Gold Investment Leading Prices

Gold Investment demand has overtaken jewelry as the key driver of prices...

VICE-PRESIDENT of marketing for refinery group Heraeus Precious Metals in North America, Miguel-Perez Santalla deals with the commercial side of physical market.

Rarely bullish on the long-term price, he speaks here to Mike Norman of Hard Assets Investor about his current view of the latest record highs...

Hard Assets Investor: Miguel, you're not so bullish on this market. I think you tend to see it more or less as a bubble...?

Miguel Perez-Santalla: Well, as you know, I've always been a bear on the real high side of gold. And the predominant reason is the demands and use – the fundamental reasons for gold. Primarily that's jewelry, and then electronics. Every cell phone has some gold in it. But the issue is that this run to safety has driven a lot of investment money into gold. And gold is a very small market compared to currencies, let's say. So the quantity of money entering the market is enough to continue to drive it up.

One of the things that happens with the price of gold going up is that it's actually crushing an industry which is a jewelry industry, which for instance this month was reporting it's down 14 percent year-on-year.

HAI: Because the demand is coming down for jewelry, because the price is too high.

Miguel Perez-Santalla: Exactly. The real reason that people have demand for gold is to enjoy its beauty.

HAI: Is it a rational rush to safety? Because at the very same time you see another investment that would qualify as a safe haven, which is the Treasury market. One is a hedge against inflation, one is a hedge against deflation...

Miguel Perez-Santalla: Well, the interesting thing is gold has gone up whether the reports are deflationary or inflationary. Money's just going after gold believing that's the place to be, because of the whole concept of it's a hard asset and you can hold onto it whenever you want. But meanwhile, the people are still Buying Gold and storing it somewhere else. So it's not like they're putting it in their homes and holding onto it. There is a segment of the market that is doing that. And Gold Coins are moving briskly. But the point is that if they're storing it, all they're doing is holding the metal in another location. Anything can happen there too. They can lose that just as easily as, you know, we don't know what happens in this world, is what I'm saying.

HAI: But what quantity of gold is represented by the investment holding right now?

Miguel Perez-Santalla: The issue is how much money is actually coming into gold from the investment side. Every year it's increasing. Let's say five years ago it was maybe a maximum 5 percent of the consumption of gold that went into the investment market. Now we're upwards of 40 percent, which is a huge, tremendous growth. So the gold is being mined, brought into the exchanges, and delivered into the marketplace; usually into a bank vault where it sits hidden for many years.

HAI: You have commercial industry-side players taking the short side of the gold market, as they normally do in their hedging activity. Could there be a situation where you get a short squeeze, where there's not enough gold to deliver against what's being purchased?

Miguel Perez-Santalla: That situation could theoretically happen, because obviously Gold Mining capacity does not grow. But what's coming out every time the price of gold goes up is that scrap jewelry comes out, and the scrap and metal that people have in their homes. So it comes out in large quantities. I can see that's where we've picked up on our industrial side – on the refining side. And so there's a lot of gold coming onto the exchange to fill that hole.

HAI: If they decide to sell, the buyers won't be there, right?

Miguel Perez-Santalla: Exactly, Michael. What's going on is that they're building the stocks. The stocks are growing. That's called the visible stocks. We can see how much there are on Gold ETFs. We can see how much the Comex has. And it's the highest amount of stocks ever, visible stocks. So you add that, plus the gold that's out in people's hands and in their drawers – I mean, there's plenty of gold out there. The day that the market decides to start selling and going the other way around is going to be dramatic.

One thing that I'd like to clarify, Michael, is that even though there are individual investors, I don't think they're the ones driving it. I think it's more like the funds. Because the funds can go in with small amounts – what to them is a small amount is a huge amount in the precious metals market. And it'll make the price go higher.

HAI: So is it a case of manipulation?

Miguel Perez-Santalla: I wouldn't call it manipulation, but there's definitely that herd mentality where they see one big guy go in, and then the other big guys go in. Pretty soon everyone's in, and it's a self-fulfilling prophecy.

HAI: Would you short the market at a point where you thought that was it?

Miguel Perez-Santalla: If it got to $1500 and I was able to, I would short the market. I think it's overdone already. But $1500 – I just can't even fathom it going any higher, no matter how much the publicity is. I mean, Goldman Sachs came out in a three-year projection saying somewhere around $1650. I don't see it. Because once the economy and the world starts to settle down – which things always do when they're cyclical – it will calm down. And when it calms down, it's going to fall hard.

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