Gold News

Speculation Now Driving the Gold Price

Short sellers and bullish speculators drove early 2015's price, not physical demand...
CHRIS MANCINI is a research analyst for the Gabelli Gold Fund, specializing in precious metals mining companies.
With over 15 years of investment management experience, including research analyst positions at Satellite Asset Management and R6 Capital Management, Mancini is now confident that gold's day will come, perhaps as soon as 2016, as he tells The Gold Report here...
The Gold Report: The US Federal Reserve has downgraded its forecasts for both economic growth and inflation. That being the case, why would it raise interest rates?
Chris Mancini: There's a certain contingent in the Fed that believes that its zero interest monetary policy might result in adverse consequences going forward. This contingent is dead set on raising rates and trying to get back to some level of normalcy in interest-rate policy.
TGR: There's a school of thought that holds that the US economy has become addicted to cheap money. What's your view?
Chris Mancini: There's no question that much of US economic growth in recent years is due to very low interest rates. The average interest rate on auto loans is the lowest ever. That obviously spurs auto sales. The rates charged for federally subsidized student loans are close to historic lows. That spurs demand for college and university courses. And even though the housing industry is still struggling with an inventory glut, the 30-year mortgage rate of 3.75% spurs demand for housing.
So, I think that if interest rates do rise, there's a good chance that the economy will slow, and there will be a panicked reaction from the stock market.
TGR: Despite this soft recovery, the equity markets have never been stronger. Why has this happened?
Chris Mancini: It's another function of low interest rates. If you keep your money in the bank, you're getting zero% and thus losing money on a real basis. This has forced savers into other asset classes. And money is flooding into America from all over the world because, compared to, say, the Eurozone and Japan, which are struggling with deflation, the US economy looks pretty good.
TGR: Is an economy that punishes savers sustainable?
Chris Mancini: It's sustainable until it's not. Asset prices continue to increase greatly, and at some point people will start to realize that the value of money is not what it seems. That will lead to a crisis of confidence and, eventually, to the deterioration of the monetary system. The question is when. And I don't know the answer to that.
TGR: Should an interest rate hike backfire, could we see the return of quantitative easing (QE)?
Chris Mancini: If the economy slows after a rate hike, I think the first thing the Fed will do is to lower rates to zero again. And if that doesn't kick start the economy, which it probably won't, there's a good chance we will get QE4.
TGR: You've argued that "Paper speculators in the gold futures market have been a more important factor in determining the movement of the gold price this year than has physical demand from gold consumers." Does the speculation depress the gold price?
Chris Mancini: On certain days it definitely does. Days when the shorts come back in and when the speculative longs take their positions off. But speculation can also lead to a higher gold price. For instance, when gold went to $1300 per ounce at the beginning of this year, I think a lot of this rise was due to speculators putting longs on and covering their huge short positions.
TGR: Aren't these speculators flirting with disaster?
Chris Mancini: We have recently seen huge moves up or down in the gold price in the space of minutes. That tells me that speculators who are using leverage are making moves to avoid being wiped out.
TGR: Physical gold demand from Asia and from central banks remains strong. Are we getting close to the point where, as you put it, "Rock will beat paper?"
Chris Mancini: That will happen when Americans lose hope in the ability of the Fed to direct economic policy and buy gold again, whether in physical form, or more likely in the physically backed exchange-traded funds like SPDR Gold Shares (GLD:NYSEArca). That's what happened in 2011, when the gold price topped $1900 per ounce.
TGR: What's your gold price forecast for 2015?
Chris Mancini: I expect it will trade in the $1200-1300 per ounce range. There's a very good chance 2016 could be a much better year for gold, especially if the Fed lowers interest rates again and embarks on QE4.
The potential end game for gold is if a complete loss of confidence in the US Dollar forces the government to peg it to gold.
TGR: Given your belief that gold will likely have a good year in 2016, what's your advice for investors today?
Chris Mancini: Investors should have a bunch of gold equities. They should look first for companies that will do well in a higher market and are also protected on the downside. They should then look for companies that are unloved now but whose leverage will make them lovable when gold goes higher.
TGR: Chris, thank you for your time and your insights.

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