Gold Price Crash or Correction?

Last year's gold price action still splits analysts...

 

PETER CARDILLO is chief market economist at Rockwell Global Capital. Here he shares his outlook on the direction of gold prices, as well as inflation, with Hard Assets Investor.

 

Hard Assets Investor: A few years ago, all the talk was inflation, hyperinflation. It didn't pan out; we saw a big pullback in commodities. But now those very same people are talking about deflation. Maybe we should put on that inflation trade after all?

 

Peter Cardillo: I think it's too early. But eventually, we will have inflation, there's no question about that. As far as deflation is concerned, Europe could be facing a sort of Japanese deflation period. But I don't think they are just yet. In fact, just the other day the ECB had its monthly meeting, and Mr. Draghi, went out of his way to say, "Inflation is low. It's certainly not where we would like it to be. But we're not that far apart from the American inflation rate."

 

So he sort of threw ice on the fact that maybe deflation is really setting in. To a certain degree, I'd have to agree with him. As you said, all the hoopla about the quantitative easing producing massive inflation never really came to fruition. I suspect one of the reasons for that is that we have ample amount of crude oil, which is the key to inflation, and the fact that the Federal Reserve managed so far to contain the flow of quantitative easing without pumping up commodity prices. Now, sure, we had a scare in gold prices. And we saw gold prices go way up. But we never really saw the key inflationary core oil take off.

 

Hard Assets Investor: When you look around the world, you see a lot of new oil production, specifically in this country. Economic activity all over the world pretty much is weak. We have very high unemployment levels still. Yet the oil price has been stable at $100. Isn't that saying there is a lot of underlying demand?

 

Cardillo: As you pointed out, America is producing much more oil now than ever. We're becoming net exporters. Look around the globe. Where is oil really being pumped out of now, that it wasn't before? Africa, North Africa, even in South Africa there are producing wells now. And Africa is becoming a major player in the oil market.

 

Hard Assets Investor: Would you be short oil? Would you be away from the oil sector, or defensive on the oil sector right now?

 

Cardillo: No, I would be neutral to it. And I think that eventually we will see higher oil prices, but not to the point where ... unless there's some geopolitical problem that arises that's a real serious threat. And you know what? That's another factor. We had that scare when we had the Arab Uprising throughout North Africa, within the Middle East region. And yet we saw prices actually come down. Again, it's a function of supply and demand. And the supply is out there.

 

Hard Assets Investor: A lot of the gold bugs from several years ago aren't heard so much anymore. In fact, some of them are saying, now, it's going down.

 

Cardillo: I don't think it's going to really collapse like a lot of people have been forecasting. I think we're probably going to see $1350 very shortly. I think the fear factor of the Fed reducing stimulus has been already placed in the market. I believe you should always have a 5-10% gold within your portfolio. So are we going to $2000 anytime soon? No. Are we going to $800 anytime soon? No. I think we're just going to stay in the trading range until we get some evidence of inflation.

 

So, certainly, quantitative easing has not really been all that negative for the price of gold, but certainly not all that positive, because it hasn't produced inflation.

 

Hard Assets Investor: The initial run-up, everyone stampeded into it. And then, when nothing happened, it was this slow leak that eventually precipitated into a crash.

 

Cardillo: Well, you want to call it a crash, I want to call it a correction. We're down 600, 575, 600 points from the high level. But we're also up from 1981; we also came up from a low of $250. So if you take that against the present price today, then percentage-wise the price of gold has steadily gone up.

 

Hard Assets Investor: Sum up your view for 2014; how do you see things playing out?

 

Cardillo: I see the economy growing at 3%, possibly even 3.25%. I see the labor market producing 200,000 to 250,000 new jobs, though the past two months it hasn't panned out that way. There were special factors in there, seasonal factors. And, above all, the weather factor. If you look at the unemployment rate dropping down to 6.6% for this time, it meant something, because the participation rate actually went up a bit. So that's good news, not bad news.

 

I think inflation probably will stay pretty much under what the Fed is looking for. But a lot depends on what happens with the geopolitical situation – probably nothing much in the Middle East; if anything, it can actually improve.

 

Hard Assets Investor: It looks pretty calm right now.

 

Cardillo: I'm looking for a good year in terms of economic activity. I think Europe will continue to pull out of its recession – it's out of recession. I think you'll see growth beginning to pull up throughout the European Continent.

 

Hard Assets Investor: All right; pretty upbeat. That's it for now, folks.