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The Factors Driving Gold

Gold still has a role to play in investors' portfolios...

JASON TOUSSAINT, managing director at the World Gold Council, speaks to Hard Assets Investor about the role gold plays in an investment portfolio...

Mike Norman, Hard Assets Investor:  Today my guest is Jason Toussaint, who is the managing director of the World Gold Council. Jason, thanks very much for coming back on the show. I appreciate it.

Jason Toussaint: Pleasure to be here.

HAI: Before we get into the market, tell us a little bit about the World Gold Council. What is your mission? What do you do there?

Jason Toussaint: The World Gold Council was formed in 1987. We're owned by Gold Mining companies. And our focus is on creating and sustaining demand for gold. So, in some sense, we are market advocates. We operate among four specific sectors, including government affairs, where we talk to central banks about the case for gold as a reserve asset, if you will. We have jewelry investment and technology sectors.

I manage the investment sector. And we've got kind of a two-pronged approach there. And our goal is to position gold as a long-term strategic asset class in investor portfolios by supporting that with relevant research, in terms of not necessarily what is gold doing in isolation, but what are the portfolio implications if you choose to add gold? What are the benefits? So we do a lot of research surrounding that.

Then, the other kind of major effort there is what we call creating access vehicles. SPDR gold shares, GLD, is a great example of that in the US

HAI: A fantastic example. That's been an amazing success, I'm sure beyond anything that you've predicted or what they've predicted over there.

Jason Toussaint: Absolutely.

HAI: It's been huge. You've done a great job in marketing and promoting gold as an investment, as an asset class. But you've had a lot of help from the market, too, over these last eight or nine years. Let's talk about it a little bit, because recently, we've seen a little cooling off in the Gold Price, if I could say that. Gold hit above $1,900 an ounce recently. It came down right about the mid-$1,600/upper $1,600 range. But I think we did penetrate down into $1,500. There was definitely a shakeout there. How do you think that has impacted the way investors feel about gold as an investment now? Do you think some people may get a little wary in terms of how they view gold?

Jason Toussaint: I think it's a great question. I think it depends on the reason why you bought gold in the first place. And, coming back to the approach that we do in the investment sector, which I alluded to earlier, we are positioning gold as a way to hedge what we call tail risk.

So, extreme events like 2008 — gold outperformed virtually every other asset class. So it's kind of a virtual insurance policy, if you will, in the portfolio. Again, it's not guaranteed that it goes up in every scenario, every extreme scenario. But there's also US Dollar hedging. And then there is inflation hedging.

Alternatively, there are those in the market who obviously speculate and trade gold on a daily basis. And I think what we saw recently with this price pullback was kind of a rinsing out of the speculative money. And we've heard indications that some momentum hedge funds who were relatively late entrants into the gold market got hit by a couple of things. One, downward price. So they were writing negative futures positions, as well as a 21 ½ percent increase in margin requirements at the exchange. So, many of them punted their gold positions, which obviously didn't help the Gold Price.

However, I think it's important to note that, from peak to trough, if you will, that was roughly a 16 percent pullback.

HAI: Right.

Jason Toussaint: On a year-to-date basis, we're still up 16 percent. So it's not as if we're negative in this position if you've held it year-to-date. And I think many strategic long-term investors are saying, "I'm still in the money in these positions. The rationale for putting these positions on in the first place investing in gold are still valid, regardless of this kind of interim pullback."

And I think, if you look at what happened during that time, there was a heck of a lot of volatility among all asset classes, including a lot of volatility in the Dollar.

HAI: Yeah. And a lot of volatility in stocks. And so basically, you're saying to investors, "You've got to look at this as an asset class, just as you look at equities or bonds. And therefore, it has to be some percentage of your portfolio, and just have it in there. And own it for the long term.

Jason Toussaint: Correct.

HAI: So what percentage do you recommend, if you recommend some number at all?

Jason Toussaint: We don't necessarily recommend directly for any clients. What we do hear, however, from many financial advisors out there who we do interface with on a continued basis, is roughly between 5 and 10 percent portfolio positions.

HAI: But I've heard — correct me if I'm wrong — that most investors hold less than 5 percent, even with the big boom in interest in holding gold and the big price move that we've had over the last eight or nine years, that most investors still hold less than 5 percent.

Jason Toussaint: I would agree with that. I would say, on an average, it's far less than between 5 and 10 percent, again. And that just validates our position that we've got a heck of a lot of work to do. There are many investors out there who maybe still don't understand the fundamental drivers of supply and demand, which ultimately do determine the global Gold Price …

HAI: Let's talk about that. Traditionally, you got the jewelry industry. They're the largest consumer of gold. They've been the biggest, I guess, buy-side component of the gold market. But now, obviously we've seen investor interest really mushroom. From my understanding, jewelry demand is down. But that's being supplanted by investment demand.

Jason Toussaint: By investment, yes. So, a couple of important points here: Global aggregate demand has been increasing for the past decade, year-over-year; very important. The sources of supply and demand are very important, to understand what is that interface. So we have constrained supply. So mine supply has increased an average of 1 percent per year over the past five years. Even with these record Gold Prices and exploration budgets at an all-time high, they're not finding new minable gold. So there is, on one hand, constrained supply.

On the demand side, we see robust demand, and not only from investment, but continued sustained demand from the technology sector, which is roughly 10 to 12 percent of demand. Jewelry in the Western markets is decreasing. However, we see substantial uptakes from the emerging markets, which I'll come back to in a minute, which is a very key point.

Finally, what we see is, on an aggregate basis, central banks are now net buyers, where they used to be a substantial source of supply. And I think the bigger impact is not necessarily what their net tonnage demand is, it's the fact that a major source of supply is out of the market.

HAI: But when you talk about supply, every ounce of gold ever mined, since the beginning of time, is out there in the world. It's not like oil — you burn it up and it's gone. So at some price threshold, that gold, held in storage, could be mobilized. It could come back onto the market.

Jason Toussaint: Right.

HAI: So, is there a sense of where that threshold is? Was it just below $2,000? We see it in the commercials — this guy is walking around the streets with placards: "Sell your gold here." So, is that happening?

Jason Toussaint: I think, in some cases, it is. Recycled gold makes up roughly 35 percent of annual supply, so it is a very liquid market. Which, on one hand, you could say, "Well, is there some limit?" to your point, where everybody sells. I don't think so. But the good thing is that gold is fulfilling what it says on the tin. It's a liquid asset. So if I want to realize the value of my gold holding, whether it's a bar or coin or jewelry, there is a market for that.

In some cases, where people need that liquidity, they are able to get it. But I would say every asset has a price. So, if GE is trading at $15 a share, and somebody comes out with a massive bid at $25 a share, they're obviously going to take a lot off the market. So I don't think there is any kind of artificial limit to where we'll see massive selling.

I think quite the contrary, because the price has gone up substantially, not only in this past year, trailing 12 months, but on a sustained basis for over a decade, that many investors who may have been on the margin thinking of liquidating some of their gold — notwithstanding the fact that there is huge volatility in sell-offs and corrections with most other asset classes — they're more inclined to hold.

HAI: Now you talked about, also, developing new products to allow investors to access the gold market. Are there any things in the pipeline now? Well obviously, GLD, we spoke about that. It's been a huge success.

Jason Toussaint: Yes. And I think what GLD has done in the Western markets is made gold a very liquid, easily accessible investment. What we're doing in places like China, we have launched what we call a gold accumulation plan, which is essentially a gold savings account with ICBC, the largest bank in the world, where I can invest and Buy Gold over a continued period of time. So, over a year, I'm able to get the average daily price of gold during that time, instead of saving for a year and then timing my entrance.

HAI: Right.

Jason Toussaint: So we're doing this in the spirit of expanding the gold market and creating more access avenues, if you will, to efficient Gold Investment. And regardless of whether people want to accumulate this gold and then turn it into jewelry, or put it in a vault, our goal is to create that efficiency.

HAI: Right. That sounds like we're going to be seeing a long term of increasing demand. Always great to have you here. Thanks very much.

Jason Toussaint: Thanks Mike.

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