Gold Price vs Confidence

The gold price will be "too high" when we have more confidence in other currencies...

FINANCIAL MARKETS are experiencing their worst turmoil since 2008. Hard Assets Investor is conducting a virtual roundtable with commodity experts, asking them a series of questions facing investors during these tumultuous times.

In this interview we speak with Stephen Leeb, chairman and chief investment officer of Leeb Capital Management, who has been managing big-cap growth portfolios since 1999. 

Hard Assets Investor: How will the US downgrade affect demand for commodities?

Stephen Leeb: More than anything, it's a psychological, not an economic, event. Who is S&P to downgrade? They can't interpret a political process. Who are they to downgrade the most complex balance sheet in the world? It's ridiculous. Yet it does have a psychological impact. It's a loud sign saying that the Dollar is not a very appropriate reserve currency. And in that sense, it's going to help commodities and precious metals.

HAI: Will the current low-inflation environment persist? And will commodities be a good hedge, should it not?

Stephen Leeb: I don't think there is a low-inflation environment. When you're paying $100 to fill up a big tank of gas, it's hard to say there's a low-inflation environment. It's just that some goods are inflating at low rates, or maybe even deflating. But overall, the necessities of life for most Americans have been inflating for some time.

That said, I think metals and commodities will continue to be a very good hedge against inflation.

HAI: Do you think the Federal Reserve will initiate QE3? And what impact will that have on commodities?

Stephen Leeb: I think that the Federal Reserve will institute QE3. And again, it will reinforce the uptrend in commodities.

HAI: Where do you see gold heading? And is there a price that's too high given the current environment?

Stephen Leeb: I think it's headed considerably higher. I don't know what price would be too high. But I think that it's better to ask, "Will there come a time when we have more confidence in other currencies, other hard assets, so that gold doesn't have to carry the entire weight of being a reserve currency?" At that point, if we continue to see gold rise, I would say it's probably rising too much.

HAI: Where do you see oil heading? And will the spread between Brent and WTI ever revert?

Stephen Leeb: WTI is a totally broken indicator. It's based on the landlocked storage capacity and it only goes to one or two spots in the country. It's broken. Almost all oil in the world is priced off Brent or maybe Louisiana Light. I doubt that you'll see it fixed. Oil is headed dramatically higher. Saudi Arabia needs $95 [a barrel] oil. That number is not going to go down; it's going to go up. Oil could easily double.

HAI: What's the best position commodity for the current environment? And why?

Stephen Leeb: Silver, because of two crucial fundamentals. One is that silver's a monetary metal, not as widely recognized as a monetary metal as gold right now. But it certainly has a history of being a monetary metal. And people will price it for that. You have a race to the bottom, as far as I can see, in terms of all the current reserve currencies. Second, half of silver's demand is on the industrial side, and it is critical for solar technology, where China is now a leader and will be buying more silver.

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