Gold News

5 Trying Years of ZIRP

Gold to rise on zero rates, base metals to rise on QE...
 
AFTER five trying years, RAB Capital founder and president Philip Richards sees the light at the end of the tunnel.
 
In this interview with The Gold Report, he argues that a continued zero-interest-rate policy from the Fed will be good for gold and silver, while continued quantitative easing will be good for base metals.
 
The Gold Report: For five years experts have confidently yet incorrectly predicted higher interest rates and an end to the Federal Reserve's zero-interest-rate policy (ZIRP). Janet Yellen announced Oct. 28 that the Fed would not raise rates now, but might do so in December. Even so, some analysts believe the Fed might follow Europe into negative interest rate territory. What do you think?
 
Philip Richards: The US economy has maintained a reasonable rate of growth. Globally, however, growth has been disappointing, with the emerging markets being particular stragglers. One reason for this is the tapering of quantitative easing (QE) that the Fed announced three years ago. The US Dollar has gotten stronger ever since. This has undermined commodity markets and also created something of a debt crisis in the emerging markets, a crisis that has not yet come home to roost. Many emerging market companies have debt in US Dollars, and their local currencies have crashed, so servicing those Dollar debts has become rather difficult. 
 
Despite this sluggish global growth, total global debt is now higher than it was in the 2008 crisis. Given the fragile state of the world economy, I believe the Fed simply cannot afford to raise rates. I don't believe that negative rates will be necessary; an announcement by the Fed that ZIRP will continue for the foreseeable future should suffice to retain market confidence. 
 
TGR: There's a school of thought that holds that higher interest rates are impossible, not only because they would kill the recovery, but also because they would cause US deficits to balloon due to skyrocketing interest rate payments on the debt. What's your opinion?
 
Philip Richards: The International Monetary Fund (IMF) has considerable influence on this question. I've been told that IMF Managing Director Christine Lagarde has asked the US not to raise rates for fear this would trigger a global debt default crisis that would devastate Europe and then reverberate back to the US
 
TGR: Should American economic growth remain nominal, is another round of QE possible?
 
Philip Richards: Yes. Given the aggressive QE pursued by both Europe and Japan, the Fed could argue that US QE worked in the past, and now that the Dollar is too strong, it's time for the US to jump back in.
 
TGR: QE served initially as a catalyst for a big upswing in the price of gold. Subsequent rounds from the Fed and from Europe and Japan have not had the same effect. Why not?
 
Philip Richards: One reason could be the increase in primary gold production, up to 95 million ounces in 2015. Another reason could be that China and India are not buying as much gold as they have in the recent past. 
 
Technically, it looks to me as if gold has found a bit of a base. The continuation of ZIRP should allow gold to make progress.
 
TGR: What effect will the ongoing currency wars have on the prices of metals?
 
Philip Richards: The currency wars have essentially followed QE. The Fed began QE in 2008, which led to a weaker US Dollar and a stronger Euro and Yen. When the Fed began tapering, the Dollar recovered, and the Euro and Yen got weaker. 
 
Printing money should be good for precious metals. Greater economic activity is good for non-precious metals and all commodities really, but of course that's on the demand side. On the supply side, many big iron ore and copper projects have come on line since 2008 and driven prices down. In addition, the financial crisis in China has flushed out hidden stocks of metals, so it appears demand was probably weaker than supposed.
 
TGR: Some pundits predict that rising all-in sustaining costs (AISC) will mean a decline in gold production. Do you agree?
 
Philip Richards: I think 2015 will be a peak year for gold production, and, as you know, it takes a long time to ramp up production. As for AISC, this is hard to calculate when so much gold production is in countries outside the US: Canada, Australia, Brazil, Africa. 
 
TGR: What are your metals price forecasts?
 
Philip Richards: I expect gold and silver to be higher in a year's time. Zinc will be moving into supply deficit. But I don't know whether there will be a zinc squeeze sufficient to raise the price of zinc to its old high of $2 per pound ($2 per pound). I expect a new high closer to $1.20-1.30 per pound.
 
I'm cautiously optimistic on commodities. We could see higher copper and nickel prices in the next year or so. Regardless of whether the US restarts QE, Europe will continue to print money, and that will be reasonably supportive of commodity prices. 
 
TGR: You said in March that you were "very disappointed in nickel." Are you more bullish now?
 
Philip Richards: Not yet, but I am hopeful for a recovery in 2016. Nickel is another metal affected negatively by the financial crisis in China, which revealed previously unknown stocks that were flushed out, bringing the price down. I think the additional supply has been nearly exhausted, and we are seeing the beginning of the establishment of a technical base. This could bring the price back up to $6.50 per pound or so in the next year.
 
TGR: How is the export ban from Indonesia playing out?
 
Philip Richards: It's still holding firm at the moment. The Philippines has stepped in and exported some nickel pig iron, but that production appears to have plateaued. Indonesia is not likely to become a major world supplier for another two to three years. 
 
TGR: We are now close to five years of a bear market in precious metals and mining stocks. Is there an end in sight?
 
Philip Richards: I'm fairly bullish across most metals. Gold should lead silver higher. What we're heading into might not feel like a bull market because prices will still not be very high, nor will mining companies be particularly profitable. Nevertheless, every bull market starts from the bottom of a bear market. The past five years have been painful for many, including us. In any event, I believe that a slow and steady buildup will be much better than something more dramatic. 
 
TGR: During the previous bull market in precious metals, gold and silver miners performed poorly compared to the rise in the price of bullion. How well will the miners do this time around?
 
Philip Richards: The erosion of the traditional premium was brought about partly by the arrival of the gold ETFs, which obviated the need of investors to buy miners in order to leverage higher prices. As a result, mining companies have gone down and down and down. Investors can now buy good-quality companies at prices quite low relative to their net present values. Those are the ones that we would like to buy. There are quite a few names out there that can be bought pretty cheaply relative to the price of gold. That's a big turnaround. The short answer is that the overvaluation of gold companies relative to gold was destroyed over the last few years. This time around it will be different. 
 
TGR: Philip, thank you for your time and your insights.

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