7 Years to New Gold Price Highs
Thursday, 11/07/2013 20:41
Never mind manipulation theories. Focus on the fundamentals, says Jeffrey Christian...
OUTSPOKEN critic of manipulation theories about silver and gold prices, Jeffrey Christian founded the CPM Group consultancy after serving as head of commodities research at J. Aron & Co., acquired by Goldman Sachs.
Here he speaks to Hard Asset Investor's managing editor Sumit Roy both about his latest attack on price manipulation claims, plus his outlook for silver and gold prices...
HardAssetsInvestor: Let's start off by discussing the story that's been making waves recently, the controversy between you and Andrew Maguire. Could you tell us the back story for those who may not be familiar? Who is Maguire? What is his relevance to the gold and silver market? And what is the controversy about?
Jeff Christian: Andrew Maguire is really just a tool. There are groups like the Gold Anti-Trust Action Committee (GATA) and others, who have formed this cottage industry to try and promote the concept of conspiracies to manipulate gold and silver prices.
I have said, as have others, that (a) there's no evidence of such manipulations in the market; and (b) these conspiracy theories are a giant distraction, which can be a very costly to investors.
You have investors who believe this stuff, and then they say, "Okay, well, the silver prices went from $5 to $50. But the conspiracy theorists tell me it's going to $400. So I should stay long." And now the price is $22. And they've lost a big opportunity to make profits or book profits.
We've said these guys are full of garbage. They pollute the precious metals markets intellectually. They distract the market from what are critical issues in the economy and financial markets and the fundamentals of the markets themselves.
In 2010, GATA introduced Andrew Maguire. They said he had decades of experience as a bullion banker at Goldman Sachs or some other unnamed bank. When he came forth in early 2010, he made all kinds of allegations against J.P.Morgan, saying they were trying to suppress the silver price and stuff like that.
A lot of people, not just CPM Group – the
New York Times, Wall Street Journal, The Economist, ABC, CNBC, the
Financial Times – said to Maguire, "Look. These are very big charges you're making against J.P.Morgan. You need to credentialize yourself. Because frankly, no one in the gold market has ever heard of you. None of the bullion dealers in London know you. They have no record of you ever having worked at Goldman Sachs or other banks. And what you say doesn't actually add up in the minds of people who have experience in these markets."
For these guys, their livelihood is collecting money from investors to support their ligations and their investigations of supposed manipulations. I'm hurting their livelihood by destroying their credibility and they have reacted hostilely in reaction to that.
But that is all a distraction from the real gold and silver fundamentals.
HAI: Let's talk about supply and demand. You've been characterized as somewhat bearish on the market. But that really depends on your time frame, right? I know you're actually quite bullish, over the long term. What do you expect for gold and silver prices over the next several years?
Christian: We issued a sell recommendation on gold and silver in January 2012. And on June 15 of this year, when the price of gold was $1390, we issued what we called a "qualified buy recommendation." We said, at the time, that we thought the price of gold could spike a little bit lower on an intraday basis. We said we thought it could go to $1240; it actually went to $1180 later in June.
When we issued our sell recommendation in early 2012, we said we thought the price would fall to an annual average price of $1300 to $1400 an ounce between 2013 and 2015. And then, depending on what's going on in the economic and political environment, we thought gold prices would likely start rising again after 2015.
That's still our view. We're looking at an average gold price this year of probably around $1420. Our expectation is that the price might average around $1320 next year, and then slightly higher in 2015.
Since we think that the economic and political environment is going to be hostile to consumers and companies and conventional investments, we think that after 2015, we could see gold prices start rising again, possibly reaching new record levels by 2020 to 2023.
We think silver would find a base somewhere above $16, maybe even above $17. That doesn't mean it can't spike below that on an intraday basis. But from a quarterly or annual average basis, we think silver prices probably find support around $17 an ounce.
HAI: How do you see supply reacting to the current low price environment? Are miners in trouble?
Christian: A lot of miners are suffering. Some of them are in trouble. But even the ones that aren't in trouble are suffering because their margins have fallen very sharply.
They're slashing their exploration and development budgets. Based on our database, the pipeline of projects that were slated to come on line between now and 2016 is about half of what it was at the beginning of the year. That's going to limit the growth in the long run.
In terms of the short run, you also have seen a very steep decline in gold and silver supply from scrap this year. That's a segment of supply that can turn itself off immediately, as opposed to mining, where you have a stickiness in production relative to price.
HAI: I want to get your sense on ETFs and the demand for those products. We've seen a big drop in gold ETF holdings this year. But silver ETF holdings seem to be going the other way. Why the divergence? And what is your outlook for ETF demand?
Christian: We think what you saw in the silver market was that a lot of long-term silver bullion holders swapped their physical holdings for shares of the ETFs. These are longer-term investors. And those people continue to buy silver.
As the price has fallen, you've seen an increase not only in silver ETF purchases and holdings, but also in purchases of silver coins. So small investors are buying more silver in coins and ETFs. Larger investors are selling silver in the thousand-ounce-bar market, but that's a different issue.
For gold, in contrast, we think what you've seen over the last decade is that a lot of investors who did not buy gold bullion previously were buying the gold ETFs. And some of the people who formerly bought gold equities switched from gold equities to the gold ETFs.
Then this year you've seen this big evacuation. I think it's a lot of liquidation from people who we think are atypical gold investors. These are people who are new to the gold market, because they either never were in it, or they were gold equity investors.
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