An Interview With "Trader Vic"

Includes: DGL, GLD, IAU
by: Hard Assets Investor

Victor Sperandeo … aka “Trader Vic” … is one of the most famous commodity traders in the world. In addition to trading his own account, Trader Vic has invested independently for the likes of George Soros, Leon Cooperman and BT Alex Brown. Sperandeo was featured in the best-selling books, Super Traders and The New Market Wizards. In a recent interview on CNBC, you said gold could go to $1,000/ounce … soon. Why do you think there is still upside in the price of gold?

Victor Sperandeo (Trader Vic): I was not bullish on gold until November 2005, when I recommended it at $592/ounce. I recommended it as a “catch up” commodity. If you look at 1982 when the bull market started for stocks, and you took the CPI and compounded it on the price of gold, you got a number close to $700/ounce. In other words, if gold prices just kept up with inflation, gold needed to rise $100/ounce. If you adjusted based on the price of oil, $1,000/ounce was a first stop and fair value was around $1,600/ounce. It is a “catch-up commodity.”

The reason I’m bullish in the short term is that China just came out with gold futures; they started trading on January 7. There are a huge number of Chinese who want to buy gold. The country is industrializing and some of the people are becoming more affluent. The numbers are big. There are a billion-plus people in China, and maybe 500 million men. Maybe 10% of those men will get married in the next several years. If you take the amount of gold needed to make two wedding bands for each of those men, gold would be at $1,500/ounce on that demand alone.

You’re going to get a pyramid into gold for China: People will buy the futures and once they make money, they’ll buy more. Then it will go up more and they’ll buy more. You get to $1,000/ounce quickly on that. I see it all all-time highs. Does that bullish posture extend down precious metals?

Trader Vic: Yes and no. It doesn’t extend directly because China did not list silver futures or platinum futures or palladium futures. When you offer the product, you get huge demand. Gold will be the leader because it is the one that is listed. When the others come on board, they will get huge demand too.

If Pakistan heats up, I would buy silver. There’s a global shortage of supply in silver, and that supply is filled by Indian citizens selling their hordes of silver. If there’s problems in Pakistan, they will hoard that silver, and prices will go up.

Generally, I think both silver and gold have great fundamental potential here. Is there anything that could derail that performance?

Trader Vic: Not really, in my opinion. If oil were to come down in a big way, that might cause a holdup in the rise of gold. But for gold to be equivalent to oil, it has to go to $1,600/ounce … or more.

The fact is that [to slow down gold] you need a plunge in oil, a big rise in the dollar or a rise in interest rates ... and you’re not going to get any of those. The Federal Reserve has to lower rates for the election, and with the crisis in housing and the slowdown in the economy, the Fed will continue to lower rates even though the CPI is moving up aggressively. The Fed says that they are concerned about inflation, but they really don’t care or else they would be raising rates. Outside of gold, what other areas of the market are looking good right now?

Trader Vic: All of the commodity charts look extremely strong. Softs are starting to move up in a more aggressive fashion. Things like cotton and cocoa did very little last year, but now they are going up. Copper has struggled a bit but it is making a bottom, and even livestock is now doing better. I think the softs are in a good position here. Where are we in the current commodities boom: the first inning or the eighth?

Trader Vic: Commodities are cyclical. Nothing goes in a straight line. But we’ve already seen some pullbacks. Commodities paused when [Federal Reserve Chief Ben] Bernanke raised rates in June of 2006: oil fell from the $80/barrel rage to $50/barrel. But now it’s back at $95 - $100/barrel. Similarly, copper went into a correction, and now it’s bottoming out.

Because of the nature of the election and the problems in the housing crisis, and with Europe slowing down to the point where they are going to start lowering rates, we are probably finishing the second inning and going into the third inning [for the commodities boom]. What sector of the commodities market is most attractive right now?

Trader Vic: I am most bullish on precious metals and softs and less bullish on agriculture and energy. Grains and oil made big moves last year. I’m not saying that grains and oil will go down, but they are not going to appreciate at the same rate they did last year. Does $100/barrel oil make sense?

Trader Vic: It’s all supply and demand and inflation. The current period is dominated by demand from the emerging nations, which recently went from complete socialism and communism to a much freer economic policy, creating tremendous demand for commodities.

The environmental/green movement is adding fuel to the fire. Drilling and digging are opposed everywhere in the world. That, coupled with the growth of the emerging markets, creates a tremendous out-of-whack supply and demand equation. Does indexing make sense as an investment approach for commodities?

Trader Vic: I’ve been trading commodities for 40 years. It isn’t easy. You need a tremendous amount of discipline because the leverage is so large and the movements are so quick.

If you’re the average investor, your best bet is to buy a broad-based commodities index. That would give you less volatility than with futures and margin. Any favored index?

Trader Vic: You have a lot of choices. I’d avoid the S&P GSCI this year, because oil has already moved and the GSCI has a large allocation to energy. The DJ-AIG is more broad-based index. Also, the S&P DTI and CTI is a long/short method of participating in commodities.

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