Is gold preparing for another shot up to $2,500/ounce heights or on the way down after being overbought? In these interviews with The Gold Report, two respected names in the investing world share their arguments for what could happen in the coming years and how to profit from it. Financial Adviser Peter Grandich predicts a lot more upside while AlphaNorth Asset Management Chief Investment Officer Steve Palmer has a more cautious outlook on the shiny metal. Where are you putting your money?
The Mother of All Gold Bulls
The Gold Report: Peter, you have called this the mother of all gold bull markets and predicted $2,500/ounce (oz) gold prices. What is driving the price of gold? Is it China's growth? Is it a weak U.S. dollar? Is it global fears? Is it central bank currency printing? What's going on?
Peter Grandich: This mother of all gold bull markets was built on a foundation of dramatic changes in the gold market itself that began in earnest 10 years ago and propelled it up to where it is now. First, two significant negatives turned into positives. The gold market had basically capped due to constant central bank selling and producers being aggressive forward sellers of future gold production. However, starting with the Washington Accord in 1999, the central banks dramatically changed direction and agreed to limit gold sales. In fact, in the last two years the central banks have actually become net buyers. At the same time, gold producers have made hedging a thing of the past. Hedging has really become a four-letter word among investors.
TGR: What convinced companies to stop forward-selling their production?
PG: The gold market finally started to rise and people realized that companies that were hedging were making less money than companies that were not hedging. In the '80s and '90s, the old American Barrick was almost a commodities trading house rather than a gold producer because it used the hedging derivatives to make money. But the great mother bull market made that counterproductive and investors began to shy away from any company that pre-sold gold.
The other factor fueling the bull market for gold is the introduction of exchange traded funds (ETFs). They brought in an enormous amount of new gold buying. In the '80s and '90s, institutional investors found it cumbersome to take a large position in gold. Physical gold purchasing was not only expensive, it involved storage costs and carrying costs. People tried to use mining shares as a proxy until they realized that when the market went down, mining shares went down with it. ETFs allow people to have direct exposure to the gold price. ETFs also offer tremendous liquidity and the ability to sell at reduced costs intraday.
Central bank gold selling, lack of hedging and the creation of ETFs are the main reasons why the gold bull market has done what it has done. The gold permabears who have not recognized these changes have missed out.
TGR: Will those conditions continue?
PG: There is no sign of change. In fact, despite the permabears cries to the contrary, we saw in the first quarter that central banks continued to be net buyers. I suspect that when the second quarter is over, we will see that central banks stepped up again as buyers.
TGR: So, why are you predicting $2,500/oz? Why not $2,000/oz or $5,000/oz or $10,000/oz?
PG: I'm actually not a big fan of a target number. I'm more interested in the direction of the gold price. My feeling during this price rise has been that gold will eventually reach not only a nominal new high in price, but an inflation-adjusted, all-time high. Right now that is somewhere in the $2,300-2,500/oz area depending on what factor you use for an inflation rate. And, that's what I think is the minimum target that we can look for before this great bull market even comes close to an end.
TGR: How do you respond to people who say that gold doesn't really have any value, that it's not an industrial metal and its value is arbitrary?
PG: I give them a very simple answer. I have thousands of years of history on my side. Mankind, for whatever reason, over thousands of years has seen many paper currencies come and go. Regardless of the economic framework, gold was used to buy the things that were important while other means of value went by the wayside.
A hundred years ago an ounce of gold bought a good man's suit and it still does. There isn't really anything else I could point to, financial assets or oil, wheat or any other commodity that has managed to do that. So, I think it's absurd when people say gold doesn't have value.
TGR: What about the people who say it's in a bubble? How will you know when gold is overbought? What are some indicators that you watch?
PG: The definition of a bubble of any kind is when so many people have gotten so involved in something that it has been driven beyond any reasonable price. This gold market has surprised us in how high it has gotten with so few members of the general public and the professional community investing in it, particularly in North America. If this is a bubble, bring more on for me because there just aren't enough people participating in this. The only bubble I see is in the number of people predicting the end of the gold bull market. That is overloaded. Gold is not.