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Adrian Day examines some of the trends that impacted the gold market in 2011 and looks at how the market is positioned as we head into 2012
GEOFF CANDY: Welcome to this Mineweb.com Newsmaker podcast. Joining me on the line is Adrian Day - he's the chairman and chief executive at Adrian Day Asset Management. Adrian it's been a fairly interesting year for gold - as we look back at it, it went up as high as $1900 an ounce - almost reaching the $2000 level and that was at the end of summer which is a traditionally fairly quiet period for gold and people - particularly a lot of gold bugs - were getting quite excited about this fact and were talking up $2000 and above and beyond, if you will. Since then it has, however, come back slightly and we now seem to be getting two camps, if you will. We have on the one side those saying well it didn't make $2000 - its safe haven potential is seemingly in doubt slightly as it trades as a risk asset - and perhaps this is the end of what we've seen over the last couple of months and indeed over the last 10 years, and we're likely to see gold trade lower into 2012. And at the other end of the spectrum people saying well this was probably just a much needed correction and as we go into the Chinese new year, into the traditional festive buying season at the beginning of 2012, we're likely to see a pick-up in the gold price. How do you sit and how do you view where we are at the moment?
ADRIAN DAY: It's a good question. I'm certainly very bullish - let's just cut to the bottom line - I'm very bullish on gold but it does sometimes take a little while to work through these corrections. You know, you mentioned gold moving up in the summer traditionally a weak period to $1950 - nearly $2000 and the reality was that at that point gold had moved well above trend and on no particularly new development that was positive for gold. So the market had really gotten well ahead of itself in July and August and so we did need a correction. The correction was sparked initially in September by the global stock market collapse, and of course in a stock market collapse you get a lot of margin calls, you get a lot of fund redemptions, and we had a lot of redemptions - and in those sort of circumstances, people sell what they can sell, not what they necessarily want to sell. Gold of course is the ultimate asset of last resort, and so a lot of gold was liquidated to meet those redemptions and margin calls. This month we had, after coming back a little bit, we had a dollar recovery but we also had extreme disappointment in gold market, that the European Central Bank at its summit two weeks ago, didn't announce a programme of buying the sovereign debt of the countries that were in trouble. And that was a big disappointment to the gold market because it was anticipating that. Now what we're seeing more recently - in the last couple of days - is the ECB in fact going around the rules that exist, in a backdoor manner, doing exactly the same thing. Europe is lending money to the IMF so the IMF can buy the sovereign debt and the ECB is making easy loans available to the private banks, so that the banks can buy the sovereign debt. So we're achieving the same thing, and that's really what the gold market had been looking for, so now we're seeing this monetising of debt happening Europe. The gold market is going to be very strong. The way I look at it is this: why has gold been going up the last couple of years and has anything changed? Well the gold market has been going up because of reflation and monetisation in the US and anticipated in Europe. It's been going up because individuals do not trust paper money anymore, nor do they frankly trust the monetary authorities to sort of come to grips with the problem and then thirdly, we're seeing central bank diversification out of the dollar. Particularly of course the Asian central banks, but not only the Asian banks - and it's precisely these newer emerged countries, particularly in Asia that had the highest reserves, but also had the lowest gold as a percentage of their reserves. And as you know in the last six months, we've been seeing central banks stepping up their buying quite dramatically. The third quarter was double the second quarter, and we've had continued buying since then. So the central banks are probably going to continue to buy - so all of the reasons why gold has been going up - why people have been buying gold the last couple of years - are still intact. Nothing has changed...
GEOFF CANDY: You say that nothing has changed, but if you accept the premise that people are buying gold and the reasons why people are buying gold is partly because of this inflation and reflation in both the US and in Europe. You're also, however, seeing a shift as a result of this of the actual wealth from the west to the east - is that likely to change the way in which gold moves? I'm thinking of things like cycles and cyclicality, because not only are you seeing continued buying and perhaps historically you have seen buying in the east, but you're seeing a change in the make-up of the east as well in terms of changing urbanisation patterns and demographics as well.
ADRIAN DAY: Well that's a huge subject and you've raised some very interesting points. Yes, number one there's no question that we have that ongoing shift in wealth from the west to the east and that is going to continue. And you make a very interesting point that perhaps that is the reason why we have seen these sort of changes in the cyclicality and the seasonality of gold - why you mentioned that it was up in July and August which is traditionally thought of as a weak period and we've had several of those sort of incidences in the last few years, which probably or perhaps can be attributed to the east - and particularly China and India - being much more dominant in the gold market. India of course remains the largest market but China is growing much more dramatically than India at the moment, so yes, we're probably going to see that continue. From the point of view of whether it's an Indian person or a Chinese individual - you look at a Chinese individual who sees yes, high growth in his country, but he also sees inflation at 5.5%, he's not earning 5.5% on his deposits in the bank and he's not overly comfortable with the banks anyway perhaps - so gold is a natural hedge for him - gold is a natural asset to put your money into. Similarly in India where you've got the rupee declining and so the gold price in rupees is going up dramatically, and again with negative interest rates at the short end gold becomes much more attractive to people in those countries.
GEOFF CANDY: These changing dynamics are fairly interesting and if we look at the investment side of the gold market for a minute, there were a lot of people saying that when the investment side, or, rather, if the investment side of the gold market that was partly to blame for the rising prices, if that came off there were questions raised about whether or not the more traditional sides of the gold market - the jewellery side for example - would be able to come in and provide a floor for prices. If we look now at where we're placed within the investment space - we've got central banks, we've got the institutional side of the market buying gold substantially, but there is some question about whether or not we're likely to see the same level of buying from the likes of ETFs for example - how do you see that playing out and what is your view as a whole, of the investment side of the gold market?
ADRIAN DAY: Right - obviously there are a lot of moving parts and as one part is strong, perhaps another part is weak. Other things being equal of course, the jewellery demand is better when you have a strong economy but lower prices - as the price of gold has gone up so much people are shifting out of gold jewellery and certainly silver jewellery has become a little more popular relative to gold jewellery just because of the price. But equally, what tends to happen is that investors tend to be more interested in gold precisely at the times when the jewellery market is weaker because it's what Frank Holmes calls the love trade and the fair trade and when one is dominant the other is weaker, but when the other is weaker then the other one becomes more dominant. We should also remember that historically, we think of jewellery as being the major factor in the gold market and so concern is raised that jewellery is not as strong today and its investors went away, what would happen to gold. But that's only been true for the last 20 years, and before that certainly investor buying, including central bank buying, was a much more powerful factor in the gold market than was jewellery. So when we look at the investment demand itself, you mentioned - very good points - that we have central bank buying today but we also have more institutional buying today than perhaps we have been used to in the gold market - and the institutions will buy both the ETFs and also buy the physical as well. Of course central banks only buy the physical. So when you put the three pieces together - the institutions, the individuals and the central banks, it strikes me that all three are fundamentally bullish but of course individuals, particularly say in India, can be a little more price sensitive. Some of the institutions tend to be more trend followers, and then the central banks obviously buy in all very large amounts, but so they come in all at one - I mean a particular central bank will come in size, but they tend to act as a bit of a floor. Right now it seems to me they're acting as a bit of a floor on declines on these corrections in the gold price because there's clearly a lot of pent up buying where people are just waiting for lower prices. So you put the three pieces together and you have a very positive environment.
GEOFF CANDY: What is your view of the safe haven nature of gold because there has been quite a strong debate coming out - at least in the headlines of newspapers over the last few weeks - about the notion of gold trading as a risk asset or as a safe haven and the one seems to be in the ascendance rather than the other at the moment. Is this something that's likely to shift over time and perhaps as we see concerns once more returning to longer term issues that the safe haven demand perhaps will come back?
ADRIAN DAY: Yes I think so - gold fundamentally remains a safe haven asset - people think of it as that but sometimes we expect too much of gold in the short term - or let's say newspaper headline writers expect - they expect gold to go up every day that there's a problem. And what happens, again gold is a safe haven asset, but let's not forget that it is also an asset of last resort. One of the reasons that you buy gold is so you have liquidity when there's a crisis. So in September when you had every asset around the world just tumbling, but you had fund liquidations to meet, well instead of selling the good quality stock that you'd bought for $10 in April that was now trading at $6 you decided to sell your gold that you'd bought at $1400 and it was now trading at $1600. That wasn't such a silly idea, and in fact it was gold fulfilling its function as a source of liquidity in a crisis - so often when you have that kind of financial crisis, gold goes down immediately before finding a pace. I don't see that as unusual frankly.
GEOFF CANDY: How closely do you watch the gold-dollar relationship?
ADRIAN DAY: Clearly with gold priced in dollars, other things being equal, the dollar goes up - gold goes down. But what we've seen for much of this year is gold moving in all currencies. But again clearly, if the dollar is strong, gold will either go down or go up less than it otherwise would have done. However in the last few days for example, I've seen the headlines saying gold is up because the dollar is down. But it's not just that - gold is up in euro terms as well in the last few days - it's up for fundamental reasons.
GEOFF CANDY: Just finally to close off with, if we look at the relationship between gold bullion and gold shares, clearly they have underperformed somewhat - and I say just quickly, but this is a topic we could talk for hours on - but if we look into 2012, is this an area that you think perhaps may offer value, or are you still sticking to bullion at this stage?
ADRIAN DAY: No, I would be looking at both frankly - there's no question that the gold shares are very undervalued relative to bullion - and as bullion goes up they become even better value, but you also have to remember what are the fundamental reasons people are buying gold at the moment. They're buying gold assets because of concern - because they're afraid, for insurance reasons - and if you're buying for insurance, you don't buy a gold mine where they're shooting helicopters in Indonesia or having strikes in Peru, etcetera - you buy the physical asset itself. So I think 2012 will probably see the gold shares perform better relative to gold, but I'm not sure that they're going to catch up what they've lagged for the last five years...
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