Luis James: We own gold for prudence, not to speculate on rising prices

Interview with Louis James, Senior Metals Investment Strategist at Casey Research, LLC about current gold issues

Upner: Could you comment present situation on precious metal market? We are witnessing almost one year correction and markets reacted many time contrary to some bullish news. What do you consider as the most real reason(s) for this behavior of markets?

Louis James: Well, the market may be at a turning point, with all the excitement some recent discoveries and takeovers are generating — at a time when gold and silver look to be gathering for a new rally. The „quantitative easing“ and other money-printing schemes under consideration in the US and EU could make that rally a terrific one, if they come to pass.

That said, the correction in precious metals and sharper correction in metals and and mining stocks we’ve been suffering or enjoying (depending on your perspective) since gold’s $1900 peak a year ago does indeed seem to have been defying clearly bullish news. Especially company news — it was quite something to see many companies report unambiguously great exploration results, or record earnings, and still sell off.

Of course, with rising mining costs, record earnings have been few and far in between, and that has disappointed many investors who thought „high“ gold prices would keep margins fat for a long time. Unfortunately, while gold has been trading sideways, costs have been catching up, and margins are being squeezed. That’s not a bad reason for people to hesitate to buy, or even to sell the producers that are losing profitability — but only if you think gold and silver have peaked for the whole cycle. If that were true, rising costs and falling metals prices would have us selling too, because nine out of ten mining companies won’t survive the end of this cycle. If you believe this, you should sell while there are still buyers.

But I don’t think last Septembers $1900 peak was anywhere near the top for this cycle — every single thing governments have done since 2008 is extremely bullish for precious metals. If you look at corrections thus far, the one we’re in is neither the deepest nor longest this cycle — and nothing to the huge, multi-year drop in the middle of the great 1970s bull run. Doom and gloom is entirely premature.

Consequently, I’m buying, happy to take shares in great companies off weaker hands at bargain prices.

As for why it happened, we could just say that corrections are normal, even in a long-term, secular bull market. But in this case, you had most industry insiders not really believing gold would hit $1500 an ounce, except possibly in a spike measured in hours, like the one in 1980. For so many people, $1900 gold was just unbelievable — so they didn’t. The rally went too far, too fast, and of course it had to correct. This is perfectly normal. It’s also perfectly normal for bearish sentiment to feed on itself and make things worse — a self-fulfilling prophecy. Markets should be rational, responding logically to price information, but they are not; they are very emotional, and psychological „momentum“ plays a huge role. A big sell-off after a big surge is anything but surprising.

And now a year has passed. Gold has not broken below $1500 — that previously unimaginably high number — let alone below $1000, or back to its lows at the beginning of this cycle. This persistence above what was previously deemed a high number is starting to make people understand that the cycle is far from over. Plus, as we just saw last week, the mere mention of quantitative easing by Ben Bernanke can send gold shooting up $100.

Another 2008-style crash could hammer our share prices again, of course, but it would be temporary, as it was then, and maybe much briefer, given that everyone remember what happened last time. Absent that, if July really was the bottom, we could see a rally for the record books in the months ahead.

Things are heating up. This is a good time to buy.
Upner: Marc Faber stated that the US Treasuries and bonds are biggest bubble ever. Why do you think that contrary to this opinion investors consider investments into some public bonds (German, US, Swiss) as safe haven contrary to the gold, for example?

Louis James: The so-called experts have been telling people for years that gold is not money, but a „barbarous relic“ of a previous era. Bernanke says the Fed only owns gold for reasons of tradition. It’s hard for most people to go against conventional wisdom. On top of that, you have the way the metals prices fluctuate. A conventional person who sells his or her „safe“ government bonds and puts his or her savings into gold, only to see gold drop 15% over the coming months, may have a heart attack.

What such people need to remember is that no matter how the price of gold fluctuates, physical gold in their possession will always be physical gold in their possession, worth something to someone — always. Not so for any paper asset you can name, no matter how safe you think it might be, it’s possible it can lose value or become illiquid. In other words, the lack of counter-party risk makes gold an entirely different type of financial asset. In the post-Lehman, post-MF Global world, in which the EU seems closer to disunion every day, no one should ever underestimate counter-party risk, in _anything_.

As my boss, Doug Casey, likes to say: gold is the only financial asset that is not simultaneously someone else’s liability.

This is why we own gold — but it’s for prudence, not to speculate on rising prices. To speculate, we buy gold stocks.

Upner: Let’s say that you should advice to some Slovak and Czech investors (middle age, medium ability to carry the risk) to invest their money in the precious market instruments. What would be your advice to build some part of their portfolio? How much you recommend invest into this industry and what kind of instruments prefer?

Louis James: Prague, Paris or Palo Alto, doesn’t matter. Under current market conditions (there is another crash waiting to happen, we’re just not sure when), we’re still playing it safe. So our general recommendation is 1/3 gold, 1/3 speculations likely to do well in economic crisis (in whatever markets you have access to), and 1/3 cash.

Note 1: We do see massive inflation coming, but until that shows up, cash is not a bad thing to hold, and it’ll be good to have some around, if we’re right about another crash coming.

Note 2: Gold can include ETF holdings and near-gold paper, like Perth Mint Certificates, but for the average investor who doesn’t need to store tens of millions of dollars in gold, we primarily mean physical gold. Just six ounces of gold is $10,000 — it’s very compact — and having a paper that says you own gold is not the same as having physical gold in your possession.
Upner: I have met with some opinions about silver that it could be an opportunity of this decade. Some arguments by the soaring costs of production, some comment decreasing ore grades, some whispering about manipulation, others use historical comparisons of gold/silver rate 1 to 16. What is in your opinion the most important and crucial factors which could move with the price (in both ways)?

This seems to make sense, but I’m not betting in it. Silver and gold are similar, but are, in fact, different commodities. Silver has it’s industrial uses, which can cause its price to move differently from gold’s. Most silver in the world is produced as a by-product, especially in big copper mines — and most „silver mines“ are really lead mines, or lead-zinc mines, with big silver credits. That means most silver mines will keep producing silver, regardless of where silver prices go.

What I do like are the specific times, like the crash of 2008, when silver’s industrial metal side makes it sell off in a huge, out of proportion way — then I do see a catch-up of sorts being likely, and look harder for good silver plays.
Upner: I was always interested in the historical comparison of gold/silver ratio. Some use arguments that the market should make the ratio close to these historical levels and speak that silver is therefore undervalued. But let’s look at the problem contrary. Do not you think that the gold is over valuated in the context of this argument?

No. I don’t buy the argument, and given the blatant and off-the-charts debasement of the worlds major currencies, gold looks undervalued to me — it only looks expensive compared to 2001, and we live in a very different world now.

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Matúš Pošvanc thanks for the interview.


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About matus.posvanc

Trhu so zlatom a striebrom sa venujem od roku 2011. Prešiel som rôznymi fázami a pohľadmi na problematiku. "Trh je manipulovaný. To je jasné!" Inak by cena zlata predsa nešla dole. "Zlato na úrovni 100 tis. USD? Žiaden problém." Najneskôr do pár rokov. "Futures trh je najväčšie zlo a tzv. papierové zlato je nutné zakázať". Nuž, po dlhom štúdiu tejto problematiky, som hlúposti a táraniny opustil. Ostalo to, čo považujem za podstatné. Význam zlata je veľký. Avšak bez pochopenia trhu okolo neho, sa sám od seba znovu neobjaví. Kúpiť zlato ako časť svojho portfólia má zmysel. Snažiť sa na zlate zbohatnúť? To je iný príbeh. Jednu jeho časť nájdete na mojom blogu.
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