Gold's Real Story About to Begin
Resource Investor speaks with gold guru GoldForecaster.com, about gold's recent volatility, geopolitical tension and, of course, gold's recent trends and possible future behavior. Gold Forecaster Editor Says Gold's "Real Story" About to Begin. The following is an interview given by Gold Forecaster - Global Watch to Resource Investor's Karl Heilman on the 20th July 2006.
On May 12, gold hit a high of $730/oz before falling back $570/oz in June. Since then gold has appeared rather volatile, but seems to be getting back on track. Do you see gold continuing to march up the price ladder, or will it fall back more during the summer months?
Gold Forecaster: The short answer to your question is that we re-entered the market on June 14th this year. In the very short-term consolidation is the pattern being set, but should be followed by more rises. The trick is to get the entry and exit right on the large moves. The trend is now a very powerful upward one, so I would not position myself to enjoy any falls. As the Indian harvest comes in (albeit the funds available for investment will buy less than last year when the gold price was much lower), followed by Europe coming back to work after August holidays and the year-end festivals coming onto our screens, I feel that the second half will be more impressive than the first half of the year. I would also prefer to look at percentage moves rather than specific dollar moves, so I can keep a sense of proportion. All markets are volatile, a feature of the days we live in at the moment so I would not single gold out. Gold is volatile because when it becomes an important rising market, most markets have become volatile as well.
What's different now in the market than in the spring when gold jumped $130/oz in a month?
Gold Forecaster: We see the market as in a process of evolution, from the days when it was simply a metal and a declining one through to a counter to the dollar, then to a counter to currencies in general. Now it is moving to a counter to monetary and economic 'uncertainty' in many markets. The growing level of investment demand on a broad front is happening not simply because of the presence and acceptance of the Exchange Traded Funds [ETFs] (which is a vital ingredient in this evolutionary process) but because the global economic and monetary environment is decaying, so promoting a rising gold price. This is the essence of the upward trend and there is little sign of these fundamentals changing in the near or long term.
Since June, there have been a number of international debacles, including the continuation of the Iran nuclear enrichment dispute, Kim Jong II's North Korea missile launch, and now the outbreak of violence between Israel and Hezbollah in Lebanon. Some analysts think gold should be reacting more that it has been. Do you think safe-haven gold buying is falling off here?
Gold Forecaster: We have to differentiate between dramatic stories, which catch the world's attention for a short while and fundamental, symptomatic events that add to the development of longer-term uncertainty. We think 'safe-haven' buying will steadily increase through to the long term as certain events damage the global structures. For example, the oil price increase in the 1970s was due to OPEP members realizing they were being paid in dollars that were being quickly cheapened. Today the oil price increase is demand driven with the demand - supply relationship threatening global shortages all the time now. This cannot be resolved by even the most powerful nation on earth (as it did in the '70s), who in fact is shortly to become a victim of the situation.
It appears that many investors are becoming more comfortable with the idea of investing in gold as a hedge against inflation and a weakening dollar, any thoughts on this? And how safe of an investment is gold in a world riddled with global dysfunction? Do you see this trend picking up?
Gold Forecaster: This is an extremely pertinent question. We believe we are facing one of man's most difficult periods ever. Let me explain: - If we look back to extreme times, such as pre-war and war days in the last century, the three pillars on which nations stood were always the same throughout history. They are religion (all and any), politics (including military force) and commerce (including money systems across the world). This was and, in the main, still is the norm inside nations. In extreme times at national levels these three fused together in mutual support to produce tremendous synergies, which eventually lead through war to post war reconstruction as a positive force in a mutually beneficial process.
Now as the globe has moved to a distinct global economy these three elements appear to be fragmenting and starting to turn on each other leading the globe into greater and greater crises. On the global stage the three are beginning to act in a divisive manner. On the commercial front, the global economy is being threatened by the stresses in the oil market, the movement of manufacturing to the East, by dropping confidence in the U.S. dollar, whose 'ripple' effects are in turn threatening political stability across the globe.
For example, should demand overtake supply in the oil market, (a near foregone conclusion) those countries who are not able to source supplies will turn to rationing. We then see the specter of protectionism, of capital controls in some countries, taking uncertainty to new highs. Overlay the confrontation between Islam and politics, in the form of the unwelcome imposition of democracy and its own morality, by the U.S. on religious States such as Iraq, Iran and on the other nations of Islam Middle Eastern reactions in general) and the possibility of oil supplies being used as a weapon comes to mind. Now price oil in currencies other than the U.S. dollar and we will see the dollar losing its most important international support. These are major changes leading to global decay across many fronts, affecting fundamental structures on which stand stability and a certain future. This points to gold becoming one of the few 'safe-haven' assets with a proven track record in extreme times.
The global economy relies on each of the three elements holding together for there to be a sound global future, but national interests set in an international context, as we see now, needs global harmony to make that national economy work. For instance, in politics Politicians are elected to look after national interests, caring for international interests only where it suits national interests, such as national exchange rates being adjusted downwards, by Central Bank market interference, to protect international competitiveness. This distorts capital flows, competitiveness promoting wealth transfer as well as undermines the present global balance of power. The structural changes we are witnessing now are leading the globe to a bleak future that is by no means discounted in the gold price. Sadly it is already clear that the problems upwind appear to be beyond the structures of this world to resolve. Worse still they may well feed on themselves. Gold has to be increasingly attractive in this environment!
Additionally, the physical demand for gold has also increased; in India for example, a recent statistic stated that in 2005, India was responsible for 25% of the metal's consumption. As both India and China continue to grow, will we see a greater surge in demand for physical gold?
Gold Forecaster: In India the main gold-buying community is the agricultural sector, which accounts for 70% of all the gold purchased in India. Their income is not growing, so whilst they will continue to buy gold the tonnage bought will drop relative to the gold price rises. However, the increasingly wealthy Indian Middle classes are spending more on gold, alongside Indians who have moved into Western Society (the influence of family elders and family itself remains very strong still) so demand from this section of society will rise.
In China, we do not see the great rush into gold by the Chinese public. It is the intention of the Chinese government that the wealthy, government linked Chinese public buy gold, but commerce in China is still sufficiently undeveloped to still prevent the flow of gold throughout the nation. Until gold prices in the outer areas of China are the same as those in the main centers, this situation will not change. Once it does, we do see Chinese demand take gold up to new heights. When it does arrive it will take demand well beyond supply.
So while these two nations will support the gold price, it will not be as significant as the new investment demand in gold through the Exchange Traded Funds.
What are your thoughts on gold ETFs as compared to mining shares? Will investors continue to flock to these types of investment vehicles as opposed to the shares?
Gold Forecaster: As we said in the last article we published on the Web, the joy of the exchange traded fund compared to gold shares is that purchases of gold or silver ETF shares is that they affect the gold and silver price, whereas not one cent of gold mining share investment affects the prices of the metals themselves.
It looks as though the newcomers to gold and silver, the pension, mutual and other funds, like the ETF shares because they only carry the risk of the metal underlying the shares, whereas the mining shares carry the diverse risks of companies as well. As an ex-fund manager, I would always prefer to spread my risks between the two, particularly as they are showing different performances at different times. A fund manager new to gold may well see the ETF as preferable to gold shares to their exclusion. Others will mix the two because they are two different animals with different leverage.
But having said that, the sheer quantity of money available to all kinds of funds is so huge that just a small move to the ETF shares is currently taking their gold holdings up 3 - 5 tonnes a week - far more than the current sales of Central Banks that are signatories to the Central Bank Gold Agreement. Once the size of the ETF holding is sufficient to make entry and exits easy in quantity, we see larger and larger investments moving into these funds until they are the main investment medium into gold in terms of tonnage. What's more important, they have widened the base of gold (and silver) demand enormously.
U.B.S. recently said investors had begun to show keen interest in "call" options to expire in December with strike prices of $1,000 an ounce and above. This certainly seems optimistic, any thoughts on this?
Gold Forecaster: With the global changes we talked about above, plus the demand from new investors against the present and expected supply situation, the gold price has to rise to well over four figures in order to satisfy this demand. The only substantial source of gold above ground that could possibly be available lies under the bed in India, where over 20,000 tonnes is hoarded. The price at which this comes to the market has to be at levels that overrides religious and cultural as well as (unpaid import) duty barriers. That has to be well over four figures and must be a clear peak, because Indians will not sell simply for profit.
Since the recent commodities boom, many large investment houses and funds are placing a mentionable stake in commodities with even talk of some pension funds investing largely in commodity markets, do you foresee this continuing in the gold market?
Gold Forecaster: Oh yes! As we said above, this could prove to be the new investment boom, cognizant of the future uncertainty and instability
And of course it must be asked, what are your predictions on gold's price in the coming months/years? Any comments on the general sentiment in the market?
Gold Forecaster: Always difficult because one is not only forecasting the gold price but the value of the U.S. dollar. We would therefore say, well into four figures and in time, higher still, but $1,000 would only represent the start of the real story.
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