Bullish on gold; may see short squeeze
20 September 2007
Juerg Kiener, MD and CIO of Swiss Asia Capital is bullish
on gold and silver and soft commodities. He has long positions in
crude and he believes gold may see a short squeeze. He is also
bullish on nickel on 50% correction.
He is cautious on base metals and energy.
Excerpts of CNCB-TV18’s exclusive interview with Juerg Kiener:
Q: Can you see blue skies for commodities from here?
A: I think if you look at the global picture, you will
still see massive bailouts of the banking and hedge fund system and
whatever is credit related by central banks. So, this injection of
money is creating further inflation down the road and to me it’s
actually quite positive, commodity as a group.
Inside that group, I think we have got to segregate it into
little groups. So we are much more bullish on the monetary side of
metals, so gold and silver, where really demand-supply balance is
strong. We are quite bullish on some of the agricultural issues,
things like cotton, sugar, coffee, basically soft commodities, which
have not really moved yet.
Q: What's been the historical track record of such periods
whenever the Fed goes into another pump money into the system
inflationary spiral or re-inflationary spiral, do commodities
typically tend to be one of the best performing asset classes? A: If you look at back to the ’70s where we’ve gone from
to stagflation to inflation I think it’s a similar thing what we
had. We had stagflation last few years going into inflationary
cycles. You’ve seen gold prices during the last cycle moving up from
USD 35 to USD 870. So that’s about a 30 folding of your money. That
means that if you have a mine basically benefiting from the output,
that’s an incredible multiplier on that issue.
So, the benefits of investing in monetary issues like gold and
silver during this re-inflation cycles are immense. Normal base
metals and energy will still be going up, but probably not to the
same tune anymore.
Q: What exactly do you expect to see with the base metals
then, and what did you make of the rally overnight, was it a
sympathy move?
A: If you look at the base metals, in general, we have a
very tight demand-supply situation. But we don’t have a short fall
of demand and production. So overall it’s just a tight market.
Now, a tight market in an environment where there is basically no
output growth 1-2% a year, but you have got 10-15% monetary supply
growth, that will get revalued. If you revalue, you keep your demand
cycle going and that means basically price will continue to move up.
Now the short term 4-5% looks a lot, but these things correct and
keep moving back up. Nickel has corrected 50% of the high. I don’t
mind picking up nickel on a 50% correction, that’s actually quite
good and that’s what bull markets are made for.
What I’m more interested are basically areas where the demand
supply balances are huge. Let’s look at gold where we produce 2,500
tonnes; 4,000 tonne demand, we have a deficit. The central bankers
who are producing, basically money, are running out of gold to fill
up the short fall.
Now if you look at this year’s Indian uptake of production, they
are going to take about 40% of gold production. So, about 1,000
tonnes out of the 2,500 tonnes. That means the market is not just
tight, it is going to fall into deficit.
What we have right now, the deficit on the futures exchange in
gold is about 50 days production and on the silver side about 150
days production. So it’s a fantastic opportunity, the benefit from a
short squeeze.
Q: Even before the Fed rate cut, we were hearing reports
that fund activity had increased quite considerably in crude. Are
you seeing that, that there’s been a lot more money coming into
crude?
A: I think we have seen on the crude side, certainly on
the derivative side, some long positions being formed. The NH market
is the largest of all the commodities market and naturally will
attract the money first.
Having seen that NH has been moving up, we have got to ask
ourselves where is this money going to trickle to next, because as
you know, as the market moves up you get much more diversification
into the smaller markets. We have seen some money coming into
energy; we haven’t really seen much money coming into the precious
metal market as yet.