Gold prices: Central banks will continue to be buyers of precious metals: Juerg Kiener

“So what we have now is really a lot of unfinished contracts that can’t be fulfilled or can’t be fulfilled in the right place. The first thing I did is that gold is money under Basel III, it also has a currency symbol,” says Juerg Kiener, Managing Director and CEO of Swiss Asia Capital.

Help us understand the kind of rally that we have seen in gold prices. It is a one-way rally, a one-way rally, if I may call it that. Now, amidst the global rumors of interest rate cuts coming from the United States and eventually India, do you think this rally has more ends?
Jurg Kiener: The interesting question is where do we really see gold going and why? And I think we need to look a little bit at the history of what’s happened in the gold market over the last two or three years. Basel III, which is basically the International Clearing House, basically put restrictions on selling gold short in the market. So you had to have full collateral. That forced a lot of people with short positions to buy back their short positions, and then we now had this war zone where third-party risk increased, and that meant gold went back to the home countries instead of staying on other exchanges.

So what we have now is really a lot of unfinished contracts that can’t be fulfilled or can’t be fulfilled in the right place. The first part that I said is that gold is money under Basel III, it also has a currency symbol.

It can’t go bankrupt against the currency and that’s another reason why it actually moves. Money depreciation and currency printing continue to accelerate, especially in times of war. So those two things are now the driving force that continues to drive gold higher.

The third element that has just joined the party is the BRIC membership structure, which is likely to be launched by the end of the year, along with a payment system that will probably require 40 percent gold backing, or perhaps some alternative assets, to settle transactions. This means that many BRIC member countries will continue to hoard gold to actually meet their payment obligations.

Central banks around the world and their gold reserves, we’ve heard that the Chinese central bank has been actively accumulating gold over the last year. So, do you think that’s going to have a big impact on global gold prices? And if so, how big of an impact do you think that’s going to be? And if that trend reverses, what kind of impact would that have?
Jurg Kiener: It will continue to accelerate globally, but particularly among the BRIC nations. Central banks will try to increase the amount of gold and risk-free assets they hold in national banks’ reserve currency accounts.

And as this global debasement of money printing continues, central banks are going to have to at some point create stability, create an opportunity to continue to print money. And the only thing they’re going to have left on their balance sheet to create that confidence is the revaluation of gold through the account. So everybody wants to go higher. Most of them are somewhere between 2% and 4% of their asset base. And I think they’re going to go at least to about 8% to 10%. And so central banks are going to continue to buy this precious metal that shines so brightly.

Similarly, I just want to understand, gold, silver. Prathamesh says at least 5% to 6% of the portfolio should be in gold, silver side, which should be held. What are your thoughts on gold and silver and also the rise in silver prices, what are you looking at in terms of triggers?
Jurg Kiener: I think the trigger has already been there in the last few weeks. Cyclical breakout structures in all the base metals. When it comes to silver or gold, gold is the leader. Silver is the follower. Silver is the one that is going to move much faster because it is accelerating than gold because it is a much smaller market. There are much more bottlenecks in the supply and demand structure itself.

The absolute undervalued asset in the gold and silver space is miners. They have basically not made any money for, let’s say, 12 years, and this momentum that we have in gold price acceleration means that their earning power is actually accelerating.

And if you look at the last quarterly earnings of most mining companies, which were basically based on earnings around 2,300, they’ve doubled.

You can almost expect those gains to double again. And I think a lot of people are not exposed to that. We still see people selling mining stocks. We still see people selling gold and silver ETFs, which is incredible, looking at the momentum and the firepower that is actually on these charts and technical structures that are very well supported by the fundamentals.

I want to understand, do you think that this is some kind of peak that we see in the upcoming run-up of gold, silver, or is this just the beginning of the run-up? Over the last decade, you look at it too, gold prices have certainly been steadily rising, we’ve discussed that as well, but are we at least near the peak?
Jurg Kiener: If I look at the picture of investment managers, I think the average institutional ownership of the metal globally is well below 0.5%. So, basically, most people don’t have exposure yet and you know how it is when things get really positive, more and more people get involved. So, the big money hasn’t arrived yet, the retail money in the West has been the sellers, the Asians have been the buyers and you can see that in terms of the premiums paid, let’s say for silver in China, it’s $4 more than in London.

That tells you that we have shortages and those shortages are driven by the stock exchanges and they need to be met, which means we will need higher prices to balance the book. So the international business as such will drive the price, it may not be the small Indian retail investor in this round, I think they will continue to buy at whatever they can, which is great, even at higher prices, I think they will continue to do so.

But I think it’s the large institutional investors who now have nothing or next to nothing who are going to increase their positions, as well as the central banks increasing their positions, and that’s going to mean that prices are only going to have very short and shallow dips before they go up.