Growth concerns to keep base metals subdued: Swiss Asia

With the recent drubbing in crude prices, investors should start accumulating oil at USD 80-85, advises Juerg Kiener, MD & CIO, Swiss Asia Capital. In an interview with CNBC-TV18, he said that the fall in crude prices is due to unwinding of long positions and diminishing risk premium. Kiener expects the base metal market to be subdued on account of growth concerns. However, he feels gold may rally is case of easing by central banks.

Commenting on the euro-dollar equation, Kiener is of the opinion that the financial position of Europe as a whole looks much better than United States. "People shouldn't forget that US has difficulties in the banking system which are equally large. The trade situation looks horrible and the budgeted deficits looks probably more like Spain and Italy than really Europe combined. So the moment the focus shifts towards the US angle instead of Europe, the currency will move all the way round."

Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video.

Q: Crude prices have cooled down significantly. How much of it would you put down to fund aversion or fund outflows and how much is a fundamental issue that's weighing prices down?

A: I think the biggest trade is on the futures markets with huge sell-off positions. Some people say the risk premium in the Middle East has come down; we are around USD 80 for US crude where the output side on OPEC will look for underpinning of the price at USD 80.

If you look at the latest restrictions, which are imposed by the US on those who take off Iranian oil, it has been cushioning the supply side. You should actually start looking at accumulating oil between USD 80-85. That’s a pretty good floor.

Q: What are the chances that crude oil and base metals are entering or have entered a multi-year bear market?

A: If you look at currency around the world, we just start seeing that the monetization efforts right now in Europe are accelerating; even in the US if you look at the slowdown of the economy. You see interest rate reductions in Australia. You see the same in India as well as in China. You see stimuli everywhere. So money gets devaluated now and this devaluation effect will mean it’s going to underpin units based in the economy.

The precious metal market has already started to move up on the news of that. I think oil is going to be following next to get together with fuels and the base metals will be lost. So the base metals could be for a bit longer period in difficulties. I wouldn’t be rushing into that. Crude, as I said, I think is a Middle Eastern play.

If you listen to the warmongering for Syria and Iran then I think a floor on replacement value including oil cost around USD 80 is a good floor to trade. I don’t think the world economy is going to collapse, not with all the money printing we have on today.

Q: Do you see the possibility of gold getting back to USD 1,800 or USD 1,900 this year?

A: If you look at the macroeconomic environment of money printing, these chances are very real. You see that the physical off-take is very large indeed. Among central banks, you see rebuild-up of positions. When Europe is talking about putting gold into securitized bonds in order to monetize the system, it means you have fewer gold positions out there which are available to for delivery.

A lot of the noise is basically paper gold, future market trading, hedge funds in very high multiples or the leverage is huge. It tells you moving up USD 200 from where you are today is not really a big deal.

Q: What are the immediate targets for crude?

A: Structurally, if you look what's happening in the world of supply constraint, decent demand, monetization like there is no tomorrow and the chance of a Middle East war then I think you look at USD 80 at the bottom. You look at somewhere between USD 95-100 on New York crude, that’s probably the trading range for next six months or so.

Q: Which of the base metals look the most vulnerable from the pack right now?

A: The most vulnerable is very difficult to answer. I think you still have nickel, which probably have some difficulties. In the short-term, all of them can wobble a bit because of the derivatives market.

The ones where we see where high quality product has been taken up quite in a sharp way is copper. It's looking into USD 20.14-20.50 in zinc and lead. I think the market doesn't really look as bad. I think it's mainly the paper market, which is driving prices up and down.

Q: Where do you see the euro-dollar, dollar index levels over the course of the next few weeks because we are heading into a lot of important events and this market will have an effect both on commodities and equities?

A: Everybody basically tells me that Europe will come to a standstill. If Greece leaves, do you think Europe will be better off with Greece or without Greece? I think it will better off. Is this already in the price? Yes.

If you look at your domestic salary curves to a large extent, it has already moved 30% down. So a lot of it is already in the price. Do we still get Italy and Spain coming to the forefront on the requirement needs? Yes. Will that put pressure or capping the upside of the euro? Yes.

How much of that is in price? There is huge short position right now in euros by hedge funds. It might continue a bit longer, but I think people looking for a 1:1; that's not very reasonable. Don't forget Europe has a current account surplus. The financial position of Europe as a whole looks much better than United States. If I would look at an issue which could reverse very quickly from downside risk in Europe to upside potential is actually in Europe.

People shouldn't forget that US has difficulties in the banking system which are equally large. The trade situation looks horrible and the budgeted deficits looks probably more like Spain and Italy than really Europe combined. So the moment the focus shifts towards the US angle instead of Europe, the currency will move all the way round.