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Market View: What next for crude oil, silver and copper equities? 

The Macro View

Oil refinery at night

I doubt if West Texas crude oil rebounds beyond $52 in the short term without clear evidence that Saudi Arabia and its GCC allies can persuade Russia, Iraq, Algeria and Iran to keep their output cut promises amid a global glut and resurgent US shale oil rig count growth.

If Saudi Arabia wants to avert another oil price crash that will make the Aramco IPO unviable, it must cut out output again as well as impose quota discipline on Russia and Iraq. The kingdom’s statement that it backed the Vienna output deal was crucial to avert a bearish stampede in the oil futures pits. When OPEC meets next in May, Saudi Arabia will have to engineer fresh cuts while global inventories are drawn down. There is no other choice. Riyadh underestimated the speed and scale of the US shale oil output snapback. The era of $70, let alone $100, is over for good.

The oil and gas major with the lowest cost output and longest life reserves in the Permian Basin in Texas, the epicenter of US shale oil drilling, is Occidental Petroleum (symbol OXY). Oxy, whose late legendary chairman Dr. Armand Hammer dealt with every Soviet leader from Lenin to Gorbachev, who wildcatted the great North Sea and Libya gushers in the 1970’s, offers a 4.8% dividend yield and 5 – 6% output growth. If Harold Hamm is right and US shale oil drillers go for “measured growth” in order not to “kill the market”, Oxy is a buy at 62 for at least a 10% rise in its net present value. Exxon Mobil, as I had expected when it traded in the mid 90”s, has now snuk to 80. No interest, though Chevron is close to my 104 buy level and I remain committed to Total whenever France’s sole Seven Sister hits 42 Euros for its fabulous free cash flow yield. My assumption is Saudi Arabia and Russia will defend the current oil order, not engage in a global game of chicken that destroys it.

Janet Yellen’s (sort of) dovish stance at the March FOMC makes both gold and silver a tactical buy again, given that King Dollar is now a dangerously crowded trade. In such a market milieu, silver invariably outperforms gold as the Federal Reserve is willing to tolerate negative real interest rates since it believes a rise in inflation above 2% is temporary. This is a formula for a lower US dollar and higher silver/gold prices. The gold silver ratio, 32 in 2011, is 72 now. This means Janet Yellen has given us a green light to buy the “white metal”. I am once again a passionate silver bull, haunted by the ghost of Nelson Bunker Hunt, beyond greed. Miner strikes in Peru, Chile and the Mexican peso swoon will limit supply while demand surges due to solar panel/auto/chemical catalyst/batteries applications. Global purchasing manager indices have begun to accelerate in the US, Eurozone, India and China while Brazil and Russia emerge from recession, all bullish for silver’s industrial demand curve.

The gold-silver ratio peaks at 84 I last saw were in February 2016 as China/crude oil were in meltdown mode and October 2008, when Lehman’s failure ignited a global credit market seizure. This is the ultimate downside risk for silver’s relative value trade. I believe spot silver can well rise to $22 by year end 2017 as the silver bulls read the smoke signals from the Fed, South America’s mines and the global industrial economy. The 2.5% contango in the silver futures contract is simply irresistible?

Freeport McMoran is the one of the world’s largest gold and copper producers but its New York listed shares (symbol FCX) have been slammed from 17 to a recent 12.60 due to a contract dispute with the Indonesian government at its Grasberg mine and a miner strike at the Cerro Verde mine in Peru. Wall Street analysts have slashed earnings estimates for Freeport even as the shares tanked. Freeport halted copper concentrate exports from Grasberg, 50% of earnings, in the past three months. A strike in Chile’s Escondida, the world’s largest copper mine, has amplified the deficit in the red metal. Dr. Copper is up 30% on hopes of Trump’s infrastructure program and China’s fiscal/monetary stimulus. Dr. Copper, with its Ph.D in macroeconomics, predicts stronger global growth. This will be hugely bullish for Freeport once it resolves its Indonesian dispute as it is the world’s biggest pure play copper miner.

Currencies – The pound sterling and the new politics of Brexit.

The reality of Brexit has sunk into the currency markets now that Theresa May has finally invoked Article 50 of the Lisbon Treaty. It was impossible for Planet Forex to price the politics or economic fallout of Brexit ever since the June 22 referendum, the reason the path of least resistance was simply to short sterling. This was the reason I was consistent in my recommendation in this column to stay short the British pound against the US dollar, when cable was 1.34 in early September and later 1.26 in late November. 2017 has seen one of history’s great sterling devaluations, comparable to 2008’s banking crisis meltdown, 1992’s Black Wednesday forced exit from the ERM Deutschemark peg, 1968’s Harold Wilson “pound in your pocket” debacle and 1931, when Ramsay MacDonald took the British Empire off the gold standards. To paraphrase Keynes, in the long run we are dead – but in the short run, we get margin calls!

In retrospect, David Cameron’s resignation, the surreal Tory leadership contest (Boris as PM?) and Mrs. May’s strident “hard Brexit” speech at the Tory conference in Birmingham amplified the perceived political risk in owning sterling and gave momentum to the sterling bears, most notably in the Singapore “flash crash” when sterling actually changed hands at my 1.15 target levels.

The Macro View

About Matein Khalid

Matein Khalid

Matein Khalid is Chief Investment Officer of Asas Capital in the DIFC; he is responsible for global investment strategy and the development of the multi family office platform. He has worked in Wall Street money centre banks, securities firms and hedge funds in New York, London, Chicago and Geneva. In addition, he has been an advisor for royal investment offices in the Gulf for 8 years. Mr Khalid has four degrees in finance, economics, banking and international relations from the Wharton School, University of Pennsylvania. He is a director at the American College of Dubai and has taught MBA level courses in commercial/investment banking at the American University of Sharjah and British University of Dubai. He writes the Global Investing columns for Khaleej Times, Gulf Business and Oman Economic Review.

Articles by Matein Khalid

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