JOHANNESBURG () -- Lindsay Williams for Resource Investor speaks with Jessica Cross, the CEO of the VM Group, a precious metals consultancy based in the U.K, about the prospects of gold, silver and platinum going forward.
RESOURCE INVESTOR: It's been a hell of a year for precious metals. This time last year, gold was below $650 an ounce. Platinum was around about $1,100, or just below. And silver was around $14 an ounce. So where to from here? Having had a really, really good year, does it carry on in 2008? On the line now is Jessica Cross, and Jessica is the CEO of the VM Group in London, probably the world's most respected precious metals and beyond agency.
Jessica, it has been a hell of a year, hasn't it? You must have been busier than you've ever been in your life.
JESSICA CROSS: It's been - it's been frenetic. But I think in short, if you want a really, really short interview, then the answer is yes. We're going to have more of it next year, and I think it's going to be an extremely exciting year. There's more to come.
And you know, everything that the figures have shown us for this year, 2007, we think it's going to compound in 2008. And so we're looking, certainly on gold, PGMs, and silver, higher prices, which is phenomenal. It really is.
RESOURCE INVESTOR: We spoke around about a year ago, and you were talking about gold going to $700 an ounce. You were very bullish of it, but you didn't sort of predict the $850, the almost $850, that we saw this year. Did it surprise you when it did go above $800, and then close to all-time highs?
JESSICA CROSS: No. You know, as soon as it started nosing up to $800, you could see. But what has been so phenomenal about the run-up and the subsequent aftermath and the retracement, is that we're not seeing the recycling of gold coming back in the volumes that we would have expected in a run-up to $850. And what we suspect is that a lot of it came out at sort of $650 upwards. So when we breached $800, the secondary just has been there.
And the refiners are telling us this, and it's across the board. And it is tremendously supportive. And in terms of the sort of recycling cupboards, it's like Old Mother Hubbard's cupboard. It's bare. And that's going to impinge I think next year on the supply and demand balance on the flows of metal.
RESOURCE INVESTOR: In the past, when we've seen these spikes in the gold price, has the recycling factor been a major one to cap any rallies? And is that why this recent rally has been so significant?
JESSICA CROSS: Absolutely. Normally, in a price spike, there's a wave of scrap, and it can be as early as 72 hours after the price moves, it just comes back. And we just have not been having those. And this is what has been so phenomenal.
But you know, you've also got other things. You've got an extremely successful ETF [Exchange Traded Fund]. And we're just putting out the yellow book numbers. In fact, you - everyone's going to get them on Monday. And we're looking to - total holdings of gold ETF by the end of 2008 of over 1,000 tonnes. Now this is phenomenal, if you think about it relative to de-hedging or central bank fails, it's a very meaningful line on the supply/demand balance now.
But the interesting thing that we're beginning to ask, you know, 1,000 tonnes equates to sort of 800, if my math is right, about $25 billion. Is that money that is now not going into gold equities? And I think that is sort of pause for thought and some of the producers and their share prices. Is this money that is being diverted away from their stock?
RESOURCE INVESTOR: Well, this was quite an interesting point that you make now, because yesterday, I was looking at the daily movements on the JSE, as I always do, on the radio show. And I saw gold at $802 an ounce, and the rand about 6.75 against the U.S. dollar, and yet the gold shares were down three and a half percent.
And I spoke to a couple of brokers, and I spoke to a couple of investors, and they said, we don't want to know anything about gold. It's too dangerous. No one wants to know about it. It's too difficult to get out of the ground in South Africa. We'd rather invest in the metal itself than invest in the gold shares. Are you finding that?
JESSICA CROSS: Well, I'm starting to think that this might be the case. And I'm not quite sure how we statistically go about proving it. It's a kind of chicken and egg thing, isn't it? But I think it's got to be starting to play a role now. And really, one starts to think, what then happens to the platinum and the palladium ETF, for example? Because relative to their smallish markets, those investment vehicles are starting to show volume now.
So I think, you know, we're going to see more investors into the ETF in all the precious metals, including silver, certainly for 2008. And then there are implications, which we find really, really interesting.
RESOURCE INVESTOR: Yes. Exactly. Money has to go somewhere, and if it's not investing in one particular vehicle, it goes to another vehicle. It doesn't just disappear. Gold shares again on the JSE today, incidentally, down over 2%. So compounded, that's almost 4% in the last couple of days.
Let's move on now to platinum. Platinum was a commodity that was trading around $1,100 a year or so ago, or just under a year ago. And now of course, today - what is it today? Around about $1,400, $1,500? It's been to record highs. It's underpinned all the time. What I like about platinum is every time it really dips back significantly because of some other factor in financial markets, people come in and they buy it, and they buy it aggressively.
JESSICA CROSS: Yeah. Yeah. I mean, you've got these secure niche markets in auto catalysts for diesel-fuelled vehicles, and in emission control, which we know well. We think that emission control is going to be strengthened, with global concerns of CO2 emissions, global warming, and that sort of thing.
You've got over 50% of the car market in Europe is diesel now, so platinum is benefiting from that. But we're also seeing growing diesel registrations in the U.S. and in Japan.
But on the supply side, we see the bigger producers still undershooting their production targets. So the metal really isn't coming to market. And we're looking for a deficit overall, 2007, of in excess of 400,000 ounces. So this is now very, very meaningful, looking at a very tight market, very little in the way of above ground stock, to be able to buffer some of the price movements.
And of course, this new ETF, which has started to take metal. So you've got strong investment interests, not only in the ETF, but also on the futures markets and exchanges. It has to translate into higher prices.
RESOURCE INVESTOR: Yes, because the ETF in platinum had a very slow start, but is it starting to gather in popularity?
JESSICA CROSS: It is. It is. And I mean, certainly in the recent weeks, it's started to pile up in the ETF.
RESOURCE INVESTOR: Good. What about silver? Silver's also got an ETF. Silver hasn't done as well as the other two. It's been sort of a poor cousin in the last few years. I mean, if you look at the relative performances of platinum and gold, silver should be probably around about $20 an ounce. But here it is trading around about, what is it, just over $14 an ounce. I tend to think it's a sleeping giant, and at some stage, someone's going to get hold of it, and it's going to push up, as the other two that we've mentioned have done. Do you get that impression as well?
JESSICA CROSS: You know, silver will sort of be somnolent for a while, and then suddenly it kind of erupts into life, and the percentage price moves then make everybody's jaw drop. It can happen, there's no doubt.
Silver, we still are looking, in 2007, for a physical surplus in excess of probably 6,000 tonnes. But you do have investment interests. The thing we are watching, unlike gold, is you've got new, large mines coming onstream, or in the pipeline. So we see a surplus starting to build.
And of course, you've got the photographic industry still being whittled away too, because of digital. But coming on the back of that, we've got a number of industrial end uses, new ones, basically on silver's biocidal properties. They will take metal off the market, without doubt, but they're not going to make up for the loss in photographic.
So you're looking at a market still in a sort of chronic surplus position, and we then rely more and more on the investor to maintain the price at the higher levels.
RESOURCE INVESTOR: Let's hope the investor starts looking at silver, because I had some very - very, very good times in silver when I first started as a commodity trader.
Let's look forward to 2008. That's a very good wrap of 2007, Jessica, but 2008, looking forward to gold, for example, it very nearly touched $850 an ounce, the all-time high we saw back in 1980, '81. Can it do it again? Can it go back there, and this time break through?
JESSICA CROSS: Oh, I think so. You know, what we're looking at for all the precious metals is really the U.S. currency and the background economic outlook for the U.S. And bear in mind, it's going to be - it's an election year. And with pressure on the Republican Party to give its candidate the hope of being selected for the White House, we suspect that the Fed will do whatever it takes to stave off an aggressive recession, which means lower interest rates.
And we're looking for further, quite substantial further cuts, in U.S. interest rates by the end of 2008; ergo, a much weaker dollar. So what that's going to translate to is the precious metals are going to benefit from this double whammy: lower interest rates and weaker dollar.
And if that is the case, we're going to be very surprised if we don't see $900 an ounce in 2008. And we stuck our necks out, and we're looking at a trading range, I mean, that's really wide. But we're looking to almost $1,000, if it can touch that.
RESOURCE INVESTOR: Quite exciting. You also mentioned in a couple of other interviews we've had in the last three or four months, Jessica, there's a loophole, some kind of fiscal loophole in India, that you were exploring. What's happening in the Indian market?
JESSICA CROSS: We are still exploring. It is an enigma in an enigma in an enigma. It's a low-cost thing, but we believe it is short-lived, and we have not got the answer yet, Lindsay. And it's going to be one of those things that we will - it will become apparent with the knowledge of hindsight. But imports into India are still strong, and we are watching that very closely.
We do suspect, however, that it's probably not sustainable. It is a short-lived phenomenon, and will go back to the sort of more traditional import levels in 2008.
RESOURCE INVESTOR: Yeah. People were worried about Indian imports when gold went to $500 and then $600. So of course they're going to be worried when it's $750, $800, $850.
Let's move on to platinum now. Platinum trading at $1,450. We've spoken about the industrial demand, and the fact that the ETF is taking off. Any price targets on that one?
JESSICA CROSS: Oh, we're looking - we've got a trading range which is quite wide. But we're looking at a base of $1,200, which we think it enormously well-supported. So that's a really sort of worst-case scenario. But we're looking upward of $1,600, and I think that's easily doable within 2008.
RESOURCE INVESTOR: And finally, silver, the sort of loose cannon in the trio. Should we be having a look at that, just in case it does one of those bursts that you were talking about? One of those exciting sort of price spikes?
JESSICA CROSS: Well, we've been kind of, you know, very circumspect on silver because of the surplus. And we're saying top of $15 - at $15 an ounce, which is not nearly as spectacular as the other precious metals. But still, I mean, $1,500 to $15 an ounce is still jolly good when you think about it.
RESOURCE INVESTOR: Looking at the three of them, and looking at your business, you said you've had a frenetic year, one of your best years and busiest years ever. And the VM Group itself is expanding. In 2008, the sort of interest that you're seeing now, does that carry you forward, and does that also tell you that the market is a frothy one, and has a few years, not just another year or another few months to go, but many years to go?
JESSICA CROSS: I think it has got many years to go. We have formed a strategic alliance with Fortis Bank, and we are now doing their outsource research for them. And we're covering precious, base metals, we're covering energy and agribusiness, but particularly looking at renewables, and how renewables are interfacing between agri, stock commodities and the energy sectors.
And there's enormous interest in commodities. It's coming from the hedge funds. It's coming from the high net worth individuals. It's really, really part of the market now. And hopefully, we are going to remain very, very busy.
RESOURCE INVESTOR: Jessica, I hope so, too. Thanks very much for your time this evening. That's Jessica Cross, the CEO of the VM Group, the precious metals consultancy based in the U.K.
