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Gary Cohn, President and Chief Operating Officer of The Goldman Sachs Group, Inc speaks to the Globe and Mail during an interview at the Shangri-La Hotel on March 27 2014.Fred Lum/The Globe and Mail

Canadian energy investors who continue to pile into new energy financings ought to consider hearing Gary Cohn out.

The former commodities trader, who is now Goldman Sachs's chief operating officer, knows a thing or two about crude, and his expertise has convinced him that oil prices should stay suppressed for quite some time. The way he sees it, supply is now so robust that a quick rebound doesn't make sense.

This view comes in sharp contrast to those held by energy portfolio managers and retail investors who consistently scoop up new energy deals, assuming this is a good time to buy new issues because oil and gas stocks are cheap. Last week, Freehold Royalties Ltd. set out to raise $297-million and in a matter of hours the share offering was increased to $324-million because there was so much demand.

During a visit to Toronto last week for a Goldman investor conference, Mr. Cohn argued that too many investors continue to believe in oil for the wrong reasons – whereas they were much more willing to accept that the metals and mining supercycle, which sent prices of commodities such as gold and copper soaring, had come to an abrupt halt in 2012.

"The oil market is uniquely different because the price stares you in the face every day," he explained. When going about day-to-day errands, "you don't know what the price of copper is, you don't know what the price of tin is, you don't know what the price of nickel is … [but] everyone knows what a litre of gasoline costs."

This relationship affects our psychology, he argues. "It's very hard to be unemotional about it, because we all consume it every day. It affects all of our lives."

Crude, though, is a very complex commodity, and calculating its intrinsic value requires a detailed analysis of virtually every community around the world, Mr. Cohn argues. What's happening in Canada doesn't apply to the current dynamic in Brazil, for instance. "Understanding a commodity supercycle and understanding commodity demand and supply fundamentals is very, very difficult," he said.

Mr. Cohn also stressed that it is time for investors to come to terms with the massive drop in the price of crude, which fell to $43 (U.S.) per barrel from $107 in just seven months. "The rational human being argument," as Mr. Cohn calls it, assumes a recovery to the halfway price between oil's peak and the trough.

But "looking at the pure math" of how many molecules are produced, consumed and stored, as he puts it, the Goldman executive strongly believes the commodity's fundamentals have evolved. A similar paradigm shift is necessary for so many markets, he argues, because the world has changed.

"All of the historical [market] data is based on a monetary policy of positive interest rates," he said. Yet trillions of dollars worth of European government bonds now carry negative yields. "This whole new paradigm of having a deflationary environment has definitely changed the way markets work and has changed the way central banks have to think."

Looking back in time for perspective on what is happening today does not offer nearly as much value as it once did, Mr. Cohn says. "All of the historic price series and time series are somewhat irrelevant."

On top of massive quantitative easing programs in the United States, Japan and now Europe, sweeping regulatory changes – such as the Basel III accord – have also added major wrinkles to many markets. The new rules have dramatically changed the way major players such as financial institutions operate, and few people realize it.

Because investment banks are now regulated based on the size of their balance sheets, even if much has been invested in safe assets, they can't always perform the same market-making functions as they used to. That is part of the reason why, Mr. Cohn argues, bond yields, such as the U.S. 10-year Treasury yield, keep swinging so wildly.

This new market reality has major consequences for investors, and few realize it. In this new world. "You can't buy everything you want to buy or sell everything you want to sell," he argued, nor can you "change your portfolio as quickly as you want to change it."

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 4:15pm EDT.

SymbolName% changeLast
FRU-T
Freehold Royalties Ltd
-0.48%14.59
GS-N
Goldman Sachs Group
+0.59%417.69

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