John Burbank: Here’s Why I’m Betting Commodities Continue to Crash

John Burbank of Passport Capital spoke exclusively with Bloomberg Television saying that he’s betting on declines in all commodities (NYSE:RJI) because of the end of QE2 and that gold (NYSE:GLD) may drop until August.

Burbank also said that unless governments inject liquidity into the market, commodities (NYSE:RJI) will “trend” back toward price levels seen at the start of QE2.

httpv://www.youtube.com/watch?v=1rcCiyGbm2k

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Burbank on if he’s exiting the gold market or just trimming holdings:

“We have hedged ourselves across all commodities, we’re invested in many different commodity equities, including energy (NYSE:XLE), base materials (NYSE:XLB), gold, and agriculture (NYSE:RJA). We feel the repositioning of investors, looking at the end of QE2, is responsible for risk coming off. Gold (NYSE:GLD) is one of those things that investors bought to not be devalued against the dollar. The dollar is getting stronger against the euro. We think this is a temporary correction. Gold also typically bottoms seasonally in August. I can’t imagine it not being strong until then.”

On if this is a temporary pause:

“Unfortunately, we are having to watch the Fed and the governments around the world, whether it is China, the U.S., or Europe and then follow. It is like we’re watching the last table at the world series of poker. All of these huge players with these huge amounts of chips, and we have to play how we perceive them to be playing. I think the Fed will end QE2, then it’s going to see what happens. I risk assets sell off.  I think they sell off now into it and we bottom again in commodities this summer. I think the better bet is to be cautious and just have some perspective about where things traded when QE2 started. Gold was $1350. Oil (NYSE:USO) was $85. Silver (NYSE:SLV) was $25. I am not predicting it will go back to these levels, but the better bet, unless there is some other kind of liquidity coming from governments, is that they trend back those levels.”

On if credit will freeze up again at the end of QE2:

“No, I do not think so. Markets and credits that have been provided to markets have done well. The oddity of all this is, likely, sovereign U.S. yields will tighten. The U.S. 10-year (NYSE:TLT) was trading around $2.61 at the beginning of November. There is a long way to go down actually to get back there. I think that long term is different from the short term. Short-term risk aversion will lead more money into the dollar (NYSE:UUP) probably than into sovereign bonds. But long term is a different story.”

On pulling back on some of his other commodity bets:

“Hedge funds need to make money on a near-term basis, just like a mutual funds need to try keep up with their benchmarks. The Fed, by doing what it did with quantitative easing, forced a repositioning almost unwillingly by many investors to make inflationary bets, as well as to avoid being devalued as the dollar fell and fell and fell. So now you have a reversion to that trade and then things settle out. Then we will see what is strong, what is weak. I think that long-term it is clear sovereign yields will be weak and commodities (NYSE:RJI) will be strong. It just a question of when we get there and when we price that in.”

On central banks becoming more of a player in the central market and how that changes the trade:

“The biggest reason to stay in gold (NYSE:GLD) is because central banks around the world can see the writing on the wall long term, which is that the dollar (NYSE:UDN) will be devalued one way or another and that Congress has no appetite for hard decisions which would be deflationary in nature, and therefore, make the dollar higher than gold and not as much of a necessary holding. You also have the Chinese (NYSE:FXI) consumer, who has become a very large buyer, matching almost the Indian consumer and I think quite clearly, will exceed the Indian (NYSE:IFN) consumer. I think ultimately, physical gold is the story. It is a scarcity story. The more the U.S. dithers and the more the Fed is willing to print money, as opposed to dealing with inflation properly, the more this trend will happen. That is the biggest reason to stay in gold right now. Otherwise, most of the beneficiaries of quantitative easing will be backing off as most investors get back to neutral.”

Burbank on if he’s looking to get back into physical gold:

“Our preference is in two areas. Physical gold and smaller cap common junior minors (NYSE:GDX). We two geologists based in Vancouver, and we think we have a good edge on which explorers are the right ones to own. We are buying, even now, and will continue to be to accumulate stakes there. Barrick (NYSE:ABX) and Newmont (NYSE:NEM) have come off at least 10% in the past couple of weeks. I think the gold stocks are discounting a further fall in gold and we don’t know if it was going to happen. If there was another government intervention that provided a lot of liquidity in the world, then we would be quicker to come back in.”

“After the earthquake, Japan (NYSE:EWJ) put a lot of liquidity into the market, which held up risk assets longer than they would have. Europe dealing with its issues with Portugal, Greece, etc. We do not know how they may change their posture. Europe has the belief that there will be some change in stance by the central bank as well as potentially by the euro community. We don’t know. Also, the end of QE2, is so heavily understood, that will happen, but not understood what will happen after that. It is possible the Fed has something up its sleeve. It knows risk assets will be selling off at the end of this. At least I hope it knows that.”

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