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"The economy on a global basis is continuing to grow and is probably more stable than it was two years ago - so there are some reasons to reduce some of the risk premia that you're seeing in the gold"
GEOFF CANDY: Welcome to this week's edition of Mineweb.com's Gold Weekly podcast. Joining me on the line is Jeffrey Christian, the MD at the CPM Group. Jeffrey clearly a lot of focus has been placed recently on the events in the Middle East and North Africa and more recently, of course, Japan. There's also been concern again about sovereign debt in Europe - given everything that's going on, why isn't gold moving higher than it is already and perhaps even more rapidly so?
JEFFREY CHRISTIAN: First off, you have to understand that gold prices are very high and they're at record levels. You do have a lot of investors who are concerned about the litany of problems that you mentioned at the outset - Middle Eastern politics, the potential for oil supplies, the disruption in international and global economics because of the Japanese earthquake, tsunami and nuclear disaster, US sovereign debt issues and European sovereign debt issues - among other things. Those are the headlines that are causing people to say ‘I want to buy gold'. At the same time gold prices were never as high as they are now prior to around August or September 2010 and you do have gold prices at a very high level that is creating an environment where, even in the face of all these economic crises, real economic growth is continuing in most parts of the world - including the United States and Europe. So you have any number of investors who will say that maybe gold prices are getting close to a cyclical peak or maybe even have passed it - I don't think it has passed it, it's probably coming in the next few weeks. A lot of investors are saying gold is looking top heavy and let's be honest - the world isn't collapsing, it's facing incredible problems, but it's been facing incredible problems for the last decade and we continue to muddle through and manage with these issues. So you have some investors - people who maybe bought gold as cheaply as $1,180 or $1.200 eight months ago and who are saying they're willing to take their profits here. Then you have other investors who say gold is looking top heavy here and I'm not going to buy any more of the metal and I believe that's what is restraining the price of gold - insofar as one might say it's being restrained...
GEOFF CANDY: I take the point. You talk about a cyclical high and your belief that it will happen in the next few weeks - what does that mean?
JEFFREY CHRISTIAN: That's really the big question right now - one of the reasons we think that gold might be reaching a cyclical peak is because, as I said, the economy on a global basis is continuing to grow and is probably more stable than it was a year ago and more stable than it was two years ago - so there are some reasons to reduce some of the risk premia that you're seeing in the gold price - the economic risk premia in gold. In addition to that you have a lot of attention looking always at the open interest in the futures contracts and right now in the April contract is the active contracts in the Comex and you have 23 million ounces of open interest. Now that's down from 32 million ounces at the beginning of March, so you've seen about a third of the open interest go away. That's why I was talking about profit taking by investors saying maybe gold is looking top heavy. You have about a third of the open interest in the April contracts already go away and a lot of that has rolled into June or forward months but some of it has actually gone away. But its 23 million ounces as compared 2.3 million ounces of registered stocks - that is a very tight, congested market and over the course of the rest of March and into the first week of April, those people who were short 23 million ounces of gold in the Comex April contracts have to either buy those contracts back, roll them forward or find physical metal to deliver into them. Most of them will be rolled forward, but all three of those actions have the effect of driving the price up on a temporary basis - that's another reason why we think that we may be approaching a cyclical peak in the next few weeks, is because the move into the April contracts often is the occasion for cyclical peak in the gold market. Another factor is the cyclicality or seasonality of gold prices. Gold prices tend to be strongest in the period December through April and they tend to weaken after that and we expect that we'll see weakening fabrication demand and possibly also some weakening in investment demand in the June-July-August period and if that happens, then we think that could contribute to a declining gold price.
GEOFF CANDY: I suppose the flipside of that coin is where does the trough sit now given that mining company costs are going up, we're seeing companies in general now having to now consider potentially higher taxes, as well as wage bills and that kind of thing - if we're reaching a cyclical peak where might the cyclical trough be?
JEFFREY CHRISTIAN: Right - while gold prices are going up - costs are going up and they've gone up very sharply in South Africa - unfortunately for South Africa - the average cash cost on a global basis is still around $580 and the average full in costs on global basis probably around $700 so you have about 100% profit margin built into current gold prices which - if you thought that the cost of production had something to do with the price of gold, you'd be very nervous because you could say these guys could give up $600. Fortunately for gold producers and gold investors, the gold price tends not to be determined by the cost of production. The cost of production obviously is important on a long run basis but you tend not necessarily to see the gold price go down there. We did see it in 1997 and 2002 and it had catastrophic consequences for the mining industry. Our view is that the gold price, when it comes off, may come down to around $1,250 or $1,300 initially and that it could come down lower - possibly to $1,150 or $1,200 over the course of the middle part of this year.
GEOFF CANDY: Looking at the demand side of things - we've seen anecdotal evidence of strong buying in India - it is the festival season as you say, which will contribute. Is this demand something that you're still watching?
JEFFREY CHRISTIAN: We're still watching it and one of the things that we've actually seen over the last say six weeks is that Indian investors who generally speaking, are the most price sensitive people. If you go back to January Indian investors were waiting to see how low gold prices would fall and gold prices in fact fell from $1,430 down to about $1,310 over the course of January. Then as the price started rising, Indian investors started pulling back initially - but at one point, about three or four weeks ago Indian investors stopped waiting for a new dip and that was very telling because you saw the same thing for example in August 2007 where investors around the world were waiting for another leg-down on gold. Then one day investors in the Mumbai market simply said they weren't waiting - this was a good price and then you saw that reflected in Dubai - and that's one of the things that we've seen that's driven the gold price from $1,310 in late January, early February up to $1,440 a couple of days ago is the fact that these investors have become less price sensitive and they say they understand that the price is higher compared to where it's been, but I'm still going to be coming in as a buyer.
GEOFF CANDY: Just to close off with, if we look at the relationship between gold and the dollar - the inverse relationship is at its most negative in two months - or it was earlier today. How important is that relationship going forward in looking at what's likely to be driving the gold price as we move into the summer months?
JEFFREY CHRISTIAN: We always say that gold does not trade against the dollar, gold trades against currency markets and it's interesting right now because you have a very scattered currency market. You have the yen at historic highs, probably primarily reflecting the fact that a lot of people have been saying they want to repatriate yens because they're going to be doing a lot of reconstruction. But you've also obviously got some investors and speculators in there betting for the yen and then you have the dollar falling against the euro which is very interesting. That probably reflects the budget impasse in the US government and a view that these guys don't really understand that they could cause Treasury debt to be downgraded if they don't get their act together. But our view is that the currency markets and the dollar in particular are important to gold, but the relationship historically was at about a 28% correlation, now it's about negative 45% because you have a lot of institutions that now trade gold against the dollar so it becomes a self-fulfilling prophecy. They see the dollar rise, they sell gold, they see the dollar fall, and they buy gold. But we don't necessarily look at the dollar exchange rate as the end-all and be-all of gold price tracks...
GEOFF CANDY: Finally - it's interesting you mention the euro and if you look at a graph in various currencies, the euro does seem to be the most reactive, if you will, the one that goes against the trend the most - why would that be?
JEFFREY CHRISTIAN: It's a little bit perplexing to us because quite frankly we think that both in the short term and in the long term, the European economies are not in as good a shape as the US economies, and we would think that the euro would be somewhat weaker than it is now - maybe 10% weaker than it is - but what you're seeing again, is not so much people betting in favour of the euro as betting against the dollar.
GEOFF CANDY: Are you willing to put a number on the cyclical peak, at this stage?
JEFFREY CHRISTIAN: We've been saying that the price could go to $1,500 or even $1,550 - I'd probably lean more to $1,500 than $1,550 at this point.
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