Gold may yet see new high; dump ETF, buy physical: Expert

Juerg Kiener of Swiss Asia Capital is bullish on commodities, as he feels much of the recent sell-off is not based on fundamentals. In an interview to CNBC-TV18, he said that the physical market for commodities like gold and copper were robust, while the weakness in prices was being caused by unwinding of speculative positions.

"We have got stimulations through money printing, we have got interest rates falling and higher negative interest rates and we have got (commodity) producers right now becoming pretty cautious on how they spend money which means your supply side is shrinking while we have stable demand. So prices have overreacted from the downside and have probably a pretty fair chance as a group to recover," Kiener said. Here is what he has to say on copper: If you really look at the real market we have got the inventory long positions in copper in New York, but we have got copper inventories at almost an all-time low in China and probably everybody will agree that China will use more copper than United States, so I am rather looking at the China numbers instead of the US numbers. So the number game right now which has been mainly played through the derivatives market is London and New York is actually not quite rebalancing the fundamentals on the ground. ….and on gold: We have seen the sell down of the gold has been mainly Futures and Comex and ETF selling. We have not really seen physical selling. If you look at India and China the physical markets are on fire and the same as I said before the paper people are playing trades whilst the physical market is actually very, very strong. It is the same in gold as we have seen copper. So I would sit with physical people and I would encourage everybody to get out of the ETFs and buy more physical and that is squeezing the people who play the paper market and that means in the end the recovery will be quicker, faster and more efficient. Also Read:

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Below is the verbatim transcript of his interview on CNBC-TV18 Q: What is your overall comment on the manner in which commodities have moved over the last three or four quarters? Would you agree with the chorus that the commodities supercycle is over and maybe we are going to see commodities perhaps flatten out or fall? A: The last two months have been pretty brutal on the commodity market and as a result most producers will right now trade at roughly break-even. So capital investment in this sector is actually falling off the cliff. This sell-down in commodities actually happened because everybody was worried about monetisation coming to an end and global growth being pretty dismal. If you look at the last numbers this week we are seeing that Germany is doing pretty okay and China is doing alright. We are talking about US recovery. Most numbers do not look that bad and monetisation continues to be in because countries like France are getting leeway to print more money and so has United States and UK, and some other currencies which have been forced to lower interest rates and stimulate growth, including Australia. We have best of both worlds. We have got stimulations through money printing. We have got interest rates falling and higher negative interest rates. We also have got producers right now becoming pretty cautious on how they spend money, which means your supply side is shrinking, while we have stable demand. So I think prices have overreacted on the downside. They have a pretty fair chance as a group to recover. Q: How much could the recovery be then? A: We have right now stock markets which are running on the news of recovery. The stocks are up about somewhere between 10 and 20 percent depending on which markets you are looking at. Commodities are down in the tune of 10 to 20 percent, if you look from sector to sector. This gap is far too wide and I could imagine that this gap is narrowing at least by half if not more and you cannot have the world recovering and saying we are going to grow, but we do not need any commodities. _PAGEBREAK_ Q: What appears to be happening in the past few quarters or at least months is that people are taking away money from commodities and investing in equities. Do you think that trend has run its course? A: The hedge fund community is very short commodities. They have been leveraging up to the tilt and they went in favour of equities. A trillion dollars short on commodities is actually killing the market segment. The question now is: when it will reverse this course? A lot of these people trading positions are actually paper positions and not the real market. So, if you really look at the real market, we have got the inventory long positions in copper in New York, but we have got copper inventories at almost an all-time low in China. Probably everybody will agree that China will use more copper than United States, so I am rather looking at the China numbers instead of the US numbers. So, I think the number game right now which has been mainly played through the derivatives market is London and New York, is actually not quite rebalancing the fundamentals on the ground. Fundamentals on the ground, we have seen off take agreements being finalized in order to feed the mills and the refiners and that will continue as it comes particularly on these lower levels. Q: While I get your point that if there is growth there is going to be a fundamental need for commodities like crude or even copper coming out of China. But gold is not much used for the physical asset per se. it is used more from an investment point of view. So do you think that perhaps gold might break away from the herd of rest of the commodity basket and might continue to remain subdued and not attract that much by way of flows? A: The only way we get recovery is by printing more money and by having more negative interest rates. Europe is talking about negative interest rates. Switzerland is talking about negative interest rates. India and Australia are talking about lowering interest rates. In Europe, we have now a bail-in clause, where banks can confiscate your money. I am not quite sure how much money one will have left with the bank. From that point of view, gold from a negative real interest rates point of view and from confiscation point of view, gold is interesting. We have seen the sell down of the gold has been mainly Futures and Comex and ETF selling. We have not really seen physical selling. If you look at India and China the physical markets are on fire. As I said before the paper people are playing trades, whilst the physical market is actually very, very strong. It is the same in gold as we have seen copper. So I would stick with physical people and I would encourage everybody to get out of the ETFs and buy more physical and that is squeezing the people who play the paper market. That means the recovery will be quicker, faster and more efficient. Q: What is the range you are giving gold over the next 12 months? A: Gold is an insurance against stability or the disstability in the financial system. The trading range right now is somewhere between USD 1,400-1,500 per ounce and if it breaks, it can break on both sides, on paper side quite significantly. To me the issue is where is gold going to be when we start rebalancing the financial system globally. I think it will get rerated in a bigger number. So, it is my insurance policy and once this insurance policy comes into implementation, gold will have a very big move. It will not move by USD 50-100, it will move by few hundreds to thousand dollars within a day. So people who buy that for safety, for wealth preservation, for insurance purposes on physical side, the number can be actually very significant. Q: Should I understand that you expect it to break on the upside of this USD 1,400-1,500 range? A: I do not know which way gold will trade in this hugely, highly derivative high frequency traded market where people can sell half a year’s products in 15 minutes and dictate the price of gold. We all know that it’s an artificial price. So if the price recovery is coming back to the system it is going to probably break through the upside. In the short-term the paper dictators in Wall Street and in the London on the London Metal Exchange (LME) will dictate the price and that could be any price you wish. What is interesting that during last few weeks when we had the price breaking down, you could not really buy gold at these prices, everybody bought premiums. It is hard to get physical stock. If you look at India and China together they were buying the early supply of gold this year if they continue at the speed they go. So I am looking for higher prices going into the next year. Q: You spoke about ETFs selling gold or gold ETFs being sold and they are being buying in the physical market. Currently what is the anecdotal evidence on what is happening with respect to ETFs? Are they continuing to sell gold? Is the expectation that they will continue to sell gold? A: Most ETFs today are paper instruments, it is like derivative. They have very little physicals gold in these ETFs. It is a paper contract, where people promise you gold. This price can go anywhere. So it is not equal to you queuing up in gold store and trying to get kilogram bars of gold or gold coins or gold jewellery. So the paper price on the Futures market is a game. It is like playing Monopoly. Once people understand that price mechanism between physical and paper could be very, very different. We have today high-frequency traders and people who are playing the paper market which is quite dangerous and is totally dispatched from the reality of the physical market. _PAGEBREAK_ Q: At the moment what are you advising your own fund and your major investors? What would be your top three asset class preference? A: We are very happy to accumulate, gold, silver and copper at these depressed prices, investments going in to the future. We are looking at companies, which have been beaten down, which are 50 percent off their recent highs, Companies, which are paying decent dividend and have good cash flow in that sector. I think it is one of this bargain periods, where people are able to buy two for one. So if you would sell Gucci handbags, the cues would be endless and so what we are doing is we are picking up some of these bargains and locking them away and we would look at them again in two-three years time. Q: Any kind of levels that you would help us with, perhaps target price on Brent and maybe even gold over a 6 to 12 months period? A: Brent is trading in a trading range between USD 80-100 per barrel and that is what the market needs to keep the output going. If it breaks, it will be because of monetary aggregates or because of derivatives. Copper has risks still to go a bit lower, due to the fact that it trades at 30 percent premium to the marginal production side. Otherwise it is quite tight, and if you play recovery you won’t actually have it. If you look at gold, we already trade into companies at replacement values. So if you can buy anything at replacement value, it is actually good and your upside is a bigger number. If you corrected 50 percent then in no time you can make up this 50 percent in no time. Q: You would not be surprised if the USD 1,900 mark touched for gold within the next 12 months? A: I will not be surprised to see the gold price making new highs in the next 18 months. Q: Would it surprise you if it went to USD 1,200-1,100? A: I would not be surprised if we have a lot of paper washout on Wall Street to USD 1200-USD 1,100. The physical market would draw all these inventories down at record speed and we would get the V-shaped recovery on the way up which will be dramatic. So in order to have a smoother recovery, you might not want to see prices going down to these levels.