Interest rates, the end of QE2 and gold in euro terms - Julian Philips

A look at what has been going on in the gold market since the dip and why it is worth looking at the price of the metal in currencies other than the dollar

GEOFF CANDY:  Welcome to this weeks edition of Mineweb.com's Gold Weekly podcast.  Joining me on the line is Julian Philips - he's the founder of Gold Forecaster.  We have seen quite a lot of commentary coming out of the gold market since the decline last week from its peak and there's been a lot of conversation about whether or not this is the bursting of a bubble and we are likely to see further declines from here, whether or not this is a much needed break and we are likely to see gold going up again and a lot of the focus has obviously been on the fact that very few of the fundamentals have actually changed.  How do you see the landscape as it stands at the moment?

JULIAN PHILIPS:  I look at the markets with a slightly different piece of glass - as Alice looked through the looking glass she looked darkly.  When I hear all the media talking about how the markets have been savaged by this and by that, if I look through euro eyes as opposed to dollar eyes, it's a much quieter picture and if you look at the dollar, the dollar has moved about 5% - it was headed to even more dangerous levels earlier, and could well go back there and if you look through euro eyes the markets have been a much quieter place.  So my question - is this really about the dollar or is it about the markets? A very difficult one for US investors to look through because they see the dollar as being the measure of value that is bedrock.  But it is proving not to be so and that is showing itself in the volatility of so many markets.  Yes silver is falling a lot more but I would put that mainly because the key silver markets are in the Americas and not in Europe, whereas gold, I have no doubt that the real market is tied into London at the two fixes, hence the stability in the euro.  So it really is a rather strange picture, but if we look at the United States and its situation we can understand why there is such volatility in the dollar and it may come as a big surprise to many people but this is certainly not the United States making the dollar stronger.  I strongly suspect and of course the evidence would be very thin, that the Chinese have tremendous amount to gain by seeing a stronger dollar and are in a position to ensure that it is a lot stronger than perhaps the markets would take it to if allowed to do so without any form of encouragement and if we look at that we say why on earth would China want to do that?  They are importing a lot of energy inflation and by raising the value of the dollar they raise the value of the Yuan and they cheapen the price of importing inflation which is a good step in the anti-inflation fight in China.

GEOFF CANDY:  I suppose the other point to that is that China has a lot of dollars which it obviously doesn't want to see whither away.

JULIAN PHILIPS:  Absolutely and it's going to get a lot more so it really is almost more dominant over the dollar than the United States is itself and we are looking at United States losing considerable power from say 30 years ago.  This is a different world completely and so we have to factor in that the US is on the economic and monetary decline.

GEOFF CANDY:  That said there have been some comments around the fact that when QE2, the quantitative easing programme that is currently underway in the US that is likely to end in June - when that does end we could see another slump in gold.  Would that only be in dollar terms would you think or would that spill over to other currencies as well?

JULIAN PHILIPS:  I am holding my breath on that one.  I wouldn't draw quite the same conclusions as others have because it's almost like talking about higher interest rates.  If QE stops will they now tighten?  Will they tighten on the monetary fund or will they actually try to encourage interest rates higher.  Is there going to be a change in the picture?  From where I stand I see the Federal Reserve as not leading but following, following the US economy.  The Federal Reserve will act to tighten monetary conditions provided it can see some real traction in the US recovery and we are not seeing that and you have to look down to the consumer who drives 70% of that economy.  Is he happy with his housing market, is he happy with his job?  Does he have disposable income that he is prepared to spend on things to ensure growth?  I don't see that at all and I think the Federal Reserve doesn't see that and I think the Federal Reserve's not too happy to see things tighten and get stronger in that way because it would destroy what little confidence our consumer has in the various economies, so I personally don't see a slump in the gold price and if we did see any form of interest rate hike it would simply be to chase inflation and you would remain with negative interest rates which would not be bad for the gold or silver price at all. 

GEOFF CANDY:  Obviously there has been a lot of demand coming out of China and clearly the inflation worries there that you mentioned earlier are having an impact as well.  How do you see China and to a lesser extent I suppose India, their role going forward in the gold market?

JULIAN PHILIPS:  I heard a fascinating statistic this morning.  It said by the year 2015 there will be more middle classes in China than the entire population of the United States.  Now in itself that tells a massive story.  We heard that China by 2015 will have an economy the same size as the US.  If you extrapolate that to 2020 you are seeing a potential dwarfing of the United States.  You are seeing certainly a middle class that is more than capable of buying gold and the joy of Chinese buying is that they don't look at derivatives seriously, they look at physical gold.  And if you look at the content of Europe and the United States in terms of physical gold buying it's a very much smaller percentage than the entire sum total of the derivatives and physical gold market in the States and Europe and therefore the Chinese demand will have a disproportionate impact on physical gold prices than the US and Europe will going forward and I am talking about from today onwards not in the future - I see that demand is being more closely related to the expansion in the Chinese middle classes than I do to any view on the gold price.  After all if you look at India and China they see gold as financial security and a glance back over the last decade will more than justify that concept and therefore I see it as ongoing.  The average Chinese investor really doesn't know what the thoughts of the Federal Reserve on interest rates or QE are.  They see gold entirely related to their personal situation. 

GEOFF CANDY:  Two related questions to that to close off, are we likely to see the makeup of the Chinese investment change as the middle class extends and deepens and develops a taste perhaps for derivative type products?

JULIAN PHILIPS:  Again look at Asia attitude to banking and to such things as gold investments.  They have nowhere near the confidence that the developed world has in the banking system.  And in fact if you look at 1% real rate on the US dollar as controlled by the Federal Reserve and the US banking system and you compare it to the average Chinese attitude to that piece of physical gold, it's going to be a very hard road for the average Chinese investor to achieve the level of confidence that US and European people have in paper money.

GEOFF CANDY:  Has a floor been established then at any specific price at this stage, perhaps above $1,000 for example, given that we are still seeing still strong demand out of India, a strong demand out of China which inherently were very price sensitive markets in particular physical gold jewellery.

JULIAN PHILIPS:  Yes and I would extend that question to - do the Indian and Chinese seeing such a floor.  They have a habit of selling, if they see anything like a spike and coming in when they feel that some new floor level has been maintained and they have been setting these new floors since $300 an ounce.  I think that they are looking at $1,500 now as a floor but they will wait until they are certain.  Once they are certain that's a matter of time - they will then go back in.  We are looking too at the season of gold.  This is normally the time the marriage season is ending at the end of May and some might think that well, India has always been seasonal, this is time they start buying, they start buying in the middle of August but because of the expansion of their middle classes, that seasonality has slowly been erased over the last five years and there is no such seasonality in China.  So I do see them seeing a floor at around that level and I don't see a seasonal drop - so it might move sideways while the floor is being established but I think we are looking at roughly the floor now. 

GEOFF CANDY:  Do you see this as a bubble given that there are some people that are saying that this is a bubble that has just burst?

JULIAN PHILIPS:  No I don't see it at all - some would like to see it as a bubble because when gold goes up like this it tends to reflect on the state of the world economy and if you look at the gold price in the euro there are no signs of any spiking, any bubble activity, there's no speculative froth and if you look now at the dollar are we talking about a gold price rise or are we talking about a dollar drop in value.  Some people will say it has to come back from whence it's come but I would ask the same of the dollar.  Will the dollar rise again after the fall.  It doesn't necessarily follow and for myself I would put a very large question mark over whether there's a bubble there or not. 

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