Commodities vs. the Race to the Bottom

How's the Dollar going to ever increase in value?

FORMER FLOOR TRADER and renowned commodities analyst Kevin Kerr has 20 years and more of experience trading natural resources.

Now editor of his own Global Commodities Alert, Kerr speaks here with Mike Norman of Hard Assets Investorabout the outlook for gold, crude oil and the wider commodities complex...

Hard Assets Investor: Kevin, you have a bullish outlook on oil, but you think the best way to play it is via options. Could you go over that for us?

Kevin Kerr: Let's be clear, this is a longer-term player; we're not going to see oil tomorrow – hopefully – not pop back up to $95 or something like that. I think it's unrealistic, with the employment situation the way it is and the economy around the globe.

But longer term, I firmly believe that oil will continue to march higher based on the problems that we had that got oil higher in the first place.

We had supply problems, we got political strife. We got growing demand when those regions start to fire up again like in India and China; there is real demand there, and here in the United States. Plus, people are not doing anything right now to move into newer biofuels like Mr. Obama has talked about, and certainly investors are not putting their money into alternative fuels when crude is at 35 bucks.

HAI: Right; the same old behavior comes back to a certain degree. But there's a desire for these nonoil alternative fuels. For some companies, that's part of their identity now. They want to go in this green direction.

Kevin Kerr: I think we're slowly moving in that direction, I agree with you there. There has been some change, but not the real dramatic fundamental changes that we need. Again, I'm talking bigger...like infrastructure, building more refineries.

People talk about the Balkan oil fields. But we need infrastructure to get that stuff out of there. We may be drilling, but this is the time we need to do it, not when oil is at $85 or 100 bucks. We need to be having this conversation now. Heck, most of these people weren't even talking about this when it was 100 bucks, so that scares me.

HAI: I think the other point, and it's a big one, is that you have Opec – the cartel which produces 45% of the world's oil supply – announcing a series of production cuts...

Kevin Kerr: Yeah, I think they're taking it seriously. Again, it's a finite period of time in which they can make money from oil – 50 years or whatever they have of production. They want to get the highest price they can for their oil; they don't have any interest in seeing oil drift down to $15 or $20 for a sustained period of time.

But at the end of the day, Opec can't control the oil price. They will cut supplies and that will start to impact our economy. But as people get their jobs back, as we start to grow again, demand is going to pick up; that's the bottom line.

HAI: Let's talk about policy around the globe, specifically fiscal, and efforts to restimulate. How's that going to affect commodity markets – for example, base metals?

Kevin Kerr: I think base metals are a huge sector to look at right now. China has got a vested interest in keeping their people happy. They have billions of people, and a lot of these people have experienced a better quality of life. And now basically with the economy shutting down, they could have political strife. They could have major riots and they don't have any interest in that. So they are doing everything they can, pulling out all the stops.

China just announced another stimulus package, and we're starting to see a base metal like copper really starting to move up faster based on that idea, that they're going to be doing infrastructure, they're going to building – they need these base metals. I think more than the precious metals, forget about them for a minute. Look at the base metals – and that includes silver to some extent – as being front-runners in this recovery in that region.

What the United States is doing, some people would say it's too much, but when you really look at it as a percentage of our economy, and you look at what China is doing, they've being much more aggressive. I think we have to use China as the gauge of when you start to see renewed demand in these industrial metal prices. They were one of the biggest drivers of the commodity rally, right? Let's face it: India and China were doing a lot more buying of the base metals for infrastructure and everything else they were building over there than we were. So yeah, I think it's much more important to pay attention to what's going on there.

They don't have the red tape in China that we have here, they don't have the political wranglings, they don't have AIG to bail out with $160 billion. They're going to put that toward building roads and fiber-optic and whatever else they're doing.

HAI: What about the crops? Corn was supposed to be the next gasoline.

Kevin Kerr: This is the toughest sector to call this year, but I will say that it's a mess. With what we've seen with farmers – and the prices of wheat and corn and soybeans just going out of sight – and the input costs, which we always took by being seed and fertilizer and everything that farmers need, such as diesel fuel...well, these guys were borrowing money to pay for it. They were thinking, okay, I'm going to sell my corn for 8 bucks or whatever, really not thinking this could fall apart.

Yet here we are now: Corn is back down to $3 a bushel, and ethanol plants are shuttered. At the end of the day, I think you're going to see a lot of farmers struggling to keep their doors open, their farms running, and those that can are going to have trouble getting the money for the seed, fertilizer and everything else they need.

I think it's a tough time. I think you could see a lot of these crops, when they come to harvest, suffer a shortfall in supply, especially as demand is picking up worldwide. Plus you've got weather problems in China and elsewhere that have caused drought and everything else. So the same problems exist, but the supply lines I think are going to be a lot less.

HAI: We've got to mention Gold Investment here because it's at the top of the news headlines almost every day. Are you a gold guy?

Kevin Kerr: I'm not a gold bug, but I do like gold; we've owned it on and off. The volatility in the Gold Price has been intense, and I can't really recommend it as a tradable market because I can't base it on anything. It's moving with the Dollar some days; the other days it's not. The old relationships are gone.

I will say, though, that I'm a firm believer that with all this printing of fiat currency, all the money with the stimulus, we're going to see inflation, and gold is a respite, a harbinger of when people are trying to protect themselves from inflation in currency. So I think there is some upside there. I just find it very difficult to trade gold.

HAI: But at some level, isn't gold an asset that people might have to sell if things get so bad?

Kevin Kerr: They might, yes. There could be a lot of liquidity that comes on the market. I have relatives in Eastern Europe, and their currency is in flux right now. In fact, they moved everything to euros and that's not so great either.

So what do you do? Yeah, gold is a flight-to-quality vehicle and people are going to have to cash that in at some point; it's money.

HAI: Does it surprise you that the Dollar really emerged as the strongest asset?

Kevin Kerr: To me it's just a race to the bottom, Mike. I don't know if it's so much moving up as it's just not moving down as fast. Europe is catching up to the US disaster, but yeah, I am a little surprised quite frankly, especially with the printing and giving away of money as we're doing. I'm not one of those that's out there screaming and ranting and raving about it, but I just find it funny because we're putting ourselves deeper in debt.

How's the Dollar going to ever increase in value?