Markets in Flux: China, Gold, and Oil

China's Equity Markets

TOM BUTCHER: Jan, do you believe that the recent Chinese government actions are going to be effective in possibly preventing any further rout in the country's stock markets?

JAN VAN ECK: As we look back at the past six months for China's equity markets, we saw tremendous appreciation and then a correction, and almost panic among investors as the markets underwent the correction. We still believe that the reform efforts to internationalize the Renminbi and to free interest rates within China are very much on track. I think the concern that the Chinese government had about the equity markets and some of the steps it took have been over-interpreted by investors. Some of the steps are ones that have been taken in many other markets. In other words, there are many markets where funds were set up to buy into equity markets to provide support. There have been markets where short selling was banned, and it wasn't in China, factually speaking. The practice has been reconsidered, but it actually was stopped in the developed markets during the financial crisis. There seems to be a little bit of looking for worse news in this bad news phenomenon. I think it will take more time for investors to get more comfortable with China's equity story.

Our view is that the systemic risks have been addressed through China's reforms over the last two years and that the reform movement will continue; we'll see what happens in the second half of this year. China is making strides to internationalize the Renminbi. The declaration of the Renminbi as a reserve currency [by the IMF] is something that the Chinese government is hoping for in the next 12 months or so.

BUTCHER: Going forward it looks as if things are on a bit more solid ground for the second half?

VAN ECK: Our point is that there's a lot of noise, but the one thing to look at when you're investing in equities is valuations. It's like anything you buy in life: What are you paying for it? We think valuations are the key to looking at Chinese equities. We thought that they were way too cheap at something like 10 times earnings a year ago. They got more fairly valued, but we think that's a good guide. In our actively managed strategies as well, it's really important what you pay [for holdings]. We are looking for growth situations in China and elsewhere in the emerging markets, but I think you want to pay the right price and have that as a discipline. I believe that's a good guide for both mutual fund and ETF investors.

Gold's Decline

BUTCHER: Jan, what is going on in the gold market at the moment?

VAN ECK: I think it's virtually impossible to predict the short-term movements of any particular commodity. Gold does tend to trade on technicals as much as sentiment, and I think it's being impacted by the concern over deflation and rising interest rates. I think there are a number of asset classes that are probably overdone, and we just need to get through the first rate hike by the Fed [U.S. Federal Reserve] and then we will likely have a better idea of how things shakeout. Right now many asset classes are acting in anticipation of a potential rate hike. I think some investors just can't wait for it to happen.

Oil: Supply and Demand

BUTCHER: Looking at the energy market, would you expect to see any rise in the amount of Iranian oil going into the market anytime soon?

VAN ECK: The energy markets, as our experts will tell you, are affected by many different factors. I think what's caused the latest hiccup in July has been the prospect of Iranian oil coming on the market. In general, supply has to be taken out of the markets and projects have to be stopped, and funding has to come to an end. That is slowly happening, but we believe it's going to be a slower recovery in price. We think that recovery will happen. We have seen price lows, as we've said before, but it's going to be a choppy experience going forward.

We're seeing some pressure now, so I think it's a little bit hard to predict prices. We see $60 a barrel, and maybe a little higher, as the target in the medium term, and that is the range we are looking at for next year. We reached $60 temporarily [in May], and it's not surprising that we've had a setback, but we are now headed in the right direction.

Second Half Outlook

BUTCHER: Would that lead to a choppy second half of this year?

VAN ECK: I think commodities are in a bear market that started in the financial crisis, and have yet to recover. That extends to energy, base metals, and precious metals; they are all under pressure. It's what our house view has been for the last several years, which is that we're in a lower-inflation, high-debt market characterized by low interest rates and a financial system that is working through some of its excesses.

Commodity markets, in particular, appear to be driven more by supply than demand. There was way too much supply that was created, perhaps fueled by dreams of China's growth, or dreams of other things. It can take years for a pricing discipline to work and for supply to contract, and for investment to contract. We're in that process of healing in the energy markets and other markets, but it takes time.

BUTCHER: Jan, thank you.