Gold
By Jeff Clark, BIG GOLD
In January, Jeff Clark of Casey Research’s BIG GOLD advisory set out to get opinions from some of the smartest, most accomplished investors in the gold industry – where is the gold price going to go, how volatile will the markets be, what’s the outlook for precious metals stocks? Read on for some of the most insightful answers you’ll see anywhere…
Rick Ruleis the founder of Global Resource Investments (www.gril.net), now part of Sprott, one of the most acclaimed and sought-after brokers in the natural resource industry. Rick has spent 30 years in the sector and is a regular speaker at investment conferences in the U.S. and Canada. He and his staff have an extraordinary record of success in resource stock investing.
James Turkis the founder and chairman of GoldMoney.com. He’s authored two books on economic topics, published numerous articles on money and banking, and is co-author of The Collapse of the Dollar. He’s a widely recognized expert on precious metals.
John Hathawayis portfolio manager of the Tocqueville Gold Fund, the third best-performing gold mutual fund in 2010. He is a Harvard grad with 41 years of investment management experience.
Charles Oliveris senior portfolio manager of the Sprott Gold and Precious Minerals Fund (and several others). Charles led the team at AGF Management that was awarded the Canadian Investment Awards’ “Best Precious Metals Fund” in 2004, 2006, and 2007.
Adrian Ashruns the research desk at BullionVault, one of the world’s largest online gold ownership services. A frequent guest on BBC News in London, his views on the gold market are regularly featured in the Financial Times, The Economist, and many others.
Ian McAvityhas been writing the Deliberations on World Markets newsletter since 1972. He was a founder of the Central Fund of Canada (CEF), Central Gold Trust (GTU), and Silver Bullion Trust (SBT.U).
Ross Normanis co-founder of TheBullionDesk.com, an online provider of precious metals news, analysis, and prices. Ross has won several awards from the London Bullion Market Association for his price forecasting, winning in 2002 and 2006.He now runs Sharps Pixley (www.sharpspixley.com), which sells bullion in the UK and continental Europe.
BIG GOLD: Gold was up 30% in 2010; to what do you attribute its rise?
Rick Rule: Gold is unique, in that both primary investment psychology motivators – greed and fear – drive the price. Gold markets ricochet between greed and fear buying, and we are starting to see that in the markets now. The fiat currency weakness, both the dollar and the euro, are the motivators for the fear buyer, and the momentum caused by fear buyers is the motivation for the greed buyer.
James Turk: Two things. First, policies like zero interest rates and quantitative easing are eroding the purchasing power of all the world’s currencies, so it is no surprise that commodity prices – which are always sensitive to currency problems – are soaring.
Second, as people increasingly recognize the difference between owning paper gold and physical gold, the demand for physical continues to climb. Given that it is a tangible asset, physical gold does not have counterparty risk and therefore protects wealth when stored properly. It is the ultimate safe haven.
John Hathaway: Growing distrust of fiat currencies.
Charles Oliver:In reality, the true value of gold does not change. What has changed is the decrease in value of the fiat currencies used to measure the gold price. In 2009 and 2010, the U.S. debased its currency via direct money printing and a massive quantitative easing program where the government purchased $1.5 trillion of mostly its own bonds.
The U.S. government will buy another $600 billion of its bonds in 2011 concurrent with running the largest deficit in its history. With this in mind, it is no surprise that the gold price rallied.
Adrian Ash: Last year’s eurozone debt crises gave only a foretaste of the sharp spikes in physical demand we could see as the single-currency experiment unravels, while the Fed’s fresh dose of debt-monetization (aka QE) lit a fire under institutional gold buying. China’s surging demand continued to make gold a strong emerging-Asia play, too.
The underlying cause, however – boring but true – was negative real interest rates. Cash in the bank now means certain losses, failing to keep pace with inflation as badly as in the late 1970s. So once again, cautious savers are choosing hard assets instead of government-controlled currency, and gold is the stand-out alternative because it’s tightly supplied, indestructible, debt-free, and truly stateless.
Ian McAvity: I believe gold’s rise should be recognized as a devaluation of the three major currencies in gold terms – the U.S. dollar, euro, and yen. That focused global attention on gold as the oldest and most credible currency in its traditional role of a store of value. This trend is now a decade old and may be entering the phase for acceleration, now that the major currencies and sovereign debt issues are both coming under the microscope.
Ross Norman: Really, it was more of the same from the previous 10 years – but particularly so the economic-related issues from the last two. The gold price fundamentally reflects the debasement of currencies – gold is not expensive, but the currencies you buy it with are worth less simply because we are printing so many of them. I
f you genuinely believe that global growth is established, that debt repudiation will be carried through (the public will willingly take their fiscal medicine), and that economic stability will be restored without a hiccup, then don’t buy gold. The trouble is, few believe that story, and hence the 30% gain in gold.
BG: What forces will move gold this year? And what’s your price projection for 2011?
Rick Rule: I suspect that this year will give us extraordinary volatility across all markets, including bullion. I think the eventual direction is higher, because of the well-catalogued failures of collectivism. But I suspect we will have some event-driven spike in metals prices, although I couldn’t forecast which of many possible events will occur.
I have no earthly idea where gold will close, but to be a good sport and play the game, I’ll say $1,750.
James Turk: The same forces will move gold higher this year, which I expect will reach $2,000, probably in the first half.
John Hathaway:A reversal of spreading distrust of government policies, central bankers, and paper currencies can only be accomplished by high real interest rates. The secular direction of the gold price will remain higher, and conversely, the valuation of paper currencies will trend lower, without a restoration of respectable real interest rates, which in my opinion, would be in the neighborhood of 4% on a sustained basis. In the absence of such a change, there is no telling where the price of gold, in U.S. dollar terms, could go.
In my opinion, gold is no different than any other market in that it assesses current fundamentals and discounts the future. Just exactly what it is reflecting at any given moment is the real challenge. In my opinion, the gold market has only partially reflected the monetary debasement that has taken place since the credit implosion of 2008, and it has not yet begun to assess the damage yet to come.
Without knowing what further convoluted and extreme measures yet to be implemented by this administration and the Fed, it is impossible to place a number on the future price.
Charles Oliver: Global currency debasement will continue in 2011. The European sovereign debt crisis continues to unravel in slow motion, and it looks highly likely that the Europeans will magically create lots of money to backstop the debt of the next European government that finds itself on the verge of bankruptcy. I expect this backdrop will help propel gold to around $1,700 by yearend.
This level is supported by an upward trend channel that commenced in 2008 with a 2011 yearend range of $1,550 to $1,750. I also believe gold could break through the upper boundary of these trend-lines should some unexpected event occur.
Adrian Ash: Headline debt crises aside – Portugal, Spain, California, take your pick – 2011 will see negative real interest rates force ever more cash savers to choose gold (and also silver) instead. Simply extrapolating the current bull run’s annual gains would see 2011 end with gold some 20% higher at $1,695 per ounce, averaging $1,450 across the year. Even on the official CPI measure, U.S. savers have now been underwater for 24 of the last 36 months after inflation.
But no one at the Fed, not even sole dissenter Thomas Hoenig (no longer a voting member in 2011), wants to see positive real returns paid to cash. The ECB, Bank of Japan, and Bank of England all look stuck near zero interest rates, too. And while Beijing might hike Chinese lending rates, it fears sucking in yield-hungry money from the West. With China’s deposit rates left untouched at barely half the pace of inflation, the early gold-demand spike around Chinese New Year (Feb. 3rd) could prove dramatic.
Ian McAvity: I don’t do specific forecasts in my work, but I think there’s a prospect of gold pushing into the $2,000-$2,400 range this year, or perhaps 2012. This presumes an element of monetary panic relating to the U.S. dollar or euro during the year. A gold price of $2,400 would be the CPI-adjusted equivalent of 1980′s $850 in current dollars, so this is not an unrealistic number.
Ross Norman: After 10 successive years of price strength during which gold rose fivefold, it is tempting to ask if prices are now peaking; we think not, and fresh all-time highs of $1,850 are in prospect. The list of forces on the buy side remains as long as your arm. But on the sell side there are potentially miners reentering hedging/forward-selling programs, central bank disposals, and possibly some contrarians – these are unlikely to be significant and, in short, with few sellers the scales should continue to weigh very significantly in favor of the bulls.
With gold’s entrenched trend line to draw on, the adage “The trend is your friend” seems likely to hold true. A twenty-something percent increase looks likely for the year, and the gold chart should maintain a steady 45-degree climb after a period of consolidation during Q1.
Our outlook for gold in 2011: Average $1,513; high $1,850; low $1,350.
BG: How volatile do you expect gold to be? What’s your low price that would present a good buying opportunity?
Rick Rule: Volatile on steroids! If we have a replay of the liquidity crisis of 2007-2008, gold could crack $1,000 on the downside. I don’t time these things; I build cash when values in other sectors are not available, and bullion for me is a form of cash.
James Turk: I do not expect gold to be volatile. It looks to me that the gold price is ready to accelerate to the upside, and I do not expect there to be any significant price corrections because the demand for physical metal is just too strong. There is always a lot of money on the sidelines ready to buy any dip.
Any price below $1,500 represents a good buying opportunity because I do not expect gold to remain below that price much longer.
John Hathaway:If the Fed announces an end to quantitative easing, gold could drop $200. In the greater scheme of things, such an announcement would change nothing.
Charles Oliver: I expect volatile currencies and governments for the next several years. Which means that gold and other hard assets priced in U.S. dollars will remain volatile. The current bottom of my gold trend channel is $1,300, so if it dropped that low, I think it would make a great buying opportunity. If gold broke below $1,300 (which I do not expect), then you might see it test the $1,000 level. That level was resistance for several years, but now it is a major support level, one I believe may never be breached again.
Adrian Ash: Gold volatility actually fell in 2010, hitting 5-year lows even as the dollar price took out new record highs above $1,400. So while gold keeps making headlines, it’s more overreported than overinvested, and that’s likely to keep any dips shallow, especially as larger investment institutions in the West look to steadily build their positions. Demand from Indian households – the world’s No.1 physical buyers – is again adjusting to new rupee highs, too.
That said, keep an eye on the start of new quarters (April, July, Oct.) as investment funds will hold on to winning positions to impress their clients, only to take profits the very next day (witness July 1, 2010 and New Year 2011 already).
If you’re trying to pick the bottom of a pullback, it’s worth noting that gold hasn’t fallen vs. the dollar for more than two months running since 2001.
Ian McAvity: Volatility will be much greater. India paid $1,045 for 200 tonnes of gold from the IMF – that’s a critical level and would be a great crash-scenario buy point, but I doubt we’ll see it. The last important breakout occurred at $1,260 and should be support and an attractive buy level; below that, $1,160 to $1,200, if it’s part of a general market wipeout. I’d bet that gold comes screaming back from such a decline if Bernanke and the ECB proceed with QE3 or QE4 to fight it.
Ross Norman: Fear and uncertainty are running high, and that should almost certainly translate into greater price volatility. I think we are close to the low for the year (we see that at $1,350), and it is quite healthy to see some of the excessive speculative froth being blown off the market just now. It makes a more compelling case a month or so from now.
BG: Gold stocks as a group did not outperform gold in 2010 – will that change in 2011? And if the broader markets sell off, will gold stocks fall along with them or trade on their own?
Rick Rule: Interesting point; the stocks did not outperform bullion, even as the companies actually began to feel the positive impacts of higher gold prices and massive capital programs.
I do think select stocks will broadly outpace the bullion markets in 2011. The senior producers are doing something they have not done for decades – earning good money! Their reinvestment options are constrained because most of them have already launched and funded major capital programs for whatever internal growth is available to them. Surplus capital can go to increasing dividends, buying back stock, and to acquisitions. Juniors who make attractive discoveries that can reduce depletion charges and lower a major’s overall cash costs will be bought at startling prices.
If broader markets decline as a consequence of an event, particularly a liquidity-driven event, the gold stocks will decline with them. If a broader market decline occurs as a consequence of debt and equity overvaluation and earnings disappointments, the markets will decouple as they did in the late 1970s.
James Turk: The mining stocks will continue to outperform in 2011, but by a much larger margin than last year, and are still relatively cheap compared to bullion. Remember, the mining stocks were in a bear market from the collapse of Bre-X in 1997 to the collapse of Lehman Brothers in 2008. After Lehman, even the best quality mining stocks were unbelievably cheap. It was a capitulation low, where emotion prevailed over logic, which is how all bear markets end. This new bull market will drive the mining shares to what will probably be unbelievable heights when we look back a few years from now.
John Hathaway:Gold stocks are generally cheap relative to bullion. The XAU [Philadelphia Gold/Silver Index] trades at roughly 15% of the bullion price vs. a historical norm of more than 20%. Gold stocks could do fine even if gold is flat, something I don’t expect. If we have another 2008 style sell-off, gold stocks will be hurt again in the short term, but the stage would be set for much higher highs for the metal and the stocks.
Charles Oliver: In 2010, the large-cap stocks that dominate the weighting in most gold indexes underperformed the gold price. However, the mid-cap stocks had a great performance in the first part of 2010. In the latter part of the year, the small-caps roared to life and outperformed most other groups.
I expect that 2011 will initially be similar to the end of 2010; however, in the second part of the year, I am concerned that the general stock market may be due for a correction that could impact all stocks and sectors. If there is a modest, orderly pullback, gold stocks could rally (much like they did in 2002), though you may see an increased focus on the bigger, more liquid names first. With this in mind, and the relatively cheap large-cap stocks, I have been increasing my weighting of larger-cap names.
Adrian Ash: So long as deflation (i.e., default) threatens credit markets, unencumbered gold is going to appeal more than geared production, especially to those cautious savers now being forced out of cash by negative real rates. Yes, you’ve got to expect the kind of gold mania that Doug Casey has long forecast to light a fire under the broader gold mining sector. But another broad sell-off in world equities in 2011 would only compound the last decade’s disillusion with risk investments.
Ian McAvity: The major gold stocks have not performed well against gold since 2003. They will get decent spurts, but long-term reserve replacement and premium-priced M&A [Merger and Acquisition] takeovers dilute their shareholders. The lows for gold stocks may be governed by the magnitude of any crash-like decline in the stock market. If the S&P or Dow falls 20% or more within a 3-month or less window, the margin clerks will sell every bid on anything. I prefer the metal to the major miners.
Ross Norman:I would not anticipate a broader equities sell-off. It does seem that most asset classes are performing strongly, and that may be a secondary consequence of QE. Broadly, I take a similar, and positive, view of mining equities as I do for gold. Should there be an equities correction, then in all likelihood mining shares will also retrace to some extent in the same way that a rising tide lifts all boats.
BG: Silver was up 81.9% in 2010, but is still below its 1980 nominal high. What’s your outlook for silver in 2011?
Rick Rule:The near-term outlook for silver is very bullish, as a consequence of physical supply shortages. Longer term could be problematic as a consequence of Indian dishoarding, an event last seen in earnest in 1997.
James Turk: I expect silver to reach $50 in Q1 2011. It may then take a breather, but eventually – and probably later in 2011 – silver will climb above $50.
John Hathaway:More volatility than gold.
Charles Oliver: In the earth’s crust, the ratio of silver to gold is 17:1. For most of the last 650 years (except the last 100) the monetary exchange rate was also around 17:1. In fact, when the United States was on a bi-metallic reserve standard, the U.S. government mandated “The Coinage Act of 1834,” putting the gold/silver ratio at 16:1. In 2010, the ratio moved from around 60 to below 50. I expect this trend to continue in 2011 and think the metal could trade up to and beyond $50 in the not-too-distant future.
Adrian Ash: Silver’s primary use is industrial, rather than as a store of wealth like gold. So it should be more vulnerable to the economic cycle (see the post-Lehman price collapse), and you could argue it’s simply tracking the huge rally in base metal and energy prices. But looking at that 1980 high – forced by the Hunt brothers’ speculative corner, rather than a jump in use – I think something else is going on, and silver is being remonetized by private wealth in the same way gold has been remonetized since hitting “trinket” prices in the late 1990s.
A much smaller and tighter market than gold, silver is both more attractive and responsive to sudden inflows of cash. As with gold, silver’s volatility fell in 2010, but it was more than twice the average level (daily basis) of the last four decades. Price-wise, another year like 2010 would see the $50 peak taken out. The biggest surprise is that the mainstream press hasn’t stoked the idea of a “silver bubble” like it has done for gold since 2009.
Ian McAvity: If gold runs above $2,000, I expect the silver/gold ratio to reach the 36:1 level, which would mean a price somewhere between $55 and $66. I view that ratio as a material driver of the silver price, trading off its long monetary metal history, apart from its attractive supply/demand profile. The 1980 spike to $50 was a very brief spike that isn’t really a meaningful measuring point, in my view. The monthly average London Fix for January 1980 was $39.27, and gold’s monthly average peak was $675.31; those are more realistic prior peak levels to measure against.
Ross Norman: After the 2010 rally, it might seem churlish to expect much more in 2011 for silver. Early 2011 profit taking has seen silver decline more than most assets, underlining the strong speculative element in the recent price run, and this also confers some weakness to its case. However, the investment community has taken silver to heart, and contrary to its modestly attractive fundamentals, the market prices are likely to overperform again. Unlike in 2010, we expect silver’s price action to conform more closely to that of gold – firmer, but a little more rational.
Our outlook in 2011 for silver: Average $37; high $44; low $27.
BG: What’s your best advice for precious metal investors in 2011?
Rick Rule: Be prepared for the most volatile market of your life, and use that volatility to your best advantage.
James Turk: It is the same advice I have been giving for more than a decade; continue accumulating the precious metals, and if you are inclined to take the investment risk, the mining stocks as well. We need to recognize one salient fact: national currencies are being destroyed and their purchasing power eroded by misdirected government policy. Consequently, gold and silver are safe havens and the best way to protect your wealth.
John Hathaway: Have at least 10% of your liquid assets in precious metals and related mining stocks. Keep your bullion outside the U.S. A good way to do so is through Gold Bullion International, which can be accessed through their website. Unless you want to spend a lot of time researching the gold mining industry, consider investing in a well-managed precious metals mutual fund. There are a number, but I am partial to the Tocqueville Gold Fund, one of the top performers last year.
Charles Oliver: All the fundamentals – excessive government debt, high budget deficits, runaway healthcare costs, growing Social Security payments, demographic trends – lead to one conclusion: Governments are bankrupt and are going to debase their currencies via money printing, quantitative easing, off-balance-sheet transactions, and whatever other tricks they can pull off. The bull market in gold is alive and well and has a heck of a lot further to go. Buy it.
Adrian Ash: Next to overtrading, the biggest profit killer in gold this last decade has been to trust clever hedge funds trying to beat the metal. Sure, the best mining stock funds have delivered fantastic returns, but they struggled to outperform gold in 2010, and there’s no certainty that will continue. But if you’re right to buy gold for defense, then it’s best to simply buy and hold until the prime drivers – abysmal monetary and fiscal policy across the West – are reversed. Oh, and of course, be sure to visit BullionVault for a free gram of gold, too!
Ian McAvity: For individual investors, don’t go crazy with leverage or portfolio concentration. No matter how much of a gold bug you are, keep in mind we’re in a period where the mistakes (QE2 is one of them) will compound the second half of the ongoing financial disaster that started in 2007.
Ross Norman: For followers of cycles, 2011 looks like the year that the Kondratieff Winter begins to bite – a period normally associated with debt repudiation, trade wars, and firm commodity prices. A winter that puts Europe into hibernation, and the smart money acquires a protective coat. This is to say, buy gold, including the leveraged 2:1 ETFs.
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