Charles Oliver joined Sprott Asset Management LP in January 2008. He focuses on gold and silver investments as a portfolio manager for the Sprott Gold & Precious Minerals Fund and the Silver Equities Class.
When I spoke to Mr. Oliver last summer, he said the weakness in the gold price in the face of unprecedented money printing from the Fed had taken him by surprise.
Have we passed a decisive point since then? Is gold heading up?
“I believed throughout 2013, with the price of gold coming down, the fundamentals were only getting better,” he answered. “During that time, the Chinese bought like mad and the Fed printed another trillion dollars through QE. Nonetheless, heavy selling took the gold price down.
“Today, the difference is that the sellers are exhausted, and physical demand is catching up. One of the numbers we are looking at is the quantity of registered inventories on the COMEX for gold. That’s the amount of physical gold that is available when someone asks for physical delivery instead of a cash settlement.”
In the following chart from Bloomberg, we can see inventories of physical gold on the COMEX (in ounces) have declined dramatically, falling by around 30% in the past year:
Please note these are total eligible reserves, which can become registered by the banks in order to settle futures contracts for phsyical delivery.
Mr. Oliver continues: “One day, we might see someone try to break the market on the physical side, by demanding delivery of more tons than can be supplied – hence driving the price up.
“Because of this threat, I would tell investors in the metals to stick to ‘fully-allocated’ products, where you have a claim to a specific amount of metal that is physically held in a vault, not lent out or hypothecated.”
So have we reached a point where physical demand will drive the price of gold up?
“The demand coming from China boggles the mind. Imports of gold through Beijing were somewhere on the order of 100 tons a month last fall.1 Assuming this trend continues, China might import 1,200 tons or more this year. That is nearly half of the world’s annual mine production of around 2,600, whereas 5 years ago, they hardly imported any. I believe a good portion of the 800 tons2 that were sold from ETF holdings subsequently were shipped to Asia.”
Gold and associated stocks have attracted value-oriented investors to the space, he adds.
“I’ve noted interest from the ‘big money’ in the U.S., partly because gold stock valuations are the cheapest they have been in 25 years. Last fall, big mining companies were paying dividends as high as 5% according to my numbers, whereas they usually paid under 1% — if anything — a decade ago. Price appreciation and companies cutting their dividends have brought them back to lower levels generally since then.
“Asian entities have been eyeing gold companies for the last decade. Last year we saw the Chinese make a few acquisitions in the Australian market, and they continue to show interest in gold companies in many different jurisdictions. And of course, Sprott itself recently launched two important partnerships with major sovereign and semi-sovereign funds in South Korea and China.”
Could gold head lower in the near-term?
“As far as the price going down again, we already saw gold bounce off from $1,180 in December, which represented a 39 % retracement from the peak – a significant number from a technical perspective. Certainly another powerful support level would be around $1,000. There were several times before 2008 when gold hit that level and came back. I believe that would be a very firm support level for gold if it dropped again.”
Where is gold headed a few years out?
“In 1980, when the gold price peaked at $800, it took 1 ounce of gold to buy the Dow Jones Index. After 1980, financial assets took the lead over hard assets. In 1999, it took 44 ounces of gold to buy the Dow Jones, at a gold price of $250. If gold were to regain the position it held in 1980, we could easily see a 3:1 ratio – gold at $5,000 given the current level of the Dow Jones, or even $15,000 if gold returns to the 1:1 level.
“Ultimately, I believe that the gold price could reach $5,000 within a few years, and perhaps go well beyond. Deficits and rising debts, exacerbated by demographic issues, are here to stay. And money printing and higher gold demand along with them.”
P.S.: Want to discuss investing with someone from the Sprott team? For U.S., and all non-Canadian investors, contact us at firstname.lastname@example.org, or call 1.800.477.7853. Canadian residents may contact Michael Kosowan at MKosowan@sprottwealth.com.
Charles Oliver joined Sprott Asset Management LP in 2008. He is Lead Portfolio Manager of the Sprott Gold & Precious Mineral Fund and co-manager of Sprott Silver Equities Class. Charles combines a big picture approach with a bottom-up process, and focuses on strong management teams with sound strategy.
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