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While we may see trade in gold get choppier over the course of the year, negative real interest rates and other factors will continue to support gold through the course of 2011, says GFMS CEO , Paul Walker
GEOFF CANDY: Welcome to this week's edition of Mineweb.com's Gold Weekly podcast and joining me on the line is GFMS CEO Paul Walker. Paul the last month has been rather eventful to say the least, and there have been some questions asked about whether or not gold should be higher than where it is given what's been going on in the political spectrum. What's your view of where gold is placed?
PAUL WALKER: I don't think the situation with gold has actually changed that much, surprisingly in the last few months, because it's always been a function of economic forces, interest rates, uncertainty about inflation against a backdrop of geophysical risk and what's happening in Libya and what's happening in Japan at the moment. All other things being equal you'd expect things to be positive for gold. Of course there have been some other offsetting economic factors. To look at gold as being driven by one particular primary driving force is probably a little misleading and so it's going to be buffeted around and moved around on the basis of that. So I don't think that a huge amount in the sense has changed although one would argue that what's happening in the Middle East and North Africa and Libya in particular should be a driver of higher gold prices - there are other things that are offsetting it.
GEOFF CANDY: I have heard comments, particularly from the likes of Jeff Christian for example saying that we are perhaps getting to a cyclical high for the gold price - would you go along with that?
PAUL WALKER: The question is what do you mean by a cyclical high. Cyclical high - does that mean we are staring into the abyss of significantly lower gold prices from hereon - no I don't think we are. The long and the short is that GFMS have been on the record for certainly the last few years, and just recently as well we are bullish on gold. We think that in particular, the economic backdrop is still very conducive to higher gold investment, backdrop of super ultra-low interest rates - we don't think there's going be a significant change in that for the next couple of months, and as long as the economic backdrop remains uncertain - sovereign debt crisis raising its head again in Europe - all of these factors in our view are going to be positive for investment demand in gold and should see prices move higher. Add into that mix of course demand in places like India - you'll see our gold survey coming out very shortly - some of the numbers that are already in the public domain through Gold Demand Trends that we do for the World Gold Council. India has been incredibly strong, China has been the big story of the last year - tremendously strong demand incidentally driven by very similar forces to those that are driving demand in places like Europe and elsewhere - ... inflation and so on and so forth - so the long and the short (it is a long-winded answer to your question) but no, I don't think we are at a cyclical high yet.
GEOFF CANDY: That being said, there was talk at the end of last year that perhaps gold was looking a little top heavy - it did come off a little bit in January and people then came in and said oh well the events in the Middle East came to their rescue almost - of the gold price and saw it back on its upward trajectory. Would you go along, or do you perhaps think that we're seeing - and we're likely to see going forward perhaps shorter and shallower corrections in the gold price?
PAUL WALKER: Well not really - no because regarding your question about whether the events in the Middle East came to gold's rescue - I actually don't think that's been a primary factor to the extent that has it impacted on people's views of where the oil price is going, inflationary risk and so on... yes that's true. But what you have to bear in mind in all of this is that the backdrop here of ultra-low interest rates, macro-economic dislocation, fears of global imbalances - the wrath of these things still remain solidly in place and that's really the bedrock of the gold bull rally - pick up a gold survey from 2002, 2003 where we were talking about macro-economic balances - the essential underlying, if you like, glue that holds this whole story together in my view, is ultra-low interest rates, negative real interest rates, growing imbalances across a range of asset classes and gold has been a beneficiary. We've always said gold is the canary in the coal mine here that's signalled that something is not quite right and trust me, the macro-economic situation is still not quite right. Gold is speaking to that theme and people are going to invest in it. Now to answer your question about whether we're going to see shallower, smaller corrections - one of gold's risks in the short term is that it is so heavily dependent on investment flows these days and investment can wax and wane quite dramatically. So, will we see prices moving high on average? Yes we believe that is the case. Could you see quite a bit of volatility on short term fluctuations in investment demand - yes you will. So it may well ironically become a little choppier going forward - again it depends on how you define choppiness - you have to be careful here because you may find that the dollar price move - the absolute price moves in the day will be significant in historical terms simply because of those high prices - in percentage terms maybe not quite as dramatic.
GEOFF CANDY: You mentioned India and China as being the major drivers and some people have questioned whether - if investment demand does wane, we're likely to see a decline because of the more traditional if you will, demand factors like gold jewellery in India and those kinds of things - wouldn't necessarily be able to pick up the slack. That doesn't seem to be proved correct at this stage, given what levels of demand we're seeing out of India and China.
PAUL WALKER: Again the complication in all of this comes down to one very simple issue - how do you differentiate between investment buying, speculative investment buying and jewellery purchases in markets like India and China. And the reality is that it's a combination of all of these and to try and pretend that one can really strip out one from the other, is just simply misleading. Undoubtedly the key underpinning factor in markets like India - and I just spent five weeks in India over Christmas - is a degree concern about where the global economy is, where the India economy is - it's a backdrop of again negative real interest rates at the short end of the curve in India. A very interesting conversation I had with one of the biggest jewellery fabricators was, "why don't you sell your stock and lease it back and lock in your capital gains" and his response was very simple to me. He said ‘and put my money where...' So there is this underlying issue in all of these markets, and that's the issue of negative real interest rates. And to go back to my earlier point, this is the glue that holds a lot of the stories together, and until such time that we see a significant shift in the interest rates, you're going to see gold demand in China, gold demand in India - driven by a combination of just genuine hedging, risk hedging or if you like, just pure speculative plays and this is where we're getting into I guess the choppy territory for gold. How much of this is long term hold and how much of it is more short term speculative investment flow. And as we move further and further into this rally you're more likely to see more of a kind of speculative nature coming in and that all other things being equal, probably lead to a little more choppiness in the price.
GEOFF CANDY: I suppose the million dollar question is when are we likely to see a turn in real interest rates toward positivity and if that is the case then that would clearly have an impact for gold.
PAUL WALKER: This is what I say to all of our clients - if you want a gold view in this day and age, and obviously this simplifies it enormously and I wouldn't have a job if it was quite as simple as calling interest rates, just in the same way that people used to say that gold was all about the sense of the dollar and recent experience - if that hasn't dispelled that idea that gold is a one-horse race, I don't know what will. The house view at GFMS is that we're likely to see ultra-low negative real interest rates, if this a dollar-euro-renminbi - interest rates are still - you've got 15% nominal growth and 7.5% interest rates - all of these markets are characterised by what I think is an unsustainable interest rate environment. I guess the question is at what juncture does this stop - which is your question - what's going to be the trigger for this. For one thing I'm certain there's not going to be Ben Bernanke having an epiphany one morning and saying "my goodness, I need to raise interest rates". These are probably going to be thrust upon the policymakers by the bond markets eventually speaking with a very powerful voice and saying we're not going to fund US 10-year debt at 3.3%, we'll only fund it at 4.3% or 5% etcetera. You're seeing those bond markets impact in areas like Greece and to believe that America and UK and elsewhere are immune from these forces is to delude yourself. What the UK is doing in terms of fiscal restraint at the moment, is probably very sensible given what they perceive and recognise to be a realistic risk of the bond markets punishing them. Though at some juncture interest rates are going to go up - where that is our house view at GFMS is the ultra-low rates existing through into next year - which is why we're still bullish on gold. Of course there's an outside chance here that the bond markets finally do a reckoning of US dollar indebtedness and that's not just federal but state debt, its city debt, its individual debt. How all of this is compacting and influencing the macro economic backdrop of America and saying fine, we're not going to fund this anymore - and if interest rates do move quickly and significantly that's where gold is going to have to either carve out a new niche for itself or it's going to come under some real pressure from investment flows.
GEOFF CANDY: Just to close off with, have you got a gold price view for the end of the year?
PAUL WALKER: Oh I believe we'll see gold through $1,500 before the end of the year - this is for certain. We are very positive that the average gold price is going to be - all of the structural factors supporting gold are in place. You might find it will be temporary things like what's happening in the view at the moment. Is there going to be an oil price shock - perhaps, but the key drivers that underpin this whole story still in the GFMS view are there and will stay in place for some considerable time. So look for higher gold prices, look for slightly more volatile gold prices in absolute terms but you'll probably see it breaching the $1,500 price level in the not too distant future.
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