Gold prices: Central banks will remain buyers of the precious metal, says Juerg Kiener

“So what we have now is actually a lot of outstanding contracts that either can’t be fulfilled or can’t be fulfilled in the right place and the first part I said is that gold is money under Basel III, it also has a currency ticker,” he says. Jurg KienerManaging Director and CEO of Swiss Asia Capital.

Help us understand the type of rally we have seen in the gold pricesIt is a one-way rally, if you can call it that. But amid global talk of rate cuts in the US and eventually in India as well, do you think this rally has more scope?
Jürg Kiener: Interesting question: where do we actually see gold going and why? I think we need to look a little bit at the history of what happened to the gold market over the last two or three years. Basel III, which is basically the Bank for International Settlements, introduced restrictions on short selling of gold in the market. So there was a need to have full collateral. That has forced a lot of people who had short positions to buy back their short positions and then we used to have this war zone that was forming, where third party risk was increasing and that meant that gold was going back to the countries of origin rather than staying in other markets.

So what we have now is actually a lot of outstanding contracts that they can’t deliver or they can’t deliver at the right place and the first part that I mentioned is that gold is money under Basel III, it also has a currency ticker.

You can’t default on the currency and that’s another reason why it really moves. The devaluation of money and the printing of money keep accelerating, particularly during wars. So, these two things are now the driving force that keeps pushing gold up.

And the third element that has just joined the party is actually the BRIC Membership structure that will probably be put in place by the end of the year with the payment system that will probably require 40% gold backing or maybe partially from alternative resources to settle transactions and that will mean that many of these countries that are members of the BRIC will continue to hoard gold in order to actually meet their payment obligations.

He central banks Globally and its gold reserves, we have been hearing that China’s central bank has also been actively accumulating gold over the past year. So do you think this will have a major impact on global gold prices? And if so, what impact do you think it will have? And in case this trend reverses, what impact will it have?
Jürg Kiener: Across the world, but especially among the BRIC countries, the acceleration will continue. Central banks will try to increase the amount of gold they hold and the risk-free assets in their reserve accounts in national bank currencies.

And as this global devaluation of money printing continues, central banks will be forced at some point to create stability, to create an opportunity to continue printing money. And the only thing they will have left on the balance sheet to create this confidence will be a revaluation of gold through the account. So, they all want to get to higher levels. Most of them are somewhere between 2% and 4% of their asset base. And I think they are going to get to at least around 8% to 10%. And so, central banks will continue to be buyers of that precious metal that shines so brightly.

Similarly, I just want to understand gold and silver. Prathamesh says that 5-6% of a portfolio should be gold and silver. What are your thoughts on gold and silver and the bullish move in silver? What are you paying attention to in terms of triggers?
Jürg Kiener: I think the trigger has already occurred in the last two weeks. A cyclical breakout structure has formed in all the underlying metals. If it is silver or gold, gold has been the leader. Silver is the next. Silver is the one that is going to move much faster as it accelerates faster than gold because it is a much smaller market. There are many more bottlenecks in the supply and demand structure as such.

The absolutely undervalued asset in the gold and silver sector is the mining companies. They basically haven’t made money for, say, 12 years and this momentum we have from accelerating gold prices means their ability to generate profits is actually accelerating.

And if you look at the quarterly earnings for the last quarter that came out of most of the miners, which were basically based on earnings of about 2,300, they doubled.

You can almost expect these gains to double again, and I think a lot of people aren’t really exposed to that. We still see people selling mining stocks. We still see people selling gold and silver ETFs, which is really incredible if you look at the momentum and the firepower that’s in these charts and technical structures, which are very well supported by fundamentals.

I want to understand, do you think we are now seeing a peak approaching the rise of gold and silver or is it just the beginning of a rise? If you look at it, over the last decade, gold prices have certainly been steadily increasing, we have also talked about that, but are we close to the peak at least?
Jürg Kiener: If I look at the landscape of investment managers, I think the average holding of the metal in an institutional portfolio globally is well below 0.5%. So basically most people still have no exposure and as you know, when things get really positive, more and more people get involved. So the big pool of money hasn’t really arrived yet, retail money In the West, the sellers have been the buyers and the Asians, and you can see that the premiums paid, say for silver in China, are $4 higher than in London.

That tells us that we have a shortage and that shortage is generated in the exchanges and it needs to be filled, which means that we are going to need higher prices to balance the books. 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 with everything they can, which is great, even at higher prices, I think they will continue.

But I think it will be the big institutional investors, who currently have nothing or next to nothing, who will increase their positions, as will the central banks, which will mean that prices will only have very short and shallow falls before reaching higher prices.