Nine reasons why gold will go past $1500
Predictions of Gold at $2,000/oz to $3,000/oz could prove to be conservative, reckons Jeff Nichols.
23 June 2010
Alec Hogg
ALEC HOGG: In this special podcast, we speak with Jeff Nichols, managing
director of American Precious Metals Advisers. Jeff you're back in the US
after being in the Far East for three weeks - what's the general mood like in
that part of the world regarding gold.
JEFF NICHOLS: It was a very exciting visit, particularly from the point of
view of the gold market. We met many participants, investors, miners,
jewellery manufacturers, government officials and to the man, everybody was very
bullish about the outlook for gold - in part because of a loss of faith in the
US Dollar and in part because the market has just grown so rapidly over there -
not only in China but in some of the neighbouring countries and market centres.
ALEC HOGG: In the note that you sent out you believe now, that
conservatively the gold price should be through $1,500/oz by the end of the
year.
JEFF NICHOLS: Yes - that's been my forecast for a while, but I think the
probabilities are higher than I might have attached previously to that outcome.
Not only $1,500 by the end of this year, but in the next few years going
substantially higher. We've been on record talking about $2,000/oz to
$3,000/oz. In the end those numbers could prove to be conservative.
ALEC HOGG: You've got nine different bullet points that you've identified
for the gold price and the reasons why the gold price should go over, but I
guess if you were to encapsulate them into one sentence, it would be that
history is about to repeat itself.
JEFF NICHOLS: Absolutely. You know whenever we've had in the major
reserve countries periods of large and rising government deficits and
substantial federal or public service sector debt, accompanied by rapid growth
in money supply and persistently low interest rates, we've always seen an
appreciation in the gold price. So in a sense it's just history repeating
itself but this time around, structurally the world gold market is in a much
different place with many more participants than we've ever seen before.
Many new vehicles that are making gold more accessible than ever before - and as
a consequence what we're seeing is an upward adjustment in the demand curve for
gold which is going to result in a long term average price - much higher than it
might have been a few years ago.
ALEC HOGG: Lets go through those bullet points - there's a lot of interest
in them - the first one you mentioned is the US monetary and fiscal policies.
JEFF NICHOLS: Yes - obviously this is what people are worried about.
We see projections of the federal government deficit growing from year to year
for the next several years. These estimates and projections, especially
the ones that are used by the White House and by Congressional Budget Office are
optimistic. They're assuming a fairly vigorous recovery in the US economy
in the next year and I just don't see that recovery coming. The economy
has historically depended on consumers in the US, and consumers are in no way,
shape or form ready to resume spending like they might have a few years ago.
ALEC HOGG: So lots of issues there. Europe's sovereign debt problem
is your second bullet point.
JEFF NICHOLS: Yes, well the sovereign debt problem has cast substantial
doubt on the euro as a possible reserve currency and medium to diversify away
from dollars. Central banks collectively have been, in recent years,
building their reserve position in euros and that's all now been called to
question. It's been estimated that about 25% of international reserves
recently have been euros with the remainder being mostly dollars, and a little
bit in yen - and the euro was being touted as a possible replacement for the
dollar or at least something that would help central banks diversify away from
the dollar. Now most central banks are sorry they've taken on such
substantial euro positions.
ALEC HOGG: Indeed and better opportunities for them to put some money into
gold. The third bullet point you talk about is moderate and good growth
rates in the gold friendly countries. What are those?
JEFF NICHOLS: Well the gold friendly countries are those that historically
and culturally have an affinity to gold. This would be principally China,
but also india and some of the other east Asian countries and centres like
Singapore, Hong Kong, Indonesia, the Philippines, going right down to Vietnam.
These are countries that historically have favoured gold as a savings and an
investment medium. People in these countries have for centuries turned to
gold as a store of value and they substitute for financial savings...
ALEC HOGG: As the countries do well, gold will benefit as well.
Bullet point number four you say - continued central bank purchases.
JEFF NICHOLS: Last year central banks, for the first time in 20 years,
became net buyers of gold and signs point to continued net buying by central
banks for the next several years at least, if not longer as they seek to hedge
their dollar holdings and feel less comfortable holding more and more dollars.
They're going to use every opportunity they have to increase gold positions in a
way that's not disruptive to the gold market. So they'll buy on dips,
countries that have domestic production, principally China for example and
Russia, the Philippines and Kazakhstan - these are countries that have domestic
goldmine production and the central banks are buying from their domestic mines
in local currencies as a way to build reserves without disrupting the gold
market, or the currency markets for that matter. We'll continue to see
that.
ALEC HOGG: Another supportive factor that you mention - rising private
investor demand in the western nations, as a hedge, I guess.
JEFF NICHOLS: Right - we've seen that especially in the last few months
with the problems in Europe triggering strong demand for small bars and coins.
But it hasn't only been coming from Europe - we've seen it in the United States,
and literally around the world, more and more people are turning to gold because
of their concerns about the outlook for currencies, the outlook for stock
markets and the fear that something is amiss in the world monetary system.
ALEC HOGG: Not hard to understand that one. Bullet point number six
- rising long-term savings rates in India and China and much of that going into
gold as well.
JEFF NICHOLS: Right - this is similar to the point I made a moment ago.
As long as these countries continue to see growth in personal income, some of
that income is going to trickle into the gold market and simply because we're
talking about so many people - it doesn't take a lot to make a meaningful
difference in gold. One of the bullet points that I talk about is the
relatively small size of the gold market compared to world currency or equity
markets for example you can have a small shift out of these other markets with
hardly a ripple in equity prices or currency valuations, but when it comes into
the gold market it has a much bigger effect because gold is after all still a
very small market.
ALEC HOGG: And linked to that is bullet point number seven - the maturing
of what you call the gold investment infrastructure.
JEFF NICHOLS: Absolutely - the best example of this is the growth in
importance of ETFs. Gold ETFs didn't exist six years ago. Now we
have over 1900 tons of gold invested via gold ETFs. What ETFs have done is
make gold more accessible to more investors around the world than ever before
and many who might not have bought physical gold earlier, now find it convenient
to buy gold in a vehicle that is very much like buying an equity and for some
institutions, for example, here in the States pension funds and endowment funds
- there are legal restrictions against investing in commodities or investing in
futures contracts, but they can invest in ETFs because they qualify as equities,
traded on the stock exchange. And we've seen institutional demand as a
consequence grow substantially.
ALEC HOGG: Bullet point number eight is on the other side of the scale -
the reduced supply coming out of gold mines.
JEFF NICHOLS: Yes - for a long time now world mine production has been on
a downtrend. We've seen little beeps up and down over the years, but the
basic trend has been down and I think it's going to continue to be down, at
least for the next five or 10 years. Even if we had a substantial gold
discovery on a par with the initial discovery in South Africa say 120 - 130
years ago, it would take many years to develop a significant gold mine from a
discovery of that sort. So there's going to be a period even in the best
of cases for gold mining where supply is going to remain constrained, and where
the depletion of existing mines is going to continue to reduce supplies
available in the marketplace.
ALEC HOGG: And the final bullet point number nine - you have touched on it
before - the relatively small size of gold in the investment market, generally.
A small shift could see an explosion...
JEFF NICHOLS: Right - we're already seeing that in some sense. The
rise in the gold price in the last year has been for many, a big surprise.
It shouldn't have been but the reason it's been a surprise is because the money
flowing into the gold market in a sense has a leveraged to magnified effect
simply because the market is so small - it doesn't take a lot to move the gold
price, whereas it does take a lot to move currencies or stock markets.
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