Gold at $1400, Oil at $100

Subpar economic growth doesn't mean flat-to-falling gold or Silver prices...

PHILIP SILVERMAN, managing partner of Wall Street's Kingsview Management – a registered commodity trading advisor (CTA) and member of the National Futures Association – speaks here with Hard Assets Investor about the outlook for Gold Prices and the broader commodities market.

HAI: What is your outlook for the economy and commodities? The year's off to somewhat of a flat start...

Philip Silverman: Well, our outlook is for subtrend growth. You know, we've had a bounce off the bottom in economic growth, as well as the markets. But we don't think that that has very much legs. Not in any way calling for a collapse, but not growth rates that we would have been accustomed to in the last couple of decades.

HAI: So that 5.7% growth rate at the end of 2009 – that won't be sustained?

Philip Silverman: We do not believe that will be sustained. You know, there was a lot of bounce-back from the crisis, a lot of inventory rebuilding. But to think that coming out of this crisis we'll be able to sustain even a normal trend growth is a very optimistic outlook and one that I don't think we can necessarily bet our money on.

HAI: Now, a 2% growth rate; how does that work out for equities, for commodities? Is it supportive?

Philip Silverman: I think certainly a general sideways price action is something we're expecting. In stocks, it's going to be a stock-picker's market. Those companies that are able to thrive, have good products, manage their balance sheets very well and compete effectively in the marketplace are going to do well; value stocks will be able to do well.

But as a whole, I wouldn't bet on very large advances any time in the near future. You know, we've made a large bounce off the bottom. A lot of money was reallocated into equities. And it's going to be a tough time to see the market go up significantly. Like I said, I'm not looking for the bottom to fall out here, but we think you're going to see a lot of sideways action.

HAI: How does the Fed play into the outlook? Recently we saw the Fed bump up the discount rate by 25 basis points...

Philip Silverman: Well, that is something you have to keep an eye on, because if they move too soon, they could choke off their recovery. But if they don't get ahold of the stimulus, we're going to see inflation coming down the road. Now, it's tough because I wouldn't expect to see any signs of inflation in 2010. We may not even start to see it towards the end of 2011. But typically, historically, when you've injected so much stimulus into the market, you will see inflationary pressures coming, tending to be three to five years out from where all of it began.

HAI: So, next year, basically, if it started in '08?

Philip Silverman: I would say we would be looking for it to really start to show up between '11 and '13. And it's going to be very challenging for the Fed to get itself out of it without...in a smooth way. And I think to bet that they're going to be able to do it is a pretty tough bet to make. I mean, they've not been able to get out of the way of inflation in the past. So we certainly think you need to have some assets in your portfolio that are going to be a benefit in this sort of a situation, whether it's TIPS – inflation-protected securities – or the gold and Silver hard assets. And most likely we're going to be seeing that, we believe.

The inflation trade is not dead. You can take your time to get there, but it's coming. Gold and silver are the two that we like – silver because there's a lot of industrial uses, technology-wise, and even in the medical field. So that it's something that's not as popular with investors, but offers essentially the same sort of price movement.

HAI: What if the Fed reacts, starts to raise interest rates? Is this not going to be negative for gold and Silver?

Philip Silverman: I don't believe so. I think people will move to gold as a safety asset and a hedge against inflation. And at the same point, gold also is a little bit of a currency alternative. The currency markets are a very difficult place these days. The Dollar has rebounded significantly. A lot of that has been the "best house in a bad neighborhood". The EU is having a lot of problems. So that's a currency that's being moved away from. But the US has got a lot of problems with the fiscal deficit...

HAI: But so does Europe.

Philip Silverman: Well, absolutely. Europe is much worse than us. And that's going to continue to put pressure on the Euro, which can mitigate the inflation outlook for the US if the Dollar continues to go up. But, the point is, unless we can get control of all of our financial house, there will not be a strong push to the Dollar. And the more it goes up, we will just see it getting more overvalued and an inability to have a lower-risk play on being short against the Dollar.

Everyone got short the Dollar this past year. It was the most crowded trade out there, carrying...short the Dollar, long other assets, which is one of the things we believe helped spring gold back recently. It got ahead of itself trading-wise.

HAI: Where do you think it's going to go in 2010?

Philip Silverman: I think we could see a new high in gold, but I'm not calling for a huge move up to $2000. It needs to come at a more sustainable pace, nearer $1400 or $1500. What we saw before got a little parabolic at the end. And that scares a lot of traders out. And at the same time, with the Dollar bounce and the carry trade coming off, it pressured the Gold Price.

HAI: What do you see besides gold and Silver? What other commodities?

Philip Silverman: We actually have been watching oil very closely. It's been in a sideways market for quite some time. So we don't see any urgency to be getting in. But we do believe that the long-term outlook for crude, based on the idea that it is a limited resource, and there will be a continued demand for crude, out of Asia and South America that we believe that, if we start to resolve out of the range to the upside, it's going to be a place that you're going to want to be.

Getting back to the $150 that we saw is a little optimistic. We would be looking for oil...if we get above the low $80s – particularly the $85 level...to make its way up towards $100. If you start to get up towards $100, we're going to need to have a much stronger economy. Because at $100, it starts to really have some effects on the end-users. And even the producers are starting to get nervous too at $100 too.

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