Where eight renowned investors think commodity prices are going

The Globe and Mail

Vancouver mining mogul Frank Giustra. (Michael Falco for The Globe and Mail)

FRANK GIUSTRA

‘If I’m wrong ... I will sing Patsy Cline’

Gold’s 12-year bull run is not over, according to Vancouver mining mogul and philanthropist Frank Giustra, despite the severe price correction the precious metal suffered this week.

Mr. Giustra, who has amassed a fortune through a series of junior mining deals, including the creation of the company that is now Goldcorp Inc., said he is now considering switching his gold investments from exchange-traded funds to major gold-mining companies and is willing to endure humiliation – in the middle of downtown Vancouver – should his call on the commodity be proven incorrect.

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“If I am wrong, if this gold bull market is over, I will stand in the centre of Robson Square and I will sing Patsy Cline’s So Wrong wearing ladies’ underwear,” Mr. Giustra said in an interview this week.

Gold has fallen about 14 per cent this month and plunged 9.3 per cent on April 15, the largest one-day drop since March, 1980, according to data from Bloomberg News.

In spite of that selloff, Mr. Giustra is confident the yellow metal will rebound because central banks in North America, Europe and Japan are continuing to “print money” through asset purchase programs known as quantitative easing. Despite years of tepid increases in consumer prices, Mr. Giustra insists that inflation is poised to kick in as a result of global monetary policy decisions that have pushed interest rates to historic lows.

“Nothing has changed on the fundamental side ... the behaviour that caused this gold market in the first place is just intensifying with all this money printing that’s going on around the world now,” Mr. Giustra said in a phone interview from the Vancouver airport. He was about to board his private jet for a flight to New York to attend a meeting of the board of trustees of the International Crisis Group, an independent international non-government organization committed to preventing and resolving deadly conflict.

Mr. Giustra called the recent plunge in the gold price and gold mining stocks a “correction and a pretty severe one, but not unheard of.” The Vancouver resident, who counts former U.S. president Bill Clinton as a close friend, said the price of gold corrected by 44 per cent in the mid 1970s before it went on to hit a then record of $850 (U.S.) an ounce in 1980. Gold hit an all-time high of $1921.15 in September, 2011, according to Bloomberg data.

During what has been called the “commodity supercycle,” Mr. Giustra made hundreds of millions of dollars for himself and his associates by assembling mining properties and management teams and taking the assets public on the Canadian stock market using dormant shell companies. He created gold, oil, copper and uranium mining firms. Two years ago, he bet that the beaten-down junior mining sector had bottomed out. He was incorrect.

“I thought it was cheap two years ago. Oh my God, look at it now,” he said.

Mr. Giustra said he is still “heavily” invested in gold, real estate and farmland. He continues to buy art and is holding plenty of cash to be ready to invest once what he deems a deflationary period comes to an end.

Gold has traditionally been seen as a store of value and a hedge against inflation. Mr. Giustra conceded that consumer prices in Western countries have not risen significantly, but he said there has been severe inflation in the price of certain assets such as real estate.

“We haven’t seen inflation in the classic sense ... but you have seen inflation in the form of asset bubbles. If you look at the S&P [500 index] right now, I think that is partially an asset bubble caused by easy money. It’s easy money that is driving the S&P to all-time highs, not actual economic conditions or earnings,” he said.

In 2003 and 2004, Mr. Giustra began selling his stakes in senior gold-producing companies and buying physical bullion and exchange-traded funds in Switzerland that are backed by actual gold. Now he’s considering reversing that trade.

“For the first time in almost 10 years I’m seeing a disparity in the price of gold and gold-mining companies that I’m starting to think of doing the switch from ETFs back into certain gold miners,” he said.

Andy Hoffman

JAMES GRANT

Aa warning about a coming financial crisis

Tumbling commodity prices over the past week are a warning sign to investors that China’s “economic miracle” is actually a gross manipulation of markets that will eventually have a nasty ripple effect across the world, says an outspoken critic of central banks’ stimulus efforts.

“Something has changed, and more significantly, people have noticed the change,” says James Grant, publisher of Grant’s Interest Rate Observer, a highly regarded bimonthly commentary on the world’s financial markets.

Mr. Grant says the world’s major central banks have been distorting the true price of assets, such as stocks and commodities, by suppressing interest rates and printing trillions of dollars worth of currency in an effort to stimulate demand. He believes that such policies by the People’s Bank of China will prove particularly harmful given that they are layered on top of the central planning policies of the Communist Party.

Efforts by the U.S. Federal Reserve and other central banks to jump-start demand have failed, Mr. Grant argues. Each new dollar or yuan added to the economy is having less and less of a stimulus effect and is instead further inflating asset and consumer credit bubbles. As China’s economy continues to slow, commodity prices will decline further, and it’s possible that China will even slip into a recession, he says.

In today’s world of suppressed interest rates and manipulated markets, financial crises come faster and more furiously, Mr. Grant says, noting that it took 25 years for stocks to rebound from the Depression in the 1930s but only four years for markets to recover from the financial crisis in 2009. The accelerated cycles are the result of distorting policies and they leave governments and markets “more accident prone,” he says.

Investors should respond by keeping large amounts of cash, looking for buying opportunities in depressed sectors. At the moment, shares of mining companies look like one of the best contrarian plays, he says.

Mr. Grant is also a huge fan of bullion, which he categorizes as a monetary asset rather than a commodity. “The price of gold is the reciprocal of the world’s faith in management of the world’s central banks,” he says. “If you believe that they are in charge of events, as opposed to events in charge of them, then you do not want to waste your time with gold.”

Simon Avery

MARK MOBIUS

Betting on an upturn in commodities

China’s slowing rate of economic expansion could actually be good news for investors, says Mark Mobius, executive chairman of Templeton Emerging Markets Group.

Taking some steam out of the national economy reduces the risk that China will overheat, a scenario that has spooked markets several times in the past few years. The world’s second-largest economy simply cannot keep growing at a 10-per-cent clip, or even the 8-per-cent rate it has hovered near more recently, the money manager says.

Four to five years from now, China will likely be expanding at a more sustainable rate of 4 to 5 per cent annually. “China is still a very dynamic economy,” says the 76 year-old globetrotter, who has spent more than 40 years investing in emerging markets.

While China has driven global commodity demand for the past decade, this week’s selloff in commodities should not be seen as the beginning of the end of the global commodity supercycle. Although the decline may continue in the short term, “later in the year we will probably see an upturn in commodities,” he says.

Hedge funds and other sophisticated investors probably had a lot to do with gold’s “frightening fall” in recent days, but the long-term trend for gold prices remains upward, argues Mr. Mobius, who directs Templeton’s emerging markets research team. “Personally, I’m buying more [gold] at this stage of the game.”

He sees price support coming from India, the world’s largest consumer of the precious metal, where demand in recent years has always gone up when global prices dip. In addition, he thinks that in trying to stimulate the economy, the world’s major central banks will eventually stoke inflation, driving investors to bullion.

Commodities producers have begun cancelling large new production projects and that trend will continue. But Mr. Mobius says his fund will continue to hold their shares and will increase certain holdings when prices look cheap.

Beyond raw materials, Mr. Mobius suggests investors buy shares of well-managed companies with solid dividend payments. He recommends 30 per cent exposure to emerging markets and another 5 per cent to frontier markets, which include economies such as Vietnam and Nigeria.

Mr. Mobius is not a fan of defensive strategies that direct money to government bonds and savings accounts. “If you think your money will be safe in a bank, go and talk to the people in Cyprus,” he says.

Simon Avery

B. MUTHURAMAN

A softened market for iron ore

Two barometers of the global economy, iron ore and coal, are set to soften in coming years as they feel the pinch of a teetering commodities cycle, according to B. Muthuraman, vice-chairman of Tata Steel Ltd.

He predicts that bulk commodities will come under the same pressures hitting other metals as new production comes on line.

“There will be a new normal” for iron ore and coal, key ingredients for steel making, says Mr. Muthuraman, whose company has been producing steel for almost as long as it has been mass produced. He forecasts that the new, higher-cost projects launched to feed the commodities boom years ago will depress prices as their production hits the market, but healthier steel demand in China and India will mitigate by how much.

“So, while the long-term prices of iron ore and coal are not going to be the peak prices of 2005 or 2006, they will definitely be higher than what existed for 100 years between 1900 and 2000,” Mr. Muthuraman said during a visit to Canada this week, where Tata is building the $800-million DSO (Direct Shipping Ore) project with New Millennium Iron.

Prices for metallurgical coals and iron ore, one of the world’s most traded commodities by value, have bounced around but largely been driven higher on demand from China, India and other emerging economies after what amounted to a 30-year lull following the Second World War.

Mr. Muthuraman suggested a new normal for iron ore prices may be $80 (U.S.), $90 or $100 a tonne, compared to $120 now and $150 in 2007. Coking coal prices might settle at $175 or $200 a tonne, compared to $300 six years ago. “What we’ve seen in the last ten years we’re not going to see for the next 10 or 20 years,” he said in an interview.

The Tata/New Millennium joint venture will go into production at the end of this year or early in 2014, shipping three million tonnes of iron ore a year to Tata’s steel mills in Europe and ramping up to six million in three years.

The companies are also conducting a $50-million (Canadian) feasibility study on a potentially massive, $5-billion iron ore development in Quebec and Labrador. Mr. Muthuraman said a potential decision there was likely at least a year away and will depend on the investment climate, including factors like the tax regime in Quebec, which is looking at increasing mining royalties.

“We know the Quebec government is looking at this and it will be important that the regime encourages investment,” he said.

Pav Jordan

TYE BOUSADA

A call on consumers and financials

For Tye Bousada, predicting the path of China’s economy matters less than making sure your portfolio is diversified. But how to find the right mix?

Diversification doesn’t come with the TSX composite, which is laden with mining and oil stocks that are sensitive to China’s growth numbers. Energy and materials make up nearly 40 per cent of Canada’s equity benchmark, a potential hazard to owners of index funds.

“There’s a high correlation between the TSX and emerging markets,”said Mr. Bousada, founding partner of EdgePoint Investment Group Inc. and former manager of the Trimark Fund. “Whatever your view is, it doesn’t really make sense to have [nearly] half of your money – if you own the TSX for example – invested in one idea, and that idea is China.”

EdgePoint’s portolio isn’t reflective of the index. The top holdings in its Canadian fund, for example, include such names as Tim Hortons Inc., Shoppers Drug Mart Corp., property insurer Intact Financial Corp. and Onex ~Corp., the investment company run by Gerry Schwartz. But “that’s not due to a macro call on commodities, it’s just due to appropriate diversification.”

It’s not the first time Canadian investors have found themselves whipsawed by a global markets mega-trend. Mr. Bousada pointed to the “new economy” that emerged in the late 1990s, which celebrated the rise of high-growth service industries and technology as drivers of the economy, and caused Nortel Networks Corp. to gain outsized importance in portfolios.

“People believed a dozen years ago that if they owned the TSX, they were owning a broadly diversified index. But the reality was, half their money was invested in one idea, and that one idea was called the new economy. And it was fine to believe the new economy was going to change the world and have investments in that, but the issue was, when it went wrong you essentially went wrong on half your money.”

His firm doesn’t expressly have a macro-view on China or what might happen there, because it is focused on picking businesses, not sectors. But it’s being selective about commodity stocks.

“We have some exposure to the energy sector, and none to base metals or gold,” he said. Lately, the firm has started to sniff around miners of the yellow metal, but only at companies that can exist at $800-an-ounce gold prices. And there aren’t many of those.

Jacqueline Nelson

JIM ROGERS

‘I would say buy the Swiss franc’

Singapore-based investor Jim Rogers says China’s slowdown shouldn’t be a surprise to anyone paying attention – especially considering the government’s attempts to keep inflation under control and manage what many consider a property bubble.

“It’s been announced over, and over, and over again. I would suspect that it will continue, at least for a while, given the state of the world,” he said in an interview.

“China doesn’t sit there in an empty vacuum,” he said. “China’s problems will contribute to what’s going on in the rest of the world, and the rest of the world contributes to China’s problems too. They work together.”

At the same time, the Alabama-raised Mr. Rogers believes the commodities “supercycle” is far from over. He said there are significant ups and downs in any market run, and the supercycle won’t truly be done until significant new supplies come on stream.

“Commodities are down right now but I would remind you that we had a bull market in stocks from 1982 until 2000, 18 years. And during those 18 years, at one point stocks – in 1987 – went down 40 to 80 per cent,” he said. (The Dow Jones industrial average fell 36 per cent between Aug. 25 and Oct. 19 that year, although it rebounded and ended the year in positive territory.)

Mr. Rogers said an aggressive investor today should put money into Russian government bonds. He also said the Russian ruble is a relatively safe currency, even for a more cautious investor.

Previously a critic of Russia, Mr. Rogers surprised many last year when he became an adviser to the agricultural fund run by VTB Capital, a Russian state-controlled investment bank. While he once argued that Russia was unworthy of investment, as it was overly reliant on oil production, it had weak public institutions and people were leaving, in 2012 he said Russia had all the ingredients needed “to become the world’s agriculture powerhouse.”

But he said that in general, investors need to use caution right now: “My top idea for aggressive investors is to be very careful, because these are perilous times. And we’re probably going to see more declines of things.”

While an investor looking for a safer place to stash their money should look to currencies, that strategy, too, has its pitfalls.

“What kind of cash? That’s a problem too. If you put it into the wrong currency, you can lose your shirt. A lot of people put their money in the Icelandic krona, thinking ‘I’m safe. I have nothing but cash.’ And then the currency collapsed,” he said.

“I guess I would say buy the Swiss franc. Put your money in cash in Swiss francs.”

Kelly Cryderman

SEYMOUR SCHULICH

Bullish on the future of natural gas

Gold magnate Seymour Schulich says everyone his age is worried about the global economy, especially when it comes to the central banks printing money, or national governments running up massive public debt.

“The people in my peer group are scared to death,” the 73-year-old investor and philanthropist said in an interview.

“The rate of paper printing going on in the world is humungous. The amount of debt being taken on by the governments to stimulate their economies is humungous,” Mr. Schulich said.

“When exactly the chickens come home to roost, nobody is smart enough to know – except those of us that are old and have seen the playing field for a long time know it will happen.”

But it’s not all doom and gloom from the Toronto-based billionaire, who made his fortune with gold royalty investments. An abiding fixture of the North American investment and business scene for more than four decades, Mr. Schulich believes natural gas is headed for a revival, and not surprisingly, still counts gold as a rock-solid investment.

Even though gold prices have plunged and gold companies are struggling, “the beauty of gold is it can’t be printed by governments.” Cautious, conservative investors should still invest in “gold, gold and more gold.”

Mr Schulich said he still likes New Gold Inc. and Franco-Nevada Corp. He also advises that “every investor should have 10 to 15 per cent of their money in gold. And I mean gold, not gold companies.”

With signs of a natural gas rebound, Mr. Schulich also takes a measure of pride in the fact he held on to his stock in the sector even as others fled the market. He has a controlling share in Birchcliff Energy Ltd., a Calgary company that he describes as having “a humungous amount of gas in the Montney.”

While new oil pipelines face tough resistance from landowners and environmental groups, Mr. Schulich said he doesn’t see the same opposition to natural gas transport. Canadian gas is closer to Asian markets than other sellers, and reserves are onshore. He predicts natural gas could be up in the range of $5 to $6 per million British thermal units a year from now.

“I’m very bullish on gas. Primary because I think if we’re smart enough, I think the LNG [liquefied natural gas] export opportunities are tremendous.”

Mr. Schulich said the commodities supercycle is far from over, but a “pause” in China’s ferocious consumption of materials such as coal, steel, copper and aluminum means there’s going to be a longer slowdown than he first thought. News reports on the size and scale of the Chinese overbuild have surprised him.

“The duration is hard to read. But there is a pause, and it could be a little longer than we all thought.”

In a period of uncertainty such as this, Mr. Schulich added one other piece of advice.

“You want to have cash around to a reasonably large degree. That’s a personal preference, but that’s my preference.”

Kelly Cryderman

ROB ARNOTT

A time to buy investments at a discount

Rob Arnott has been telling his clients for a long time to diversify beyond stocks, bonds and cash. Commodities have been one of his preferred alternatives, and despite the beating markets delivered over the past week, he continues to favour them.

“It’s a move in the direction of a new buying opportunity,” the chairman of Research Affiliates says of the tumbling prices. Consumers are always delighted when they can buy products on the shelves at a discount, Mr. Arnott says – so why shouldn’t they adopt the same outlook with commodities?

The renowned U.S. money manager, who oversees Pacific Investment Management Co.’s All Asset Fund, advises buying commodities over repeated intervals in an effort to average costs, rather than trying to time the market. Commodities are notoriously volatile, but Mr. Arnott estimates the downside risk to be a maximum of 20 per cent from this point. On the other hand, in the next market cycle, which could begin as early as the end of the year in some regions, we could see prices double off their lows, he adds.

Mr. Arnott is not discounting the fact that China has reported weakening growth. He agrees that the world’s second-largest economy has likely entered the early stages of a long, protracted period of slowing growth. Within three to five years, it’s quite possible that the country’s gross domestic product expansion will have slowed to 5 per cent, he says. While this rate would be alarming to the Chinese, it would still represent sufficient growth to support rising prices for commodities for a long time.

Commodity prices will also get a lift from the “reckless money printing in the corridors of power around the world,” Mr. Arnott says. Overspending by governments will help drive noteworthy increases in inflation, one to three years from now, and that will lead to rising prices of hard assets, he says.

Beyond commodities, Mr. Arnott thinks that emerging-market bonds remain a good deal and emerging-market stocks are becoming attractive again after selling off this year.

And despite fears by many investors that high-yield bonds have entered the bubble zone, he says interest rate spreads are within historical norms and default risks are lower than average, thanks in part to governments’ reluctance to see businesses fail.

Simon Avery

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