Has gold lost some of its safe haven appeal...?
A TRANSCRIPT of MineWeb's Gold Weekly podcast, in which host Geoff Candy asks Tom Kendall, research analyst at Credit Suisse, whether gold's volatility during the latest phase of the Eurozone crisis mean it has lost some of its safe haven appeal...
Geoff Candy: Welcome to this week's edition of Mineweb.com's Gold Weekly podcast. Joining me on the line is Tom Kendall – he's the vice president for commodities research at Credit Suisse. Tom it's been a relatively volatile period for gold, but that does seem to be tailing off somewhat. There was talk a while ago about the fact that gold had lost some of its safe haven presence because of the volatility – do you buy into that and how does the volatility affect things at this stage?
Tom Kendall: Yes, it has been a similar situation to what we saw in 2008 on occasions where gold had been purchased as a defensive asset and then sold off quite heavily along with pretty much everything else when there was a real flight to US treasuries and a need for cash – and that's what we've seen over the last two or three weeks in the gold market where we've had this strong rally in treasuries as people need liquidity, people getting very concerned again about the banking sector – about counterparty risk and on top of that, the margin calls that people have got and the need to cover losses in other asset classes have seen some sizeable liquidation in gold which took us down below $1600.
The bounce from there was reasonable and we've seen some good support from Asian physical buying, particularly since the Chinese came back from their holiday during the first week of October, but there's nothing right now that gives us the momentum we need to break above the top which, as we speak, is around $1700.
Geoff Candy: Talking about the similarity to 2008, there is concern about the banking sector in Europe and partly in the US as well – how similar are we to what was happening in 2008 and what are we likely to see going forward for the Gold Price, if we do see a return to the kind of credit conditions that were abounding in that period?
Tom Kendall: To me, I think the similarities are more in the way that some of the markets that we follow have reacted rather than what's really happening in the underlying financial markets. There are some similarities but the crisis this time is somewhat different and the responses to it are somewhat different and the banks, by and large, are coming through this period with better capital ratios than they had in 2007-2008. Certainly when we talk to corporate customers, their balance sheets are pretty solid, particularly compared to where they were two or three years ago. So there are similarities in the way the assets are reacting to the certainty, but there are some differences in what's driving this crisis right now. What we probably need to see from here is a bit more certainty in the markets and I think that is dependent on, by and large, European politicians.
Geoff Candy: We did at least see the Merkel's and Sarkozy's of the world providing a deadline for their proposals for the solution to the problem. Are we likely to see them meet that deadline and if not, what would happen?
Tom Kendall: Great question – by and large we are turning slightly optimistic on the European sovereign debt and banking situation. We and others have been saying for a while that it's only really when the markets push politicians closer to the edge through very high volatility and substantial intra-day moves that the politicians really get to grips with the issues – and we've started to see signs that that is now the case. We still haven't got anything substantive, and when we do, as you say, need to see something substantive and see some detail by the beginning of November. If we do, then it's going to be interesting to see how much of the market's attention then focuses back on the US debt situation, and what that means for the US Dollar going forward.
Geoff Candy: Let's talk about currencies quickly, because they do have an impact on the Gold Price, and perhaps these days a lot of gold bugs saying that it's pretty much just a race to the bottom for the world's currencies and we should be measuring currencies in relation to how much gold they can buy rather than the other way around.
Tom Kendall: Yes indeed and there is some justification for that argument, particularly when you see the national authorities in Japan and in Switzerland intervening very strongly to either support or weaken their currencies in the face of large moves in the FX markets and over the medium to long term, that is the key supporting argument for gold in that you don't have it subjected to those kind of interventions, assuming of course that the central banks in Europe aren't looking at gold as an asset that can be monetized to help find a way out of this debt situation.
Geoff Candy: Do you think that might come to pass?
Tom Kendall: Personally I think it's highly unlikely. There are some interesting ideas about how central bank gold could be utilized, either in a leveraged form or collateral form to provide some backing to plans to resolve sovereign debt issues in Europe, but my view is it's highly unlikely – for one, it's an issue of scale. I don't think really even monetizing a significant of what say the Banca d'Italia holds – the central bank of Italy holds – really would contribute a great deal and I think the effect on sentiment by monetizing those reserves would probably be counter-productive.
Geoff Candy: Talking about sentiment, if we move to the east – we did see, as you mentioned, the Chinese buyers coming back into the market after their holiday – it is the festival season in India at the moment – what is the level of buying like and especially given how strong the buying was during the traditional down season in summer?
Tom Kendall: China first – it looks like it's been a pretty good autumn festival holiday there. The reports we've seen and the figures that we've seen trading on the Shanghai exchanges suggest that we're probably looking at a sales figure in volumes terms, somewhere between 10% – 15% up on last year, and last year was a pretty good year. So it looks like it's been a good October so far for China. Indian demand too has been pretty robust – the monsoon season there was reasonable so rural incomes are reasonable. The correction in price clearly was very well timed in terms of attracting buyers into the stores on the run up and during this festival season in India. So India too looks like it's going to be having a very good year.
Geoff Candy: If we move to the investment side of things and we spoke briefly about hedge funds earlier, but we do see a tapering off somewhat of substantial positions in the gold market by the big hedge fund players at this point in time. Is that likely to change do you think, and what are the reasons behind it?
Tom Kendall: That's something that has been common to positioning from those kinds of investors across pretty much all commodities over the last two months or so. There is not a great appetite out there amongst those macro type funds for taking sizeable positions in commodities right now, and that's a function really of the uncertainty that there is about the direction of not just the European economy but the global economy going through into 2012. Again it comes back to this issue of uncertainty – markets don't usually like uncertainty. Certainly a lot of the portfolio managers who have been burnt on a number of occasion s by trying to either come in too early or not getting out of positions soon enough – so we're going to have to wait a little longer before we start to see a significant return of those kinds of investors in size to not just gold, but to the other commodity markets as well.
Geoff Candy: If we look at the gold equities now, there's been a lot of talk recently about the dislocation between gold equity prices and the prices of gold bullion and much talk about what we're likely to see in terms of earnings going forward from the gold companies and perhaps a re-rating on the back of that. What is your view?
Tom Kendall: Yes, it's a logical argument and a reasonably compelling argument I would say certainly for some companies, but the problem that we have there is again, this issue of correlation between asset classes, between equities and commodities and foreign exchange, this period has seen correlations come much closer together, and so if you're looking to benefit from a re-rating of gold equities, the re-rating there is not going to give you a great deal of performance unless equity markets as a whole more broadly are recovering and continuing to bounce off the lows. So for the time being I understand the arguments and I would probably up to a point, buy into that argument, but it is dependent on the broader equity markets right now – not just on the assessment of gold equities themselves.
Geoff Candy: Given the types of investors that we're seeing moving into the gold market right now, how much of the weight falls onto the shoulders of the management teams of these companies to perhaps show that they have a good understanding of what to do with the cash flows that are coming from higher Gold Prices.
Tom Kendall: That's a good point and it always comes back to the fact that the best mining companies and the ones that deliver the best returns to shareholders are the ones that remember that they are mining companies and that they're not marketing companies or something else. It's the age old factors that you want to see in a company – it's a focus on cost control, it's a focus on management, it's a focus on certainly in some parts of the world, safety and community relations. But as you alluded to at times like this, it's also a focus on not throwing away shareholder value through ill-timed or mis-priced M&A activity.
Geoff Candy: Finally we've seen gold trading in a relatively narrow range over the last while, what's your view over the next 12 to 18 months – what are you going to be focusing on and what do you see Gold Prices doing?
Tom Kendall: It's going to be less of an acceleration out of this than I think a lot of people might be looking for, but I'm still expecting gold to trade higher over the balance of this year. Sooner or later we break out of this $1600 – $1700 range and through into next year we do see gold push above the high of around $1920 that we said earlier this year, and I think gold trades up above $2000 next year without any doubt. But as I said, it's going to be a longer, slower grind higher than perhaps a lot of people are looking for – and the key drivers are going to come back to FX markets, come back to the state of the US economy and the status of the US debt situation and how the political situation develops in the US in the run-up to the presidential election next year. That's probably going to be very interesting.
Geoff Candy: Indeed it is...
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