Don’t Give Up on Precious Metals

01/27/2012 3:00 pm EST

Focus: COMMODITIES

Daniel Gramza

President, Gramza Capital Management, Inc.

Dan Gramza discusses the global supply and demand picture for precious metals including copper, silver, and gold, his mid-term outlook, and how to decide between futures and ETFs.

Let’s take a look at the metals market with Dan Gramza. Dan, are we going to see gold just trade sideways or can we continue to move up?

Well, I have to tell you, we’ve seen some weakness in gold, as people probably cashed that in to take care of paying some other things that they have.

Long term, I’m bullish on gold, I’m bullish on silver, and actually, I’m bullish on copper as well. That one’s going to be a barometer of our economy.

We also need to see what China’s doing. If we stay with copper for just a minute, China’s the largest consumer, the United States is number two, Germany is number three. We use 40 to 90 pounds of copper in a new car, depending on the model. We use about 400 pounds of copper in a brand new home.

If we look at where China is right now domestically, what they’re producing now, what they need for resources, there’s really not enough, I don’t believe. So the demand for copper is going to be very strong. I’m looking for a rally in that market.

China’s growth rate is slowing. Now, of course, it’s slowing to 6%, which we would love to see here in the United States. Do you think that colors your outlook at all?

Well it does in terms of perceptions about copper right now. It’s very sensitive to what’s happening there, but the fact is, it’s still growing.

In the next five to ten years, they’re expecting 350 million people to move from the farm to the city in China. Now, most of the country lives on the farm. Those people that move to the city, they’re going to want refrigerators, they’re going to want stoves, they’re going to want cars, they’re going to want other things.

The estimate is they’re going to have to build at least 50,000 skyscrapers to take care of this, 120 mass transit systems to get these people moving, plus the demand that they’re going to have for consumables, and they still have to build stuff for us to buy, so the internal resource demand in China, that’s not going away.

Whether they’re at 6% or 5%, the fact is, the shift is occurring and we’re going to see an increase in demand, I think, coming out of that country.

And one last metal, silver, the industrial metal.

That’s right, it really is. If you look at some of the industrial applications of silver, it’s that precious metal/industrial metal kind of balance.

Kind of bipolar.

It is kind of bipolar, I like that. That’s a good description. I really look at that being more of a sideways-type market, but I’m bullish on that market, again, for the same reasons. I think that we’re expecting an increase in demand for that product line, and I’m looking for a rally in silver.

How would you advise both traders and investors to play the metals market? Do you prefer the physical, the futures contracts, or do you prefer the ETFs?

Oh I like that question. First, I don’t like the physical that much. The reason I don’t is that you’ve got to do something with it, and is it that liquid? Then, who do you sell it to, and do you get the best price? And then you’ve got to insure it. It’s not attractive to me, personally.

Where I am more attracted would be in the financial instrument side. I would say this for someone: if they want to put money in gold and not look at it, I would suggest the ETF. If they want to put money in gold and manage that position, I would suggest futures.

There are differences between the two. There are pros and cons to both.

If you look at it in terms of maximizing our capital, if we look at after-tax benefits, if you look at the fact that the futures trade 24 hours a day, then I would pick futures. But, if I’m not concerned about those issues and I just want to put some money in gold, then I would look towards an ETF.

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