West Sells Gold, Asia Buys
Tuesday, 9/10/2013 20:25
What this meeting of supply & demand mean for gold prices long term...
CEO of Jefferson Financial, Brien Lundin is publisher of the highly regarded
Gold Newsletter, and host of the annual New Orleans Investment Conference, the oldest and most respected event of its kind.
Now, with the global rally for gold prices underway since late June, Brien Lundin speaks here with
The Gold Report about hunting out undervalued mining companies in safe North American jurisdictions...
The Gold Report: Brien, judging from the tone of the September 2013 issue of Gold Newsletter, you have renewed excitement for precious metals equities. Why?
Brien Lundin: You're absolutely right, and it's all based on the metals markets. In a typical year, the precious metals markets bottom out at the end of July to early August, when physical demand from Asia abates, before kicking back up in late August and September.
This year, gold bottomed out in a final downward thrust at the end of June and then started building back up. At the same time, a lot of anecdotal evidence began to reveal an extremely tight supply situation in the global gold market. Taking all of that together, I was fairly confident in calling a bottom for gold prices.
Then, the equities started to respond. However, the situation in Syria prompted some safe-haven demand in the last few days and the mining equities stepped back; with safe-haven demand, investors want the metal, not the paper. But that was just a brief blip. I see an open road ahead for gold metal and gold equities.
TGR: Gold is moving higher, but without much of an explanation. What is your take on the situation?
Brien Lundin: The market has had some strong performance, jumping $15, $25, even $35 in a day. I think those spikes are a result of the extremely tight demand situation in the gold market. In the spring, Western speculators and some of the big holders of SPDR Gold Trust (GLD), the gold exchange-traded fund (ETF), abandoned the market in anticipation of the imminent end of quantitative easing (QE). We also had some manipulation, notably on April 12 and April 15, in a blatant attempt to force the market through sell stops, thus benefiting from short positions. As a result of these speculative selloffs, the market was dramatically oversold.
But this rapid price decline sparked tremendous bargain hunting in Asia. Asian demand more than overcame the selling by Western speculators. The supplies of gold in the Comex warehouses dropped to record low levels. We saw gold being transferred from vaults in the West to the East, causing the rare occurrence of a negative Gold Forward Offered (GOFO) rate – the interest rate difference between gold holdings and LIBOR. That has happened only twice in this bull market, at the beginning of the major bull trend around 2000, and in 2008. Both times it marked a major turnaround in the metal.
There is a lot of evidence that this unprecedented supply situation was behind the sharp, brief upward spikes in the gold price. As you add up these sharp spikes, gold was gradually and then more rapidly coming off that bottom in late June.
There are number of players in the East who want gold and are willing to pay higher prices. There also is a shortage of gold in the West. From a fundamental supply-demand standpoint, we still have some room to go in this oversold rebound.
TGR: Could you expand on why you believe China will soon be "driving the bus" for the global gold market?
Brien Lundin: The Shanghai Gold Exchange (SGE), putatively a futures exchange, is actually a physical delivery mechanism for the Chinese market. Most of the gold traded on the SGE is actually delivered to end-users. As of the end of June, SGE reported nearly 1,100 tons of gold have been traded so far this year. That equates to all of the metal that had been traded on the SGE in 2012, which itself was a record year.
Put another way, at this rate of consumption, demand on the SGE this year will equal the entire newly mined global output projected for 2013. In effect, all of the new gold supply in the world is being consumed by a single exchange in a single nation.
China will soon exceed India as the largest source of gold demand in the world. There are demographic factors behind this: a deep cultural affinity for gold, a growing population and a rapidly growing middle class. The per-capita use for gold in China is still relatively low but has a lot of upside. As incomes grow in China, gold demand will grow on a per-capita basis even as the population grows. The potential for growth in the demand for gold is almost exponential.
TGR: Who in China is
buying gold?
Brien Lundin: The assumption is that the People's Bank of China is buying gold to build up the nation's gold reserves. China also has become the world's largest gold producer, yet none of the gold it produces ever gets exported.
There is tremendous upside potential in central bank buying of gold in China, in that China holds a huge amount of US Dollars in its foreign currency reserves. If it were to increase its gold reserves to the average level of most developed nations, it would quickly absorb all of the available metal in the global gold market.
TGR: Would the gold price be on an even stronger upward trajectory if India hadn't taken measures to curb gold buying?
Brien Lundin: Yes, Indian demand would have been much stronger if its central bank hadn't increased the tariff in phases to 10%. Just as importantly, it imposed an 80/20 rule, which requires that 20% of all of the gold imported into India must be subsequently exported as finished goods. Those rules, imposed without explanation of how to follow them, effectively shut down Indian gold imports from the end of July through the end of August.
TGR: You recently wrote "Gold has bottomed. The market is set up for a large sharp rally when and if a short covering stampede is sparked." What could those sparks be?
Brien Lundin: One appears to be the situation in Syria, although we don't know how that will develop.
A more important and fundamental driver for a short-covering rally would be the flow of economic data in the US, where economic growth had been showing signs recently of slowing. That slowdown, if it were confirmed, would eliminate any justification for tapering off the Federal Reserve's QE program. A growing consensus that QE will be here for a while will be the driver that gets the shorts to abandon their bearish gold positions.
TGR: How does all this translate to gold equities?
Brien Lundin: The majors had a fairly good rebound and were outperforming gold until the Syria situation erupted. That touched off broader equity market selloffs, and the gold stocks were victimized.
Interest is just starting to filter down to the junior resource stocks. I'm not as negative on that subsector as some of my compatriots. Greed is the most powerful motivator in the investment markets, and greed will draw investors to the juniors like iron filings to a magnet if we see a sustained upward trend in gold and silver.
TGR: What do patterns in the market trends tell you?
Brien Lundin: This year the gold market has experienced a number of head fakes, where we thought we had a bottom, then it dropped to a lower plateau, then dropped again. I think the June 28 bottom will hold. The fundamental evidence argues for an extremely tight situation in the gold market, which will keep the prices from dropping to an even lower plateau.
A lot of evidence, from stochastics to moving averages, is delivering very strong buy signals. There is anecdotal technical evidence like the negative GOFO rate and backwardation in the near-term futures. All this added together points to higher gold prices and a more sustained rally.
Yet, in the broader market, sentiment is still not very positive for gold. We're still climbing a wall of worry in regard to sentiment, yet, for those willing to look, an increasing amount of evidence is pointing toward higher prices. This is really the perfect situation.
TGR: How does silver fit into what's happening with gold?
Brien Lundin: Silver is leveraged to gold. It follows the moves of gold, but it exaggerates those moves both upward and downward.
With gold rising, silver is outperforming gold – a sign of a healthy bull market. In turn, silver equities are a way for investors to leverage the moves in silver. Investors get a double-play action by investing in silver equities.
TGR: What is the importance of safe jurisdictions?
Brien Lundin: Safer jurisdiction is an important point. In this market, there are so many undervalued companies out there that there is no reason to take on sovereign risk if you don't have to. As we start this rebound, it's important to look for undervalued juniors that have proven resources or are in production. You can get them at bargain level prices, and they will be the first to respond.
TGR: What about Mexico?
Brien Lundin: Mexico is a great mining region. Geophysical anomalies mark every big discovery along the Guerrero Gold Belt. A number of multimillion-ounce discoveries line up along that belt like pearls on a string.
TGR: Tell us what people can expect at the New Orleans Investment Conference this November.
Brien Lundin: We have a tremendous lineup, highlighted by Dr. Ron Paul, the iconic leader of the libertarian movement in the US. Charles Krauthammer, one of the smartest guys in geopolitical analysis out there today, and Peter Schiff, one of the smartest guys in the investment business, will be there. Other big names include Dr. Marc Faber and Dr. Benjamin Carson.
Dennis Gartman, who has made some very accurate calls on the commodities markets, and Dr. Martin Weiss, a leading authority on the bond market and rating financial institutions, are scheduled. And, of course, we have dozens of today's top experts in every investment area.
TGR: Do you have any parting thoughts on the gold and equities space?
Brien Lundin: Over the past 12 or 13 years we've seen a shift to a secular megatrend in the metals and commodities markets. There have been some tremendous profit opportunities along the way, including periods when junior resource stocks multiplied in value very rapidly. We've also seen some severe setbacks.
Right now, we're seeing an analogue to previous periods where, with courage and cash, investors could reap tremendous gains as the metals rebound. All the evidence is pointing toward a new rally in the metals. It's time finally for investors to get back into the market.
TGR: Brien, it's always a pleasure to talk with you.
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