Tim Guinness, the CIO of Guinness Atkinson Funds, sees a long-term bull for gold, and short-term room for natural gas.
HAI: What’s your overall view on the outlook for commodities?
Tim Guinness (Guinness): In the short run, I would take the view that gold and silver and other metals are due to mark time for a period. Until we see how 2011 and the first half of 2012 unfolds — particularly in places like China — there is little to go on there.
I think there is an anomaly in the pricing of North American gas, which is a significant commodity opportunity staring people in the face. I also think that the value of energy equities — those that are exposed to particularly oil and gas — offer remarkable value. If you compare energy stocks to mining stocks since the bottom of the market correction in March 2009, you’ll see that mining stocks have had a heck of a run, where energy stocks haven’t.
HAI: You pointed out that natural gas is looking cheap. In the past, investors who tried to buy into that story using ETFs have suffered because both natural gas futures and ETFs that track natural gas futures have suffered due to contango. What do you think about that way of accessing the market? Does it make sense?
Guinness: Go back two years: I’ve been telling everybody who would care to listen that the contango problem makes oil and gas futures ETFs a pretty unsatisfactory way of addressing that market opportunity. We have had a significant contango for an unprecedented portion of the time, and it has been very expensive.
It is true that Keynes argued that the norm for commodities should be backwardation; in which case, ETFs would be a fine way to play it. But that has broken down in the last seven years and that has hurt investors.
HAI: How would you play natural gas then?
Guinness: I think the obvious way to play it is through energy equities.
HAI: Looking a year ahead, should investors be concerned about movements in the dollar/euro rate when looking at commodities?
Guinness: My perception is that investors in the euro are extraordinarily focused on the PIIG problem, and they’re not focused on the dollar problem. Euroland has got problems in really quite small territories like Portugal, Ireland and Greece. By contrast, the dollar bloc has a huge problem in America, its largest constituent, as a result of quantitative easing and large government deficits threatening to unleash inflation.
This goes back to why commodities have not only been a good investment for the last 10 years but will likely continue to be a good investment. The first seven years — the run-up to 2008 — was based simply on supply and demand problems. But the last three have been driven by both supply and demand, driven by the emerging markets economy, and also the realization, after a few decades, that inflation risk is for the first time suddenly there.
HAI: That brings me to the next question I wanted to ask you: Should gold, for example, be seen as a new reserve currency?
Guinness: Let’s put it like this. I think the world’s monetary system — the experiment with fiat money — that we have been engaged in since 1970 is showing signs of failing. And so we have to then think about, what do we do?
We all know the trouble with gold, or the alleged trouble with gold, is that the supply of gold doesn’t expand as fast as the world economy is growing. If the world’s gold supply only grows a half-percent a year, and the global economy grows 3 percent, then you have a deflationary problem. But it’s more complicated than that.
So if you dig a bit and ask me where the gold price could be in 2025, I will tell you it could be $7,500.
HAI: So you’re saying it has a way to go, in dollar terms, at least.
Guinness: Exactly. If you took the work that Peter Millar does, he has a metric which basically compares the value of the gold reserves in total global Central Bank reserves. He makes the point that in 1950, the value of the gold accounted for 90 percent of Central Bank reserves; it’s now at 10 percent. It’s gone as low as 2 percent.
If it went back to 50 percent, that’s how you easily get to the $7,500 price. It’s not a number that’s pulled out of the air. It’s what would happen if you decide that you’re going to bring back gold so that it was going to play some role in a world market system.
I said, “if we decide." In truth, I think it may actually be imposed on the world by circumstances.
HAI: Looking on to oil again, do you believe that current prices are sustainable? And particularly, the gap we’re seeing in the price of the U.S. benchmark West Texas Intermediate and Brent has grown to all-time highs, which implies that there’s some market chaos behind the scenes. What’s going on as far as that gap in particular is concerned, and as far as the price of oil generally is concerned?
Guinness: We don’t think it’s very sustainable at this level. Our argument is that there is a comfortable level for oil, to which it will revert, but it is around $90 a barrel. We also think that Brent and WTI will come back into a much more normal relationship.
HAI: So there are temporary supply and demand factors that are pushing them out of whack with each other?
Guinness: Correct. To me it’s totally bizarre that arbitrage isn’t working to bring them back into line more quickly. At the end of the day, that cannot persist. It’s an anomaly; it’s very difficult to exploit.
HAI: Final question: Do you believe that investors who are interested in energy are better off focusing on companies and countries, like Brazil, or other raw materials exporters, rather than on pure commodity investments themselves?
Guinness: I do.
HAI: Thank you for your time. It’s been very interesting.