income markets and the domestic economy are heading for the rest of the year. There continues to be debate over inflation and interest rates, with the general hope among investors that inflation is moderating and interest rates will come down. The most recent inflation reports did not support this thesis and equity and fixed income markets have reacted accordingly to the likelihood that the Fed will not decrease rates much this year (if at all). The picture is further complicated by the recent 1st quarter report that GDP was slowing. Stagflation (low economic growth and enduring inflation) seem to be on investors’ minds these days. Compelling arguments can be made that the ever-expanding U.S. debt (and the cost to service the debt at higher interest rates) will continue to weigh on GDP.  

Many asset classes over the past 10+ years have benefited from artificially low interest rates. At today’s higher rates, those asset classes are suffering. Banks are more conservative and are underwriting loans at lower loan-to-value ratios and higher interest rates. Nowhere has this been more noticeable than in commercial real estate. Activity has slowed down considerably and when transactions are getting done, they are often at lower prices. While we have not seen significant distress (other than office), commercial real estate values have come down and we are starting to see some opportunities to invest at better valuations.

We started investing in gold bullion in the Branzan Alternative Investment Fund (BAIF) in 2004 at a price of approximately $400 per ounce and added to the position over time. There have been periods when gold has been a drag on performance, but it has performed well over the past 20 years. We have held our gold position as a ballast in the portfolio and as an insurance policy in times of uncertainty. It has served its purpose well since last October. Since October 2023, gold is up 25%. Year to date in 2024, it is up approximately 11%to a value of approximately $2,300 per ounce.

The demand for gold seems to be driven by increased buying by foreign buyers (including central banks) that are diversifying their U.S. and foreign currency reserves. New supply of gold coming online is inherently slow and expensive (with inflation driving mining costs higher) and demand has outstripped new supply which has resulted in increasing prices. As prices have increased this year, we have sold a portion of our gold holdings to rebalance BAIF’s portfolio, but we continue to believe it is prudent to hold gold and silver in the portfolio.

We’ve spoken about our investments in mineral rights and oil and natural gas royalties over the years. We are active investors in the space and believe that oil and natural gas will continue to be a vital part of the global economy for decades to come. While energy supply from renewables will continue to grow, the worldwide demand of energy is also growing. As overall demand for energy grows (particularly in developing countries), the demand for all types of energy also grows. Due to political and ESG pressures, many institutional investors have exited their investments in fossil fuels or have committed to not making new investments in this space. From our perspective, we believe that is good for our strategy – less money chasing opportunities results in less competition and should allow us to find better acquisitions at more attractive prices. Further, from a regulatory standpoint it has become increasingly difficult to drill new wells in the U.S. While the regulations vary from state to state, the overall result has been fewer drilling rigs and fewer new wells being drilled. Supply is constrained and demand continues to grow (not even considering future demand from eventually refilling the Strategic Petroleum Reserve). We believe all of this is bullish for oil and natural gas. If you’d like to learn more about how we are investing in the space, please let us know.

As always, please do not hesitate to contact us with any questions. We enjoy hearing from our friends and partners and find it very valuable to hear your opinions and thoughts on the investing landscape. Thank you for your continued confidence in Branzan.

Branzan Investment Advisors

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