Gold News

Gold's Pork Belly Trap

If you think gold is just another commodity, you're not alone. Sadly...
 
SO WHEN is gold more than a commodity?
 
When it is recognized as the last safe haven in a volatile world, says Doug Casey's senior analyst Louis James in this interview with The Gold Report... 
 
The Gold Report: You recently observed in your newsletter that gold has been acting more like a commodity, like pork bellies, than like a currency. That misclassification has discounted the value of precious metals, depressing the price. Why do you think that is?
 
Louis James: Commodities, as a group, tend to move together. We see it with copper and other industrial metals, and we see it in other commodities, including pork bellies. The commodities index is not just an average line. It actually is fairly representative of the sector as a whole. That matters right now because the trend for commodities is downward, plus the fundamentals are...scary.
 
China's slowdown is accelerating, for example. If gold were just another commodity used to make jewelry or fillings, it would be logical to lump it in with iron ore – and therefore be bearish. But it plays another role that is much more valuable. It is the currency of choice in an uncertain world. 
 
 
The good news is that the perception seems to be changing. When China's stock market tanked and the rest of the world hemorrhaged a month ago, gold prices jumped. Gold acted as a safe haven asset; it acted like money. It was where people went when they were scared. That was an important validation.
 
That doesn't mean everything is hunky dory now. But it is a reminder that with sufficient provocation, gold still does its job. 
 
TGR: What are some of the things that cause the fear-o-meter to jump? Is it the Federal Reserve? Is it ISIS? Is it Russia? You mentioned the Chinese stock market. I know a lot of people think a presidential election is a scary thing. Are we going into a season of fear? 
 
Louis James: Financial fear trumps political fear when it comes to impacting precious metal prices. The China stock market crash was indicative of what we can expect in the future. Wall Street doesn't really pay attention to what's going on in Eastern Ukraine and President Putin's macho posturing. Those sorts of events are important, and they certainly have financial consequences, but the markets react more to immediate stimuli. They tend to be pretty shortsighted about what is going to affect the bottom line this quarter. 
 
TGR: The market seems hyper-focused on every twitch from the Federal Reserve and what it plans to do about interest rates. Brien Lundin recently said an interest rate increase is already priced in, and the actual event could be a good thing for gold because people can put that behind them. Do you agree with that? 
 
Louis James: The Fed may raise rates by some nominal amount, just so it has the option to lower them again later. Brien's right that that's largely been priced in, but the reality often comes as a shock to those who don't believe it. Even a nominal change can have dramatic results. There are so many fragile points around the global economy today. Any jolt can cause follow-on crashes, collapses – all the volatility we have come to know and love since 2008. 
 
I understand why some investors are largely in cash right now. I can't blame them. But people going long things that do well in a crisis – like gold – are playing it smart. They should not panic: hold on. People who want to make new speculations need to be sure they know which way the Fed will go to go to place a bet. My general advice is to wait and see what happens. If you are absolutely convinced you know what the Fed is going to do, there might be some interesting options you can try, but don't kid yourself about the nature of your gamble. For most investors, that's just not wise. 
 
TGR: If, as Rick Rule has said, we are getting close to capitulation and the metals prices will soon start to turn up again, what companies will benefit first – the majors, the junior producers, the explorers? 
 
Louis James: The majors are always the first line, the go-to money, when gold starts to shine. They are also, however, the least responsive. It takes a lot more to move a company with a $10 billion market cap 10% than one valued at $10 million, let alone double. But a highly prospective junior that has a rich discovery can easily move by that much just because of a turn in sentiment.
 
TGR: Is that true with both the explorers and the smaller producers? 
 
Louis James: The junior producers will benefit first along with the development stories. These are the people who have already made a discovery and are advancing toward production, or they've already gone into production and margins are high enough to endure the downturn. Those are the companies that will be best positioned when the market turns, the first magnets for new money coming back into the market.
 
That said, if you really want to buy low and sell high, the maximum leverage you can get is if you invest before a discovery is made. To do that, you have to follow the competent prospect generators who have, can and will come up with the next discoveries. Those stocks will not be the first to respond to a market rebound, but for people who want absolute maximum gain, they offer the highest leverage with the best risk mitigation possible.
 
TGR: When gold prices increase, do you see silver prices following or leading? 
 
Louis James: They always vary together. They can, as you know, vary by larger or lesser amounts. Right now, it's a relatively large amount. It's not quite a record amount, but it is close. It's about an 80:1 ratio last I looked. That's pretty far from the recent norm of 50 to 60:1. That means it might move more quickly. If you push that elasticity, a rubber band wants to snap back.
 
TGR: That's what Eric Sprott has told us. 
 
Louis James: He's right, but never forget that silver, in addition to being a precious metal, is an industrial commodity. It is produced as a byproduct more than by pure silver mines. Actually, there are really no pure silver mines. Even silver primary mines are largely zinc or lead mines that have a lot of silver in them. The point is that silver production is largely determined by demand for other metals. Several mega-copper projects coming on line soon in places like Peru have very strong silver credits. So we could see supply exceeding demand on the industrial side and affecting the price, regardless of what gold does. It is unpredictable short term. Long term, it has to come back. 
 
TGR: You are going to be sharing more ideas at the Casey Research Summit in Arizona in October. What can attendees expect to take away from that conference? 
 
Louis James: This will be the first year we are putting on the conference as part of Stansberry & Associates family, so you know it will be a first-class experience for attendees. That means the speakers and the amenities will be top notch. 
 
It's also going to be the only opportunity I will have to answer questions directly from readers for the rest of this year. That's because, for legal reasons, I am no longer able to correspond directly with them. But I can answer questions from the podium, so attendees will hear it all first-hand. This is also the one time a year investors can shake hands with Doug Casey, talk to him, ask him questions. He's very easygoing and less restrained than I am. 
 
This conference will cover a wide range of sectors, from metals, to energy, to technology, to water. On that last one, with El Niño gaining strength and all the environmental hype about water scarcity, this is a topical story. But there's a lot of money to be made in all these sectors. 
 
TGR: Thanks for your insights.

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