Serious Gold Investors
Tuesday, 3/25/2014 08:32
As opposed to the gold jokers, that is. Asian central banks vs. hedge funds...
FORMERLY head of government affairs at market-development organization the World Gold Council, George Milling-Stanley has been active in the gold market for more than three decades.
Now president of George Milling-Stanley on Gold, he speaks here to Hard Assets Investor about the outlook for central-bank and investment gold demand, and their impact on prices.
Hard Assets Investor: The perception of gold as an investment vehicle has changed dramatically in recent years. It's gotten very popular. Is that waning a little bit?
George Milling-Stanley: I think we're still in a bull market that began way back in 2001 when the price was down at about $250 an ounce. And for the first few years of that bull market, we went along quite nicely, going up about $100 a year, which was enough to generate investor interest, but not enough to give you sticker shock in the important consuming markets for jewelry in China and India and so on. So it was a nice healthy market.
Then in 2009 and '10 we went up $200, which was a little fast. And then in 2011, the hot money came in and drove us up $500 in just nine months. When a price goes vertical in any asset class, it's going to end in tears. And it did in gold. They took their profits and went away.
So the hot money's gone. We're now back to I think a basic fundamentally driven solid market that seems to be trading in a range between about $1150 and maybe $1350, with, at the moment, the pressure of tending to be to the upside because of what's going on in Ukraine and so on. So I think we're in a pretty healthy market right now.
Once we get momentum behind this and break out of the top end of my range...which I hope will take awhile to happen, but I think it will come sooner than I want it. Once that happens, the hot money will come in again and take us probably above where we were before. I hope that doesn't happen for a year or more, but it might happen in a month.
HAI: $1900?
George Milling-Stanley: No, I'm not saying $1900 in a month, I'm saying the start of that process. It took them three years to do it before. We're around about the same level where they started before, around the $1300 mark. They did it fairly quickly last time. I think the hot money will come in. Maybe not until we get above $14 or $15. That would be nice because that will be somewhere toward the end of this year. I think that would be healthier.
The longer we build the base, the firmer the foundation for going higher. So investment is still there, the solid investment is there. The long-term investor, through ETFs, through allocated accounts, whatever it may be, that's still there. There's no question about it. The jewelry is coming along quite nicely with China and India, the rest of Asia, doing reasonably well economically. We've not got any economic disasters. No hard landing in China or anything like that. So I think the market's in a pretty healthy state right now.
HAI: Is this a particular class of investor?
George Milling-Stanley: There was a certain kind of people who would always buy gold. There are people who will always have gold as part of a strategic allocation, maybe a 5% or 10% allocation. That's always there. And they hold their nose when the price isn't performing, but they're glad about the diversity that it gives them. They're glad about the relatively low volatility, relative to other assets, it gives them. So those kinds of people I think are smart investors.
People who are putting a tactical overlay on when they're expecting the price to move up, again, is I think what we're starting to see now. To my mind, that's sensible. It's not a particular kind of investor; it's a mindset of investor. There are some institutions, some individuals who take this view, and the whole range in between as well.
That's what I call the serious investor. Then there's the hot money that comes in from time to time, primarily hedge fund driven. No question about that. Momentum traders, trend-following speculators – they're the people that took gold up to $1900. They're the people that will take it up through there at some point in the relatively near future, within a year or two, is my guess. They will come back in.
But at the moment I think that the market is pretty soundly based. It's the people who have that strategic allocation and are prepared to make a tactical allocation on top. And ETFs have really just made it easier for all those kinds of investors through the stock market. It was exactly what investors who weren't involved in gold needed. And it shows up in their monthly statement from their broker as well. It's an easy way to do it.
HAI: A lot of people consider gold an inflation hedge. Let's look at that argument. If you look at the price of gold right now, and if you look at where it was in 1980 in nominal terms, it went almost all the way to $2000. But when you adjust for inflation, if you invested in gold back in 1980, and if you look at it now, or even at the peak when it hit $1900, you didn't beat inflation. So why does this argument continue?
George Milling-Stanley: You're still lacking inflation, I agree with you: The price would have to be at $2300 or thereabouts in today's Dollars to match the $850 we reached back in 1980.
When I talk about gold as an inflation hedge, I'm talking about the long term. And at my age I can talk about the long term; I've been there for a good part of it. So, over decades, gold tends to be a good inflation hedge. In the short term, not necessarily. But if you're looking over decades or even centuries, it will tend to preserve the value of your capital.
To my mind, that's really why the smart investor goes into gold: not necessarily to make a lot of money – though for the last 10 years, you could have made an awful lot of money in gold if you were swift footed enough – but it's not to lose money. It's kind of to preserve the capital and to help preserve the whole value of your portfolio. That's really why the smart investor goes into gold.
There's a long tradition in this country of thinking that gold is just an inflation hedge. So if we don't have inflation like between 1980 and 2000, say we didn't have inflation, then you don't need to buy gold. I think that's mistaken. It's a hedge against Dollar weakness. It's a hedge against geopolitical tensions.
The fundamentals right now of supply and demand are growing healthier for gold, and they have been for quite some time. So it's a lot of different reasons to buy gold.
HAI: I know you've worked very closely with central banks in your career. During the '90s when gold was $250, they were net sellers of gold. Over the past several years, probably around the peak again, they were net buyers. Where are they now? And is it fair to say you can look at them sort of as contrarian indicators?
George Milling-Stanley: I think that's a little bit harsh. It's important to recognize there are two very, very distinct constituencies of central banks. There's the advanced economies of Western Europe and North America that were economic powerhouses during the heyday of the Gold Standard from 1870 to 1970. And there's a legacy of those days when they needed gold to back their currencies; they have huge gold reserves.
At mark-to-market, on average, that group has more than 75% of external reserves in gold. Then there's the rest of the world, which are now the economic powerhouses but were not during the Gold Standard – China, India, the rest of Asia and so on, Singapore, Taiwan. They don't have that same legacy of the Gold Standard days, so on average, they have less than 5% of their reserves in gold at mark-to-market.
The sellers at the bottom were the Western Europeans. I agree that they're generally a good countercyclical indicator. They're not selling right now. Their appetite for sales dwindled when gold got up to $1000 essentially. But what has been happening is the rest of the world, led by China, Russia, Brazil, Mexico, Korea, Thailand, India, it's all over the lot: What we used to call the emerging markets have been buying increasing quantities ever since this bull market began in 2000. They're a good indicator. They're buying not so much because they're expecting the Dollar price of gold to go up, but because they're expecting the international value of the Dollar to go down.
It did that from about 2002 until 2008, and then suddenly the world rediscovered the magic of the Dollar as a safe haven. I still think that the Dollar is a currency looking for something to decline against in value, but everybody else is better at depreciating their currencies than we are right now.
HAI: This was the fear the gold community had, that one day the central banks would print money like crazy. Are you surprised that gold didn't go higher?
George Milling-Stanley: Not really. The rise to $1900 was obviously predicated on all of that money creation you're talking about. But I think the real deal is that we have not yet seen inflation come out in the statistics. Monthly CPI is still relatively benign and looking like it's going to remain that way.
What we've had is a massive increase in money supply in this country and elsewhere in the world as well. But we haven't had the other shoe that Milton Friedman talked about, the other half of the Friedman paradigm. You have to have an increase in the velocity with which that increased money supply moves around in the market. The commercial banks are basically happy sitting on larger reserves than they had before because they know we're in a serious tail-risk environment.
And because the regulators – whether the people trying to implement Dodd-Frank or the Basel Committee on Banking Supervision in Europe – are saying at some point in the future we're going to require you to hold a lot bigger reserves, but we can't tell you when or how much bigger. The banks will get back into their lending business once they have clarity on the regulatory front. Then you'll see the velocity, and then you'll see it coming up...
HAI: It's also that people's incomes are not really going up. If you look at the banking system as the real creator of the credit money, the demand for credit is just not there. Because a lot of people are not seeing a rise in income to justify taking on more credit.
Let's sum it up. Right now a little bit of a trading range I think is what I'm getting from you, but getting close to the point where a lot of that hot money might start piling back into the market again.
George Milling-Stanley: I think a good trading range to play, this $1150 to $1350. If we break out on a sustained manner above $1350, then we're off to the races, and I think everybody should be long.
HAI: Somebody's got to teach these hedge fund guys how to buy when the price is down, not when it's up.
George Milling-Stanley: Buy low and sell high. Not a bad lesson.
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