"You want to concentrate on how many ounces you have in relation to your total investable assets..."
THE SON of an award-winning gold panner, Casey Research's Jeff Clark is hardly new to the world of gold. When not looking for gold himself, he can be found researching Gold Mining companies, analyzing big trends in metals and looking for safe and profitable ways to capitalize on the gold and silver market for subscribers to Casey Research's investment newsletter.
In this interview with Hard Assets Investor, Jeff Clark discusses what the current volatility in the gold market signals to investors, as well as what the best asset allocation is when it comes to gold...
Hard Assets Investor: Earlier in the year, you wrote an interesting piece about Gold Price volatility. We are certainly seeing volatility now. How would you characterize what's happening?
Jeff Clark: Yes, are we seeing higher volatility right now, but the big volatility in the past occurred near the end of the bull market, during the actual mania. And obviously we're not in a mania now. What I think the current volatility could mean, however, is that something big is about to happen. When volatility ratchets up, that usually means you're on the precipice of a big move one way or the other.
Naturally, given my view of the importance of holding gold at this point in time, I think that big move is going to be higher. But the volatility we have, while it is above what the average has been since 2001, doesn't signal anything else at this point.
The average one-day move for gold has been between 4 and 6 percent as far as the biggest moves. But back in the mania in 1979 and the early 1980s, gold fluctuated by more than 5 percent on 38 days of those last four years. Once every 45 days you saw gold move greater than 5 percent. We just don't have that kind of volatility right now. The biggest move, by the way, was back in January of 1980: Gold rose 13.2 percent in one day.
By the way, investors should realize that volatility is not the same thing as risk. Those are two separate things. Risk is where you have the threat of a permanent loss of capital. Gold doesn't represent that because it's never gone to zero, nor does it have counter-party risk. Once I have it in my hand, I don't have to worry that a third party will default on it. And of course in a high-inflation environment, currencies can go poof. If we experienced hyperinflation, gold would excel; it actually rose a greater percentage than the German currency did during the Weimar Republic.
Neither is volatility a bad thing. You want to focus on using it to your advantage. If, like me, you believe the bull market is not over, you use volatility to buy on the cheap when the price is down.
HAI: What would fuel this big move? Europe?
Jeff Clark: A lot of Europe's woes are built into the Gold Price already. What could spark a higher Gold Price coming out of Europe would be if Spain or Italy blew up financially. Or, if it becomes obvious to the mainstream that the bailouts aren't working. Or, if there was an outright default. Any major negative news item like that coming out of Europe could spark another leg higher. But it could easily be something that has nothing to do with Europe, like Iran lobbing a bomb or an unexpected jump in inflation here in the US.
HAI: So buying the dips is the logical answer to a volatile gold market?
Jeff Clark: Absolutely. The answer to whether or not to buy now, and whether or not you're getting a good price, is to think of the word "accumulate." That's the primary tool to getting a good price over the long term because you're buying more ounces when the price is lower. You're basically Dollar-cost averaging.
HAI: What is the best rate of accumulation for the average investor?
Jeff Clark: You want to concentrate on how many ounces you have in relation to your total investable assets. Statisticians tell us that anything less than a 5 percent exposure to an asset class in a portfolio has a statistically insignificant impact on it. You want to have a reasonable, but meaningful, exposure to gold and silver. If it's less than 5 percent, don't expect it to do a whole lot for your portfolio.
HAI: What is one of the biggest misunderstood fundamentals of gold that you see or hear?
Jeff Clark: What frustrates me the most, and I think is the biggest misunderstood fundamental of gold, is when somebody like Warren Buffett compares it to a stock and says, "It's just a piece of metal. If you melted it all down, it would fit inside an Olympic-size swimming pool and it would just sit there and do nothing."
Well, we could take all the paper money that's been printed and fill a football stadium with it and light it on fire. Who has the store of value now? Or we could just print more stock certificates and dilute the value of current shares. You can't do that with gold. With all due respect to the Oracle of Omaha, he really misunderstands what gold is about. Gold is not a stock; gold is a form of money, an alternative currency. That's what it's been throughout history. It's irrelevant to compare it to a stock's performance.
If you want to make a fair comparison, let's compare Newmont Mining to whatever Warren Buffett's favorite stock of the day might be. Given our current fiscal and monetary path, I'll pick Newmont because its dividend is tied directly to the Gold Price.
HAI: What are some of the most important fundamentals that you that you keep an eye on as a gold analyst?
Jeff Clark: There are two main things. One is of course what the real interest rate is. We have researched this and found that the real interest rate impacts whether gold is in a bull market, and whether it stays in a bull market.
By real rate I mean that inflation is higher than the 10-year Treasury. When inflation is higher than the 10-year bond, real rates are negative and that's very supportive of a higher Gold Price. We can go back and document this for the past 40-plus years and show that when real rates are negative, the Gold Price rises. This is not conjecture or theory, but 40 years of data.
Let's say Bernanke is forced to raise rates next year. Irrespective of whether you believe that will happen or not, would that mean the gold bull market is over? Well, to answer that question you have to know what inflation is doing. If he raises rates but inflation is higher, then the real rate is still negative and you still have a positive market for gold. Again, this has been a solid indicator for four decades.
The second thing I watch is how our politicians handle our debt loads, our deficit spending, and all this money printing, which is occurring not just in the US but other countries as well. We've really painted ourselves into a corner. Something's got to give because our current path is unsustainable and there are going to be repercussions.
I'm watching to see if is there going to be any responsible action on the part of government leaders to change this path. If they don't, then I have no choice but to continue to Buy Gold and silver.
HAI: Do you see anything that would keep gold from not achieving its 12th-straight year of appreciation?
Jeff Clark: I like that question because I like to tell investors, "You know it almost doesn't matter if it has its 12th year of appreciation or not." Why? Because the bull market is far from over due to the reasons we just talked about. That said, it's highly likely gold will be higher this year. It ended at 2011 at $1531 an ounce, and it's probably going to be above that level by New Year's Eve.
Even if the Gold Price ends the year flat for whatever reason, or there's another big deflationary event and gold temporarily sells off like it did in 2008, that doesn't mean the bull market is over. I don't know when it ends or how high the price goes, but until those two major factors [negative real interest rates and deficit spending] completely reverse course, gold is going to have to go higher, and I'm going to continue to buy it.
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