Gold Rush 2008
Why are so many people choosing Gold Investment today...?
LOUIS JAMES, senior editor at Casey Research, constantly travels the world, visiting highly prospective geological targets, grilling mining company management and geologists, and interviewing natives to find out what they really think.
(It helps that he's fluent in French and Spanish, and speaks a little German and Russian.)
Here Louis James talks to the Gold Report about gold, and why he expects twists and turns in the precious metals sector amid the long-term bull trend.
The Gold Report: When we last spoke in December, you talked about the gold market being governed as much by market psychology as by demand and supply fundamentals.
Louis James: I still see it that way. Ninety-five percent of all the Gold Bullion that's ever been mined still exists somewhere on the earth's surface. Supply and demand is not limited to production and consumption. Market psychology plays a critical role.
I don't want to disparage calculations about how many ounces the mines are producing vs. how many are being bought, but what matters more is whether people are feeling inclined to buy or sell gold. We're talking about a psychological phenomenon, not something calculable or predictable. Zeitgeist can change suddenly. When things go bad in a very obvious and big way, gold will make a major move.
TGR: You're saying that the price would have to go up substantially for people to put existing gold back into the market.
LJ: Yes. There's been a lot of turnover. Many people holding gold now bought during the up cycle and they want a higher price. Those who bought gold on the downside of the bear market in the late '90s and are not in it for the long haul would have been content with an earlier exit point. Those with a higher cost basis have replaced those who are not long-term holders.
When gold corrected sharply in August, I went down to my local coin shop, but this time something was different. Usually, when the price goes up, some people are taking profits – but, because Gold Investment looks like it's trending up, others are buying. So there's been a balance. Dealers could hold inventory because the price movements have enticed both buyers and sellers. But that really changed in August. The US Mint failed to predict the demand for gold bullion. There was a physical shortage of bullion product in smaller units, which is different from saying there's a gold shortage.
That caused a big disconnect. People were saying, "The price of gold is going down, but you can't buy any physical gold. What's wrong here?"
Well, the price of gold is set in New York and Hong Kong and elsewhere by big players. It's not determined by people buying gold bullion coins at their local dealer or even at a bigger dealer like Kitco. The point is that both higher and lower prices had been balanced throughout most of this cycle, but in August almost everyone was buying. Result? My Gold Coin dealer had no inventory. If I wanted to buy I had to keep calling because it's first come, first served. And if he had any product, then I had to hop in my car and buy right away, or else I didn't get any. That was different.
TGR: Why are the big players not as worried about getting physical gold?
LJ: They're not buying the same thing. If the US Mint miscalculates the demand for one-ounce Eagles, that affects the smaller player who buys at the corner shop. For people buying 10-kilo Gold Bullion Bars in an Allocated account in Switzerland, the Mint's miscalculation doesn't affect them at all.
TGR: Right now we're paying over spot price in our corner of the retail market. Will that change?
LJ: I doubt it will any time soon. The Mint could see that demand was growing and increased production, but not enough. To me that's very significant.
All we hear in the news now are hair-pulling stories of the financial woes of venerable institutions. If there's anything that actually surprises me in this market, it's not so much that juniors are beat up or that gold goes down. I am dumbfounded that there can be so much economic turmoil and people aren't shouting in the streets. This stuns me because this is America. We don't have one or two bank failures every month. That's a third world phenomenon. I would have thought that the level of anxiety on Main Street and Wall Street would be much higher than it is now. I cannot fully explain that. People have a lot of faith in the "powers that be" to fix things – more faith than is justified, but the bad news we've already seen is of historic proportions.
TGR: Do you think that kind of anxiety could boost the precious metals sector, specifically Gold Bullion?
LJ: The guy on the street is becoming more aware of gold. US bullion dealers are running ads in airports now. You hear more about gold on TV than ever before. I suspect that many Wall Street traders are very desperate to find some new high-yielding sector – anything will do, even a barbaric relic like gold, if the returns are right. So unless the price of gold drops even more and stays down for a long time, the major gold miners are going to reap the kind of record profits they've had over the last two quarters.
If Gold Prices come back up, in the next month or two, the realization will dawn on Wall Street that here's a sector showing record profits quarter after quarter. How long can that happen before they figure out that maybe mining is no longer an 18th century business? If only one percent of the traders on Wall Street make that leap, that's huge – it's much larger than the entire gold market.