Against a backdrop of high inflation and stagnating growth in the economy, the cooling off in international crude prices is the one good thing that is going for India right now. Juerg Kiener, managing director & chief investment officer, Swiss Asia Capital analyses the commodities space and gives his view on gold, silver and crude.
Below is an edited transcript of his interview. Watch the accompanying video for more.
Q: Brent is down 21% from its 2012 highs. How much lower does it go from here?
A: In general if you look at the commodities, we have every couple of years some corrections and they are always in the tune of somewhere between 15-30%. For a lot of them you start reaching levels where the bottom structures are reached and the accommodation phase is going to be back in.
Q: How much lower does it go from here? What kind of targets are you seeing on it?
A: If you look at Brent, the risk is we do a price around USD 80 per barrel plus-minus USD 4-5. If you look at gold, we have been around USD 1,525/oz. We have tested that four times. We are trying to breakout on the upside. So at the moment we are in the consolidation range. So that actually looks quite reasonable.
The silver market looks like it could go a bit lower in the short-term but even there we see already bottom building processes. So the news in the press is already pretty bearish and prices the bottom building there is already taking place, particularly in corn and wheat.
The world doesn’t really look as bad as the large price correction in May really makes us to believe. The risk-off trade which has come to a large extent as well through hedge fund liquidation and now hedge funds playing the short side will play out its course. We are going to get the next big move on the upside again.
Q: How much of this correction especially on crude would you say is courtesy technical factors that you alluded to and how much a fundamental issue? What would that pit medium-term targets for crude at?
A: We don’t really produce much more crude today than we produced some three-five years ago. The world has grown in the meantime, so the market is very tight. The Middle East issue has not really disappeared. We have seen there, the risk premium going up and down to the tune of about USD 20. So if things intensify with Iran again, the risk premium will get built up again. So, I don’t see that the fundamental structure has changed so much.
What we had in these last couple of months has been a short squeeze on the dollar. The dollar has been rallying because we are hacking around Europe. We are telling everybody that Europe will break apart and Europe will not work anymore. I think this dollar rally will start fizzling out again and we are going to start focusing on the problems we have in the United States again. So, once this focus comes in, we are going to get from a euro weakness to a dollar weakness and this is going to move commodity prices back up.
Q: Which one would you bet on in terms of spiking back the hardest because commodities have corrected across the board including for many of the base metal faces?
A: One of the key components which we are looking at that’s probably moving up first will be gold. We are seeing that a lot of governments are looking now at gold backed bonds to be issued in order to rescue Europe. We have seen even in India and in Turkey, gold backed bonds being discussed and we see as well the discussion in the BIS regarding moving gold back into Tier-1 capital is taking shape.
So as gold gets monetized, the risk in gold is actually relatively small to the upside. Secondly, the soft commodities are the ones which are looking very soon at the bottom. The rest might be delayed to the tune of about three months or so. So these are the first two areas in the commodity area I would start accumulating.
Q: There has been so much concern regarding growth. Even this morning, China’s PMI has come in at the lowest level this year. How would you view something like copper? There has been some easing on copper this morning, perhaps on the basis of bargain hunting. How would something like that look to you in the medium to long-term?
A: We are all looking now in the rear mirror and we all talk about China slowing down to 5-6% growth. But if you look not in the rear mirror but you look forward you actually start seeing we have quite aggressive policy changes now in China. We see bank reserve requirement being lowered, we see the government starting to push again to stimulate the economy through loan growth and most likely we are going to see even an interest rate cut on the horizon.
So the growth curve is probably bottoming right now in China and we are going to see growth picking up again in the second half. You’re base metal demands, your oil demands will start and the newsflow will become much more positive again. I think destocking which is quite often happening in late spring has already taken its course. So I am not really as bearish in the next six to nine months even on the base metals in the energy side.
Q: Given the way equity markets have come off and given the newsflow, a lot of comparisons are being drawn between this period and the post-Lehman crisis period that we had, crude prices are nowhere near that level. What probability would you attach to the outcome that crude actually corrects to that much momentum?
A: If we have a real banking crisis where we start fearing that the financial system is collapsing, because JPMorgan can’t hold its derivative book or Deutsche Bank has to write-off too much then we might see a collapse in the whole commodity space which is quite significant. But then I would say many other things will collapse too - fixed income market will look at liquidation levels and your equity market will have substantial downside risk too.
What I am looking right now is policymakers trying to smooth over this weakness, print money, monetise the debt and make sure that the transfer of payments are happening between financial institutions as well between weak economies to keep that risk at bay. We have an election year this year in the United States and the Fed is going to do the utmost to try to smoothen these policies before the election campaign starts speeding up. So by end of June-July, the Fed will have to make its last stance on providing the liquidity required for a smooth transition.