Gold News

Gold Bull vs. Bearish Bull

Seconds out! Because here's one fight that will draw no blood...

THESE INTERVIEWS previously appeared in the Exchange-Traded Funds Report, writes Lara Crigger at Hard Assets Investor.

Jason Toussaint, managing director of investment at the World Gold Council in New York reckons "Gold Has Higher To Go." Dennis Gartman, publisher of the Gartman Letter, believes "Gold Is Ready For A Pullback" from these current levels...

Lara Crigger: Jason, right now, the gold market is, shall we say, "enthusiastic," due to fears of a double dip and uncertainty about the economy. Is gold nearing bubble territory?

Jason Toussaint: No, it's not. Look at where we are now versus when this gold market began, literally a decade ago. It's not as if this market came out of nowhere and grew asymptotically. This has been a sustained, gradual increase in the Gold Price over the past decade.

In terms of the actions of investors, as measured by their investments in the gold market, we're far from what I'd refer to as a frenzy.

Crigger: Do the fundamentals behind gold's current rise support a further price rise?

Toussaint: Of late there's been a bit more volatility than, say, over the past year. Having said that, it's important to note that demand for gold is not led by the investment sector. We had only one quarter where investment surpassed jewelry demand.

People aren't Buying Gold simply as a Dollar hedge or inflation hedge, or for double-dip fears. Some cultures around the world – like India and China, which are the largest gold demand markets – will purchase gold, most often in the form of jewelry, as a matter of lifestyle, religious beliefs, cultural beliefs, etc.

So yes, gold is a good inflation hedge. But if you look at the buyer of jewelry at a gold market in Chennai, India, they're not asking, "Well, wait a minute, what's the CPI estimate coming out of the US tomorrow?" They don't care.

Crigger: Do the traditional reasons people invest in gold – that is, for wealth preservation – still hold? Or is it now more about speculation?

Toussaint: Well, every efficient market has its blend of speculators, investors, long-term and short-term holders. Just like any other asset, it's the relative balance of supply and demand that determines the price in any given point in time.

But I think the traditional uses of gold in the investment portfolio have changed. The modern approach to gold investment is: Instead of isolating risk factors like Dollar worries or inflation worries in my portfolio and hedging those, let's instead add gold to the portfolio and see what happens.

Gold is the ultimate diversifying asset class. The correlation between gold and the S&P 500 is statistically zero. In fact, the highest correlation between gold and any major asset class is with emerging market sovereign debt. A lot of emerging market countries rely heavily on gold and other mining activities for their income.

Crigger: What makes gold different from other commodities?

Toussaint: There's hugely different drivers at work. How many people do you know who wear corn necklaces? How many iPads have their semiconductors wired with corn? I'm being flippant, of course, but it comes back to the nature of demand. Gold is not like other commodities. Is it fair to lump gold into the rest of the commodities baskets? Or, should it be pulled out as a separate asset class?

I think what's occurring now is very similar to what occurred in emerging markets equities. If you look back to the mid-'90s, most US institutional investors did not have segregated allocations to emerging markets. Fast-forward to where we are now. Virtually every diversified and global institutional investor has at least some dedicated allocation to emerging markets. The same is occurring in commodities.

Look at, specifically, commodity baskets, whether it's GSCI or any of the other commodity indices: Gold had a very positive return in 2008, but everything else – the entire energy complex, platinum, palladium, all of the other metals except silver and gold – had vastly negative returns. That's because many other commodities are hugely correlated to the global business cycle, whereas gold is not. So when things go completely off the rails, as they did in 2008, gold is there to preserve wealth.

Crigger: When you look at the future potential trajectory for gold, do you foresee a pullback in the Gold Price soon?

Toussaint: As a matter of policy, we as an organization don't predict the Gold Price. But we do look at the fundamentals supporting both today's Gold Price and where it may go in the future. So we can absolutely talk about trajectory.

Gold Mining supply is fairly steady, although it's slowing down and becoming more difficult to find new minable gold. New discoveries of gold, even with dramatically increased exploration budgets, are decreasing.

Crigger: Is that because there are gold deposits out there that we just don't have the technology to access in a cost-effective manner? Or are we simply running out of new gold deposits altogether?

Toussaint: It's a combo of the two. Let's not forget the technology to mine gold is pretty advanced. There are mines in South Africa that are 3 1/2 miles into the earth.

The easy gold is gone. Is more gold left to be found? Yeah. But they're not finding it at the rate that the industry would hope.

Crigger: How does central bank buying and selling play into that?

Toussaint: Typically another source of supply has been central bank selling. But gold is increasingly being recognized as a reserve asset among the world central banks. So the Western central banks have slowed down selling. Conversely, in accumulation mode, you have the Eastern central banks; places like Russia, India, Maldives, China, etc.

Crigger: How should investors get their gold exposure? Through bullion, ETFs, futures, stocks or a mix of the above?

Toussaint: It depends on the allocation size. A lot of wealth advisers we're speaking to now recommend a 5 percent allocation to bullion; that is, to gold. And with a fairly modest allocation of that size, it could be done with all GLD or physical. But when you buy physical – and there's certainly merit for doing physical vs. GLD – periodic portfolio rebalancing becomes a pain. It's not really a liquid rebalancing activity.

Crigger: Dennis Gartman, in your newsletter, you recently wrote that gold was "hyper overbought" and "hyper overextended". That's quite a contrarian view right now.

Dennis Gartman: It's possible that Gold Prices will still go violently higher, but if past is prelude to the future, one has to be skeptical of gold's ability to launch much higher than where it is right now.

Does that mean that this is the end of the great bull market in gold? No, just as the decline last December from $1220 per ounce back to $1100 was not the end of the great bull market, either. But it was enough to shake late buyers and trend-following individuals. The skeptics who finally threw in and bought gold? Last December washed them out and made the market healthy again.

My bet is that we get another washout, which will make the market healthy again. And we will go to even higher levels a year from now. But is gold, in the short term, preposterously, egregiously, exaggeratedly, shockingly, surprisingly over-bought? Oh, you bet it is.

Crigger: Has gold caught on among mainstream investors?

Gartman: There's no question Gold Investment is catching on in the mainstream. Gold is also catching on in the sophisticated stream. We have institutional buyers of gold that five years ago would never have touched gold. And they are.

You also have an interesting interplay where sophisticated sellers of gold, the central banks, who had been selling gold for years – and doing it very badly – have suddenly stopped selling gold. In fact, they have turned to being buyers of gold.

Gold has caught on. And when things catch on, they get a little exuberant, a little exaggerated. And then they have to catch "off" for a little bit.

Crigger: Are we nearing a bubble in gold, then?

Gartman: No, I don't think gold is nearing a bubble yet. I've lived through enough bubbles to know that bubbles are stunning in their exuberance. And I believe the gold bull market will end in a true bubble. There will be some time in the future when gold is trading $150 in a day higher, and then that day it will end $120 lower.

Right now people are probably squeezing their bread money to buy a little bit of gold. Nobody has hocked the house yet. But bubbles end when people get so excited and they get so exuberant that you have price movements that we would just find mind-numbingly severe. And my guess is that some time in the future that's how the gold market, which is now a reasonably adept, reasonably sane market, will end – in an insane, irrational, violent bubble.

Crigger: It used to be that gold's role was as a store of value only, and many people do still invest in it for that reason. But do you think that investors are increasingly trying to cash in on these higher Gold Prices?

Gartman: Yeah, now it is becoming a momentum play. Anybody who's Buying Gold now because they think they're getting a rationally priced store of value, no, I say [they]'re probably wrong. What you do have are momentum players hoping to cash in on the next $10 movement higher.

Crigger: So when will we see a pullback?

Gartman: Markets are fundamentally driven, technically driven and psychologically driven. At times, one of those three becomes the dominant factor, and right now the psychology is overwhelmingly the dominant factor. And when psychology becomes the dominant factor, you're usually getting close to the time when a correction of some magnitude is not only warranted, it's bloody necessary.

I will reiterate: I'm long gold. I'm still bullish in the gold market. I'm just demonstrably less bullish than I was, which of course will make me a disdainful, hated bear on gold. Hard to imagine that you can be bearish on something of which you are long.
Crigger: How much gold should investors have in their portfolios right now?

Gartman: No more than 10%. No more.

Crigger: How should that be allocated? Is Gold Bullion the way to go, or miners, or ETFs or a mixture of all three?

Gartman: I avoid the miners. Let's take that in a hierarchy. I will avoid at all costs, always and everywhere under pain of death, owning junior gold miners. I won't own them. It's just amazing to me how many junior gold miners are dens of thievery. They're just one hype after another. So just avoid them. Does one out of 100 work? Probably. But it's not worth the 99.

After that, the next group is the large miners – the Barricks and the Newmonts, et al. I don't mind owning them as much. They're leveraged to the price of gold. If you have to own equities, own them. It's just safer and wiser. Now, if you have to own bullion – if you're a true dyed-in-the-wool gold bug who disbelieves in everything and thinks that we are all going to hell and that the only thing you need is gold, some distilled water, dry food and some ammunition – go ahead, buy yourself some bullion. And if you're that much of a disbeliever in the system, store it at home. But I think that's a silly thing to do.

The best methodology of all is the purest methodology, and that's to own the Gold ETF, GLD. It tracks the price of gold tick for tick, less the very, very small cost of owning it. You do, in fact, own bullion stored in a vault. It's there. You may not be able to go pick it up, but it's there.

Crigger: You just name-checked GLD. Do you prefer that gold ETF over all of the other ones?

Gartman: To be bluntly honest, GLD is the only one I've looked at. GLD has served its purpose quite admirably, and if somebody can prove to me that there's a better, simpler, purer gold ETF, please bring it to my attention.

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