Gold Prices Driven Higher by Europe and China: Greg Weldon
and Grant Williams
Source: JT Long of
The Gold Report
Preserving wealth in a volatile political and financial world
is a job for gold. Greg Weldon, publisher of
Weldon's Money Monitor
newsletter and Grant Williams, a portfolio advisor at Vulpes
Investment Management in Singapore, will share their insights at
the Cambridge House California Investment Conference Feb. 11-12.
In this exclusive interview with
The Gold Report,
they answer the question: How low and high can gold go?
The Gold Report:
Recent headlines continue to focus on the debt crisis in Europe
as more countries are having their debt downgraded. Greg, you
have diagnosed the problem as credit addiction and said that the
European Union won't be able to recover until leaders take
painful measures necessary to kick their addiction. What does
this mean for commodities and commodity equities?
It's critical for asset prices across the globe. It is a debt
addiction, debt refinancing and deficit financing problem, not
only in Europe, but also in the U.S. and Japan. Austerity is the
real answer to the fact that there is too much debt, and
austerity measures in an economic sense are not positive.
My fear is that it's going to be very difficult to see how
economies in Europe, the U.S. and Japan can stand on their own
two feet without the assistance of central banks debasing
currency through debt monetization. I liken it to filling the
sink halfway up with water and pulling the plug out of the drain.
Of course, the water level will recede unless you turn the faucet
on and start more water pouring into the sink. The level of water
represents asset prices, the water flowing out of the faucet
represents liquidity provided by global central banks and the
drain represents the real macro economy, which has not been
At the end of the second round of qualitative easing, when the
Fed shut off the faucet, the water level (asset prices) started
to go down. But now the water is running again-particularly with
some of the measures instituted by the European Central Bank,
with its three-year loan program, the federal liquidity swaps and
the back-ended way that it's managed to involve the International
The problem with all of this is it does nothing to fix the
underlying problem, which is too much debt. This is not
sustainable. Central banks turning on the water faucet is good
for asset prices. The real solutions of fiscal austerity, which
are probably not palatable to most politicians in Europe, are the
real struggle as we go forward. This problem is not going to go
Grant, in your
Things That Make You Go Hmmm....
newsletter, you painted a picture of the final implosion of the
euro and U.S. municipal bond meltdown. What would this mean for
That was part of a prediction piece that I wrote at the end of
2011. It was semi-tongue-in-cheek. My contention was that as
volatile as 2011 played out, we didn't actually get any
resolution. And it feels like 2012 will be the year those
resolutions start to take place. One of the primary ones is the
European situation. A Greek deal to solve the crisis seems to
constantly be on the horizon, but they can't seem to come up with
an absolute solution to the public sector involvement haircut
issue. When they do, I think it's going to be the start of a
whole slew of legal action to try and either trigger credit
default swaps or negate any haircut from those who don't want to
sign up. Greece has a big refinancing coming up in March. It has
to raise a little over €14 billion (
), and between now and then it somehow has to get a $130B loan
package approved from the Troika. It is very hard to see how
Europe can just keep pumping money into Greece. It's very likely
we'll see Greece exit the Eurozone then, and that's going to
focus everyone's attention on Portugal. I think Italy will be OK.
Spain worries me more than Italy because the economy there
structurally is in far worse shape. But if a bunch of countries
pull out, that leaves the question of how people unwind any
obligations they have in the current euro construct.
What this means for commodities is that the money-printing
presses are going to be turned up to the max again. Despite
adamant claims from politicians to the contrary, money
printing-even if by another name-will have to be implemented at a
magnitude much, much higher than ever before to meet current
demands. Cash is being given to banks basically for free through
the long-term refinancing operation on the quid pro quo that the
money finds its way back into the government bond market. The
problem is that a lot of this money is going to leak out
somewhere other than where it is intended and I suspect it's
going to leak into commodities and equities. We are going to see
stock markets float higher, not necessarily on particularly good
numbers from corporates, but from the simple dynamic of a lot of
freshly printed money looking for a home. We have already seen it
in gold and silver this year. They both had big corrections in
December, but they are two of the best performing assets of the
year so far and I suspect the more money they print this year,
the faster these things are going to go up.
People are starting to understand that deflation is not an
option for the central banks. Once people realize that if we get
a brief period of deflation, it will be fought aggressively with
inflation, they will start to look past any deflationary period
and position themselves for inflation. That is going to mean
higher prices in commodities.
How high could gold and silver go in 2012?
I think gold trades at $2,200 an ounce (oz) this year. I think
silver trades at possibly $60/oz this year, but they're really
just stepping stones on the way to higher ground. This 11-year
ascent in both precious metals is only going to change when
central bank policy surrounding it changes. I just don't see that
happening in the foreseeable future until they get this debt
problem under control.
We are going to see periods with crazy spikes. We are going to
see corrections. Some will view this as a collapse but the
difference between a correction and a collapse is your entry
price. If you bought gold at $700/oz a few years ago and you
watched it go from $1,900/oz to $1,500/oz in December, that's a
correction. If you bought it at $1,900/oz, it's a collapse. I
think it's important to try and take a longer view. The rationale
for owning gold and silver is still in place. In a world of
printing presses and fiat currencies, no one can manufacture gold
and silver out of thin air. I think they are both going to go a
Greg, what are your predictions for 2012?
There is a disconnect in the markets. Currencies really aren't
moving much either. The dollar hasn't appreciated much. This is
why gold is stuck in this range, capped just above $1,700/oz,
with potential downside toward $1,300/oz. People are liquidating
commodities. My sense is that there is more weakness to come in
H112. Commodity prices in Q411 have already come down
significantly, pumping some relief into margins. There is a
little window of opportunity here where equities and some of the
commodities markets could have some upside.
Debt could become an issue again in H212 depending on how
central banks deal with that and whether we have a big downturn
again in the stock and commodity markets. My longer term view is
that when push comes to shove and central banks are staring into
the abyss of a potential debt deflation, they will choose to
reflate at whatever cost. That is bullish for gold long term. If
banks can find the political will to do it, there will be
significantly higher prices for commodities across the board in
the long term.
China, in particular, has a bullish dynamic. Certain
commodities, such as copper, have their own supply-demand
dynamics that are detached from the dollar and monetary policies.
The Chinese imported copper at a record high in December. Copper
stocks on the London Metal Exchange have fallen by close to 30%
since October. Copper is one of these commodities that has upside
potential regardless of what the dollar is doing.
Grant, you are based in Singapore. There was a lot of talk at the
last Cambridge House Conference in Vancouver about whether China
is growing, shrinking, landing hard or soft. What impact will
China have on commodities and equities around the world?
China faces a lot of problems. A lot of people think it is in for
a hard landing. It is always difficult to believe official
Chinese statistics, but the message that the Chinese government
is sending through those numbers can be useful. For example, the
Chinese growth numbers last week showed an 8.9% increase in gross
domestic product. In a world of basically zero growth, that's a
pretty good number, but it's not the double-digit number we've
been conditioned to expect from China. Whether it was true or
not, it shows that the government is saying: things are OK. We
are on top of this, we're in control. We are not going to slow to
zero; we're just going to grow a little bit slower. The big
problem China has is inflation. Roaring food inflation in a
society in which half the population lives in relative poverty in
rural areas would be a big issue. A lot of people talk about
property bubbles-and there are definitely bubbles in Chinese
property-but as long as the government can keep people fed, it is
going to find a way to get through this-at least for now.
China also has vast currency reserves. The Chinese absolutely
understand that paper currency is being devalued incredibly
quickly. So, until someone puts a sell-by date on copper and iron
ore, it will keep stockpiling the stuff because it will need
these commodities to continue growing. China will continue to
swap paper money for commodities. The Chinese are bringing gold
into the country as fast as they possibly can. Gold is in the DNA
here in Asia. It doesn't take an awful lot to persuade the public
to own gold.
Greg, in your book,
Gold Trading Boot Camp,
you said gold is at the top of the macro-monetary pyramid. Why
does it hold such an important position?
It is a rare and unique mineral that has provided a store of
value for centuries that is not backed by any government. It is
not subject to anyone's IOU. Gold stands alone in the level of
security it creates in people's minds as a way to store wealth
and protect it from governments that are continually debasing the
value of paper money.
You put the dollar second on the pyramid, but said that could
change soon. What will be the catalyst for change and what will
be the result for investors?
I don't know what the catalyst for change could potentially be.
For me, the dollar stays as No. 2. There's been an interesting
little sequence recently where the dollar has rallied and gold
has declined. But gold has not declined to the same degree that
the dollar has rallied. Gold is appreciating in a lot of
currencies outside of the dollar where it's actually
outperforming dollar-based gold.
Investors have a greater degree of confidence that the Fed
will do what it has to do to circumvent a bigger issue. Next to
gold, the dollar still is the second place that people feel
Mining equities haven't been able to keep pace with the price of
gold. Do you see that changing?
It continues to surprise me, frankly, that these stocks are on
such crazy valuations against the metal. I think once we start to
get wider acceptance that inflation is going to be the outcome
rather than deflation, people will start to look at these
companies in a different way. Mining companies will instantly
become some of the most attractive companies in the world.
I think there's going to be a tremendous wave of consolidation
in the mining sector. When it comes is a tough one to call,
though. We're going to see a lot of junior miners get taken out
because it's going to become a battle for ounces in the ground.
If you have proven reserves, the majors are going to come looking
for you-particularly if you are in a safe political
jurisdiction-and they can afford to pay very, very good multiples
of where the stocks are trading now.
In the last 10 years, we have seen some tremendous finds.
We've seen some tremendous small companies that are very, very
well run with incredibly experienced geologists. It requires a
lot of due diligence to go through the sheer number of gold
mining companies and find the very valuable ones, but I think
having ounces in the ground and a good, proven management team
are the two fundamental criteria that you have to look for in
these stocks. Once the consolidation starts to take place and
once the scramble for ounces of gold in the ground begins, I
think the resulting valuations will be quite spectacular.
You are both speaking at the Cambridge House California
Investment Conference Feb. 11-12. Based on all of these trends
that you've laid out, how can investors preserve wealth or even
profit during volatile times like these?
Investors who are focused on preserving wealth are best served by
buying gold on the dip that is currently taking place. The gold
price has a chance to reach $1,450/oz-that's a sizable move
There's a chance that monetary authorities would take gold
coming off that hard as a sign that they need to be more
aggressive. It will be interesting to see how that plays out.
However, being long gold and silver is clearly the best play in
my mind to preserve wealth.
For investors who are looking to appreciate wealth, the
commodities markets offer tremendous upcoming opportunities. That
is because there is one thing that I can be certain about:
Volatility will remain high. We are not going back to a
low-volatility environment. It's treacherous for individual
investors trying to do it themselves. We run a long-short
commodity program that's non-leveraged. But there is a lot of
talent in the commodities space for individual investors looking
to profit from this market environment.
Preserving your wealth is absolutely the right way to look at it
at the moment. Trying to make a profit in markets when there is
so much uncertainty is a very dangerous thing to do because
things change midgame. So I think for the next several years,
using gold, silver and the platinum-palladium group metals as a
store of wealth fundamentally makes a lot of sense. I suspect you
are going to see outsized gains as a byproduct of using that
strategy because I think the prices will go materially higher
inflation numbers. Using gold and precious metals to hedge
yourself as a safety trade is the smart thing to do. By doing
that, you will not only protect your existing wealth but you can
also generate increased wealth through price appreciation in
excess of inflation.
When you say gold and precious metals, how would an individual
investor protect wealth using gold? Are you talking about holding
the bullion, buying gold exchange-traded funds (
) or buying equities?
It depends. I think
wealth using highly geared gold mining companies is a dangerous
thing to do. Yes, if gold goes crazy, you are going to make some
outsize returns, assuming the asset in the ground is good,
assuming the management is good and assuming you don't get any
collapsed mines or any other geological anomalies that sometimes
are part and parcel of owning gold mining stocks. Holding the
bullion itself is absolutely the safest way to do it. You have an
asset free and clear with no claims on it. It's yours. But that's
not necessarily an easy thing to do from a logistical
perspective. A lot of people look at the ETFs as a good vehicle,
and they are a perfectly good gold proxy. You have a claim on
some physical metal there. But for pure safety's sake, owning the
bullion itself or as close to pure bullion as you possibly can is
the smartest way to go.
If you're looking for any kind of leverage or any kind of
gearing, then you need to start looking into the mining
companies. But outside the major miners, it's a very dangerous
place to be unless you have someone very smart holding your hand,
and you need to do an awful lot of work on researching the
particular stocks you buy. While the returns can be extremely
good, particularly at these low valuations, gold is a very, very
tricky thing to dig for and mines are very tricky things to
operate and to run. So you have to be aware of that.
Most important, try to steer clear of government bonds. In a
world of increasing inflation, and a world where central banks
have promised to try and generate MORE inflation, to lend money
to irresponsible governments at 0.23% for two years in the case
of the U.S is just crazy to me. Over the long term, you are
absolutely guaranteed to lose money in real terms by doing
Thank you for your advice.
Greg Weldon started his Wall Street career working in the
Comex Gold and Silver Pits after graduating Colgate University.
He progressed as an institutional sales broker at Lehman and
Prudential before joining Moore Capital as a proprietary trader.
At Moore, Weldon honed his systematic trading methodology and
risk management discipline before joining Commodity Corporation
where he became one of its top risk-adjusted money managers.
Today, he publishes
Weldon's Money Monitor, The Metal Monitor
The ETF Playbook
in addition to operating his Managed Futures Account Program
as a CTA. He has a unique ability to define and forecast the
market's direction through his proprietary dissection of
fundamental and technical market data. Weldon Financial is now a
highly regarded and profitable publishing company, having
garnered some of the world's most respected fund managers as
loyal and daily readers.
Gold Trading Boot Camp: How to Master the Basics and Become a
Successful Commodities Investor,
in late 2006 in which he predicted the current global credit
crisis and discussed the impact on golf from intensified central
bank debt monetization. You are invited to participate in a
"one-time" free trial of Weldon's research @
Grant Williams is a portfolio and strategy advisor to Vulpes
Investment Management in Singapore-a hedge fund running $200
million of largely partners' capital across multiple strategies.
Williams has 26 years of experience in finance on the Asian,
Australian, European and U.S. markets and has held senior
positions at several international investment houses. Williams
also writes the popular investment letter
Things That Make You Go Hmmm.....,
which is available to subscribers.
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