With the global economy still in a slump, investors seem to be jittery about the volatile scenario in the commodities space. Juerg Kiener, MD & CIO, Swiss Asia Capital, finds that economies across the globe are consuming commodities at levels higher than what speculators are making it up to be. He also said prices of crude could swing either 5-10%, but in the medium-term the picture appears bullish. However, he says in the long run gold is a safer bet. A: What we are really seeing in the commodities market is that, everybody is quite nervous on economic slowdown. If you look at a forward curve in commodities, you have actually got forward prices which are significantly lower. The spot price which really shows physical demand in the economy are actually higher and we have a backwardation which shows you that the economies globally continue to consume commodities on higher levels than what the speculators are making it up to be. The market is actually quite psyched up for very tight demand-supply situation and is going to look at probably significant higher prices, once the speculators get washed out. Q: There is a lot of apprehension, that crude is actually showing some signs of a breakdown. It’s retraced from USD 83-84 per bbl to close to USD 70-72 per bbl and that it may fall further. Are you bullish or constructive on crude for the next six months or cautious? A: Crude is probably in the market where backwardation doesn’t work. Prices could swing 5-10% on both sides quite easily in the next two-three months. In the medium-term, the picture looks bullish. If you look at some of the other commodities you can look at soya, you can look at sugar, ethanol, just to name a few, backwardation is in the game. These are the real things which people need. If you look from a financial point of view, with the financial commodities which is gold and silver that just started to move into backwardation, some say we haven’t seen for many years and shows how tight the supply is and how strong the demand is and people start paying premiums just to get the exposure. Q: How much of the recent moves have been correlated to the dollar index which has also had a fairly volatile ride? A: On the end to a large extent it’s a dollar call. Commodities are partially moving up because of monetization, because of the loss of purchasing power, next to the demand-supply structure. You could give it an equal waiting from demand-supply point of view and from a monetary point of view. As we move forward and you start talking about further liquidity in the market, to the basement of money is going to accelerate even further. That component of the valuation will increase further. The dollar index will certainly start moving prices up significantly. Q: On which of the base metals are you seeing signs of backwardation? What would it imply in terms of price contraction for them? A: We haven’t seen too much backwardation in the base metals, but we see tight markets particularly in copper and nickel. We see there a clear picture of accumulation even manganese, almost everything. What’s high and top quality is actually moving up. The amazing thing which we see is there is still a lot of smaller companies which have new projects coming on-stream which are trading between 30-70% below replacement value. That is actually pretty much bear market territory in valuations, so we are looking at very cheap valuations and accumulation. We have seen the BHP move, basically going into Potash. The market on the corporate side in the commodities space particularly on the lower level is very cheaply priced. Q: Raw sugar prices went through a rather deep correction a couple of months back. Do you expect it to get worse for that commodity? A: Sugar has been very volatile. It’s been up and down, but we have got backwardation in sugar. I would expect sugar to start coming back up. Sugar like any other of the commodities have been affected quite greatly from the El Niño and La Niña effect and so I don’t expect a huge supply coming on-stream and making up for the shortfalls. Q: What about gold? How are you mapping that for the next two-three months? A: Gold is the safe haven investment which you are looking for if you believe that monetisation, quantitative easing is going to continue. We have now basically almost six months period of consolidation. We are coming into the seasonal pattern where until March we have one festive occasion where people are accumulating gold purchases. We have seen as well that central banks are coming into the market. Central banks are normally the first ones and that retail is at a loss, so we would expect that move to continue moving prices higher. We had option expiry yesterday. Everybody has been looking at weakness into option expiry like the pervious years. If you look to what happened yesterday, actually the prices started to recover very quickly above the key option expiry of USD 1220-25. I am looking at this very bullish picture from the demand side and the price movement in gold.

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