As the global economy continues to edge toward uncertainty, investors are trusting paper currency less and less and are looking for ways to protect their wealth in case things become even more unstable. Increasingly, investors are looking to precious metals to help them store wealth.
Peter Grandich – a commentator on markets, economies, and politics at Grandich.com – believes that investors will continue to see a bull market in gold (and silver) for the near term. Mr. Grandich recently spoke at the Cambridge House Vancouver Resource Investment Conference and we followed up with him in the days after the conference to learn more about his talk and what he forecasts for the future.
First, he started with a helpful summary of his talk for those who could not make it to the conference: "My talk was about why I still believe the mother of all gold bull markets remains fully intact," he said, and most of the subsequent interview is focused on reasons why he believes this. Along with his bullish position in gold, Mr. Grandich also shared his views on other markets: "I talked about why the US stock market could still go higher – although it won't be a roaring bull: The main reasons are the easing policy of the Fed, combined with the bears' inability to use bad news to take the market down." And about bonds, Mr. Grandich is bearish: "I have called bonds 'the worst investment for the next ten years.' I'm looking for one more rally to new low yields on the 10-year T-Bond and then I hope to get aggressively short." And Mr. Grandich is underwhelmed with the currency market: "The US dollar really has had no rally whatsoever despite an overwhelming majority of people who got long in the dollar; it merely has been in a corrective phase in a long bear market that, in my opinion, will take us to new lows in the coming years."
After his summary of various markets – and particularly his position of a gold bull market – we dug deeper into his forecasts to find out how he has reached the conclusion that we are in the mother of all gold bull markets, and to discover what investors should know for the coming months and years. Not surprisingly, Mr. Grandich sees the biggest gold price influencer as being a supply/demand imbalance in favor of increasing demand.
One prominent reason for the higher demand is a shift in Central Bank policies that has also had a dramatic effect on gold supply and demand. Mr. Grandich explained: "Until the Washington Accord, Central Banks used to be big aggressive sellers of gold. And producers like the old American Barrick (which is now Barrick Gold) were really commodity houses and used forward selling as a big way to gain extra return on their gold. That led to excessive supply that was coming into the market and it never allowed demand to take hold."
So supply was heavy and demand was light in previous years. But that changed when Central Banks decided to stop selling as much gold: "Central Banks decided that they were not going to be aggressive sellers anymore. The first was the Washington Accord in which Central Banks agreed to only sell limited amounts of gold. And in the last couple of years, they haven't even met the amount that they limited themselves to. And now we know that they are actually net buyers in the last couple of years. As well, institutional and private investors turned to the mining companies and said, 'by selling your production forward, you're limiting your upside'. Investors only wanted to deal with companies that have very limited or no hedging exposures." With these two changes – one from the Central Banks and one from investors looking for more value from their mining investments – there was a fundamental shift in the supply/demand equation and suddenly gold became a scarcer commodity in higher demand. Mr. Grandich added: "Not understanding that and how dramatically it changed the gold bullion market is one of the things that bears have missed."
An additional impact on gold demand has been a rising mistrust that people have in paper markets. Mr. Grandich explained: "We've seen more and more circumstantial evidence to support our case that the paper market has been manipulated from time to time; so the physical bullion market now overrides that and it has made the physical market more trusted."
Investor perceptions of gold have really changed and this is also increasing gold demand: "Gold has become an asset class – you're no longer a nut-job who wears a tinfoil hat if you like gold. People are recognizing that currency is being debased and people are looking for a true store of value. Even China has set up a program for its citizens to buy gold, similar to a US 401(k), and not having people buy stocks and bonds because paper assets can get very devalued."
Along with the physical market, ETFs are becoming increasingly popular among investors who want exposure to precious metals. "The ETFs created a very seamlessly and easy vehicle for institutional and large scale investors to have exposure to gold and track it without the cumbersome challenge of having to buy large quantities of physical gold and store it," said Mr. Grandich.
So, how will these supply/demand forces impact gold prices? "I don't think we're going to see 500% or 600% gains from here," said Mr. Grandich, "but I think the market has a decent chance of reaching all-time highs (not just nominal highs) in the $2300 to $2500 range."
Along with gold, silver is also an important investment. Mr. Grandich said: "I also think silver will continue to track gold and, at times, outperform it because the market was aggressively short and bearish and it has been caught somewhat in a squeeze and I think that will continue."
In spite of the increased demand in gold, Mr. Grandich has not seen as much participation by some investors in the gold markets… yet. "Between the 1960’s and 1982, the Dow Jones Industrial Average (DJIA) traded just between the 700's and 1000. In 1982, there was an infamous front page story in BusinessWeek that said 'equities are dead'. They gave many reasons why the market could never really get much higher than 1000 on the Dow. Then an unknown newsletter writer named Robert Prechter gave a prediction that the Dow would reach 3700 on a little-known technical analysis called Elliot Wave Theory. He was laughed at. But the Dow gained 1400% over the next 15 to 18 years. But the public did not end up net long equities until the mid 1990's." Mr. Grandich asserted that history is repeating itself, this time with gold: "For years, gold was trading (mostly) between $300 and $500 and people became so accustomed to the range, they just thought that's what the price was and if it got above that price, it was overpriced. That kind of thinking prevented people from getting into gold. Now, they find it unmanageable at $1700." But Mr. Grandich believes that $1700 is as low for gold today as 7000 was low for the Dow in the 1990s.
There have been some corrections but these are normal and do not detract from Mr. Grandich's bullish position: "The December correction was just another point where everybody and his mother turned bearish. The media has been supporting people who have been starkly wrong for a decade by saying that gold is topped out. We'll probably have another correction and what bears haven't been bludgeoned to death will once again surface and say the end is near. I think there will be a correction of gold at the $1800 level, which should happen before spring. Then we might see another correction when we break that psychological barrier of $2000."
Lastly, Mr. Grandich warned investors of one more reason to pay attention to gold: "The United States is in the eye of the storm and people have not recognized that we are actually in worse economic/debt shape than Europe because the focus has been on Europe and its problems. But when we get through the eye of the storm – probably after the next election – the focus will shift to the US economy and the problems that are here. I think we have a 6- to 12- month window where our financial markets will be relatively okay in the US but when we get into 2013 then the trouble is going to begin. But we have 2012 for people to prepare."
Mr. Grandich is paying close attention to the supply/demand equation and he sees gold increasing as a high-demand storehouse of wealth. And, he sees this demand growing as North American institutional and individual investors realize the reality of the American economic situation and flee from paper currency to a more trusted physical currency. If that happens, history could repeat itself and our current gold "ceiling" of $1700 could be considered a new bargain basement price.
REFERENCES
Cambridge House Vancouver Resource Investment Conference: http://cambridgehouse.com/
Peter Grandich's website: http://www.grandich.com/