Gold is set to touch $1,300-1,400 an ounce by spring next year, believes Hong Kong-based Puru Saxena, the founder and CEO of Puru Saxena Wealth Management and the editor and publisher of Money Matters, a monthly economic newsletter. That, of course, is assuming the tailwind sustains, he adds. The bullishness also extends to crude oil, a commodity where he sees demand outstripping supply over the medium to long term. Saxena fielded a host of questions from DNA, including currency printing by nations, oil and emerging markets. Excerpts:
You recently wrote, “If the bull market is still intact, then gold should break above $1,000 per ounce within a few weeks.” Why did you say that?
Gold has been consolidating in a wide trading range since March 2007 and since the bull-market began (2001), the metal has rallied sharply every two years. So, from a timing perspective, gold is due for a big rally and if the bull-market is still intact (our view), then gold should first go past $1,000 per ounce and thereafter, it should climb to an all-time high.
Now that gold has broken past $1000 an ounce (first on September 8 and then on September 11), what is your target price for the yellow metal?
Gold could easily reach $1,300-$1,400 per ounce by spring next year. If the crowd becomes euphoric, we could go even higher by April-May.
But you’ve also said that “If the price of gold fails to do this, we could see a sharp decline in bullion and precious metals mining stocks. Put simply, if the price of gold fails to climb past $1,000 per ounce and instead, it falls below $920 per ounce, it will be a negative omen. At that point, our suggestion would be to immediately sell precious metals and related stocks.” Are we missing anything?
Everyone is bullish towards gold and this is worrying for us. If gold does what everyone expects it to, then we want to be invested in bullion and precious metals mining stocks. However, for whatever reason, if gold fails to break to a new high soon, we could see a lot of frustrated bulls and this may result in liquidation. In this scenario, we don’t want to be caught with our positions and we will dump all our holdings should gold break below recent support (around $920-$930 per ounce). Remember, there are no guarantees in this business and we want to protect our capital if gold doesn’t do what we expect it to do.
There is a buzz about China asking its citizens to buy gold and silver. How much of an impact would that have on the price of these precious metals?
China has been buying a lot of gold and even its government has bought huge amounts of bullion to hedge its US dollar denominated surpluses. This news is already in the market, hence fully discounted. So, this may not have any immediate impact on the price of gold.
A lot of analysts and market watchers have been more bullish on silver than gold. What is your take on that?
In our opinion, silver is simply a high beta play on gold. When the price of gold rallies, silver rockets higher and when gold declines in value, silver plummets. If the multi-month rally in gold materialises, then silver will probably do better than gold and this is why we have exposure to silver mining stocks.
Talking of China, the country seems to be on a massive currency printing spree. How do you see that panning out? One theory going around is that a lot of this printed money is finding its way into the Shanghai stock market, and hence the rally there. Does that worry you, given that you are bullish on emerging markets in Asia?
China is printing money and its bank credit is exploding. This year alone, bank credit has surged by $1 trillion. A lot of this money has found a home in Chinese assets (stocks and real-estate) and this explains the massive rally. In the near term, this doesn’t worry us because we don’t think the Chinese authorities are going to start raising interest-rates anytime soon. And as long as the central bank doesn’t tighten monetary policy, the ongoing boom in China’s assets may turn into a gigantic bubble.
We like participating in bubbles and hope that we’ll be smart enough to get out before the bubble deflates. But, that is not likely to happen for several months.
Andy Xie, former Morgan Stanely economist and now an independent economist based out of Shanghai, recently called China a giant Ponzi scheme. He also referred to the ‘Panda put’ (the investor belief that the government won’t allow the markets to fall. The popular belief these days is that the Chinese government cannot allow the stock or the property market to collapse before October 1, 2009, the 60th anniversary of the foundation of People’s Republic of China. So, the bull run is on at least till then). Do you agree with his views?
Every economist is entitled to his or her views. Andy Xie has been bearish for a long time but the markets are rising. As an investment management firm, we don’t pay much attention to economists or analysts. On the contrary, we pay full attention to the market action and valuations.
Today, stocks in China are slightly overpriced but earnings are growing rapidly, so the rally should continue for at least another year or two.
Moreover, the uptrend is still intact and the latest shakeout looks like a routine bull-market pullback rather than the start of a bear market.
Long-term investors should be buying China as it is the next great country of the world. There are plenty of companies in China that don’t have any dealings with the West and with growing domestic consumption these businesses should reward shareholders over the medium to long term.
Would you say that the rally in emerging markets is primarily because of all the currency being printed the world over finding its way into these stock markets? Do you see a crash coming in the Indian and the Chinese markets in the days to come?
Look. Money printing is nothing new —- it has been going on since gold was removed from the monetary system in the early 1970s. The reason emerging stock markets are doing well is due to the fact that these economies are in a much better position than the developed nations in the West. Today, the West is choking on debt, its banking system is fragile and its households are over-leveraged.
On the other hand, Asia is sitting on massive reserves; the region has a high savings rate and domestic consumption is on the rise. So, investors are obviously pouring their money in the safer parts of the world. As far as a crash is concerned, we don’t claim to be short-term market forecasters but our view remains that the markets will continue to rally until the central banks start raising interest-rates. We don’t see that happening for at least another year.
The western economies continue to print money big time to try and pump-prime their economies. Opinion seems to be divided on what impact this would have in the days to come. However, you recently wrote, “It is my contention that we will get neither hyperinflation nor deflation.” Why do you say that?
Central banks are inflationists; nobody can argue this fact. Rightly or wrongly, they have decided that the solution to every problem is the printing press. Since the implosion of the credit bubble last autumn, Western central banks have desperately tried to combat the deflationary forces by printing money and eventually, this increased monetary base will result in high inflation. For the time being, monetary velocity (the rate at which money changes hands within the economy) is low and as long as this remains the case, we won’t get high inflation.
However, once the economy stabilises and demand returns, we will see very high inflation. We don’t expect hyperinflation because we don’t think that investors in US Treasuries will just sit and watch as Mr Bernanke introduces a trillion-dollar bank note. However, we do concede that the cost of living in most parts of the world will probably double over the coming decade.
Over the last six seven months, there has been a lot of talk about green shoots sprouting in the Western economies. How credible is that belief?
There has been some improvement after the global economy fell off the edge of a cliff last autumn. For instance, there is some indication that American housing is bottoming out and the unemployment rate is close to peaking. However, we are still concerned about the rising foreclosures in the West and nobody really knows how this will play out.
Have financial institutions seen the last wave of trouble?
Make no mistake; it was the foreclosure avalanche triggered by the subprime mortgage resets, which caused the credit crisis. Although the bulk of the subprime resets are now behind us, billions of dollars worth of Alt-A and Option Adjustable Rate Mortgages are coming up for resets between now and 2011. So, it is probable that the second wave of foreclosures will cause even more problems in the banking sector. Accordingly, we are not investing any capital in banks.
One impact of the global slowdown has been demand destruction. But even with that, you remain bullish on the price of oil? Why?
Demand destruction is a myth. For sure, global oil demand has declined by 2.7%, but this can hardly be classified as demand destruction! Consider this data:
According to the US Department of Energy, liquid fuel demand in the developed nations peaked in August 2005 at 41.89 million barrels per day.
Since then, it has plunged by 3.6 million barrels per day to 38.27 million barrels per day. However, you may want to note that despite these tough economic conditions, consumption has been extremely resilient in the emerging world. For instance, demand in the developing countries peaked in October 2008 at 46.33 million barrels per day and it is down by only0.36 million barrels per day!
We are amazed that the worst global recession in decades has barely managed to shrink energy demand in the developing world. Whilst this is wonderful news for the energy investor, it is a terrible sign for society.
The grim reality is that global oil production is peaking and the daily flow rates will probably decline over the medium to long-term. So, supplies will fall at a time when demand is rising and this is why we are very bullish about the price of crude oil.
What’s your prognosis on India? Which are the sectors you are bullish on? The last time we spoke, you said “I like infrastructure, power and the beaten down property development companies.” Do you still stand by that? Do you feel that the Indian stock market has gone up too far too soon?
This may not make any sense to you, but we are bullish about Indian equities. However, we are not so positive about India’s future. If our view is correct, some Indian companies in the sectors mentioned above will probably make a fortune over the next decade. So, they will be great investments for their shareholders.
However, India has numerous problems and we suspect it will be extremely difficult for the Indian government to solve these massive issues. So, in the long run, although some Indian companies should do very well, life for the average Indian may not improve to the same extent.
We have some exposure to India and we will remain invested for the entire business cycle. If and when the market corrects, we will probably add to our positions.
Comments