Analyst, trader sees wheat’s potential in Russian shortcomings and new influx of gold investors.
Kevin Kerr is president of Kerr Trading International and a senior analyst at UncommonWisdomDaily.com, a resource website for traders that is owned and operated by Weiss Research. HAI Managing Editor Drew Voros caught up with Kerr, who splits his time between Florida and Estonia, to talk about his perspective on natural gas, Russia and Eastern Europe, and why he thinks gold and grains are the place for investors to be in 2012.
HardAssetsInvestor: Since you live part of the year in the region, can you give us a little insight on Russia in terms of commodities. What are some of the commodity shortages in Russia right now? What are some of its abundances?
Kevin Kerr: Russia has an abundance of pretty much every commodity, except in the agriculture sector. The biggest things they're missing are technology and investment. And now, with them joining the WTO after years of trying to get in, we hope we’ll see better trade and better encouragement of investment in Russia to improve the infrastructure, improve production on drilling and refining and mining, etc. Russians are going to remain very protective of their oil assets, as well as their mining assets. But it’s a good first step to get them in the WTO.
As far as Eastern Europe goes, they're fully dependent on Russia for heating fuels. And it’s a real problem. We’ve seen what Russia has done with the Ukraine in the past. They're now building a new pipeline to circumvent the Baltic States. And Western Europe is also subject to Russia’s whims — whether they want to continue to send heating fuels over or not.
HAI: How is Russia feeling at the moment about its wheat production? There have been some reports that it had contemplated a possible curb on exports.
Kerr: I’ve put out some wheat trades today. We actually got long wheat call spreads out to July because we feel that Russia will curb exports, that buyers will turn to the U.S. for wheat supplies. There are problems for other grains, too. In South America, we’ve had mixed weather reports and quality of crops. Those of us who are bullish on the grains question the USDA numbers that have repeatedly come out sounding very bullish. But if you really crunch the numbers and talk to farmers, it just seems far too optimistic.
When you put all three of those things together — corn, wheat and soybeans, which have been crushed over the last year — are all already making a good comeback. We have beans approaching 12 cents. We have corn back up to $6.50 and wheat is maybe higher. So all the grains right now are very attractive at these levels. I’m a firm believer that the grains will correct this year to the upside.
HAI: What would be the timing on an announcement on wheat curbs in Russia?
Kerr: It’s probably going to be more toward the middle or end of March as we approach planting intentions here in the U.S., before planting actually begins. Of course, they could come out at any time saying they're not going to export.
HAI: How are you feeling about gold?
Kerr: I really believe that gold will break out this year, based on all the currency risk we’re seeing and an influx of new buyers, protecting themselves against, certainly, the dollar and the euro fall, but really, the broad-based fiat currency fall.
This could be the year that gold goes over $2,000 and sustains it, and maybe even marches higher than that.
HAI: And how do you play gold?
Kerr: I primarily use the options on futures and spread options, to limit my risk. Of course, it limits my upside, too. But I like the option spreads, the call spreads on gold, and usually will trade out at least six months. We’re actually trading December’s gold contract right now.
HAI: What’s that contract price?
Kerr: December is trading right around $1,750.
HAI: Not too bad, you’re almost there.
Kerr: The average investor who doesn’t trade gold has to understand that nowadays we’re seeing gold, on some occasions, trade as much as $50-$60 in a day. So $2,000 is really not that far off.
HAI: Let’s talk about natural gas since it is dominating commodity news. What are some of the pitfalls you think about when you're on this topic?
Kerr: Natural gas has always been a tough market. The problem with gas, if I were going to say there's a big problem, is that it’s basically controlled by a spigot. Whenever there's not enough, you just open the spigot a little wider. And when it’s too much, you close it down a little bit. It always was a regulated commodity.
We also have an abundance of gas. That’s the other problem. There is a ton of it here in the U.S. and that’s always weighed on prices. It’s the transportation and distribution network that can interfere with prices, but it hasn’t really ever been enough to get critical mass to really drive prices higher, except for those occasional weather events.
From the investor standpoint, it’s been a tough market to trade just because it doesn’t have a lot of longer-term trends. It trades on a weather curve and fairly short-term trading. Those are some of the challenges.
Liquidity is another one. A lot of the market hasn’t been really liquid. Now, with ETFs and some other stuff we’re seeing, it’s a double-edged sword. We’re getting more involvement, but not always the most liquidity.
HAI: With a consistent down-line trend, investors look at that and say, “I should short that.” There's plenty of production going on and storage is almost at full capacity. Is this one of these commodities that screams to be shorted?
Kerr: I’m very cautious about taking a side on either direction, although the short-side bias has always worked out a little better, just because there are all those elements putting pressure on the gas prices. I will say this: A weather event can certainly spike this market, just because there is so much short-side sentiment. But the long side, when it does get some energy behind it, can move quite quickly. We’ve seen that over the years, especially in the wintertime, or if there's some kind of disruption of another type on the pipeline.
But at the end of the day, prices are getting to levels now where it almost makes sense not to even produce gas. You're going to start seeing less production, which could also ratchet prices back up. That’s another kind of a double-edged sword, though. If prices ratchet back up, then you get production increases as well.
HAI: What are some of the ways that people can invest in natural gas?
Kerr: The futures markets are available to those who have the risk tolerance for that, and the options on futures if you're buying them, of course, which offers limited risk. There are obviously a few key ETFs that trade natural gas. The ETFs are a little better for someone who’s just introducing themselves to trading natural gas.
Then, of course, there are select stocks. One that comes to mind is Williams Cos. (NYSE: WMB). Devon Energy Corp. (NYSE: DVN) is another solid player with good production in line. And they have excellent pipelines. I prefer individual gas producers and transporters. They will continue to grow and those stocks will move higher.
HAI: Let’s talk a little bit more about some natural gas ETFs. One of the problems with United States Natural Gas (NYSE Arca: UNG), obviously, is the contango impact. Does the volatility also affect the contango?
Kerr: It does. The volatility is extreme and UNG has gotten a lot of bad press from a lot of investors who have been confused or just not made money with it. And I think part of the problem with UNG is that it is subject to contango. Also, the weather anomalies we were talking about. Liquidity also has been an issue across the board with the ETF options. UNG is certainly the most traded for natural gas. It’s just a matter of time before it reflects the overall market, more visibly.
HAI: How do traders keep an eye on weather?
Kerr: I use AccuWeather and some agricultural websites. A lot of people depend on the “Farmers’ Almanac,” too. I laugh, but actually, recordwise, it’s been pretty good. Nobody can predict the weather. So it’s best to find a source that everybody is looking at for the weather because then you know that’s how they're going to trade. And since there's a large majority of people who use the “Farmers’ Almanac,” that can also be a good indicator of what people are thinking.
HAI: Is there a part of the country that is more of a weather indicator for natural gas?
Kerr: We typically look at the Midwest, because there are more people in the Midwest who use natural gas than oil than in the Northeast, where the use of heating oil is more prevalent.
HAI: There is a lot of movement toward liquefied natural gas. Is that an option for producers to offset growing inventories?
Kerr: That’s definitely something that this country needs to invest in. Similar to what Brazil did with sugar-based ethanol. We need to put all our resources toward developing LNG that we can export to other countries. We are really the Saudi Arabia of natural gas in the U.S. and we have to find a way not only to use it domestically more efficiently, but to package it up and ship it out and make some revenue for this country.
LNG’s biggest problem is cost. And, of course, these ships that transport LNG are very expensive, very limited in what they can transport, and they're huge. And they're just so expensive. Until we can find a way to compress that natgas and the LNG and transport it, and build these ships effectively and efficiently, it’s going to be elusive.