Jeff Christian's insights into the commodity amidst global crisis.
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ALEC HOGG: It’s Thursday July 19 2012 and in this Boardroom Talk special podcast, Jeff Christian, who is the managing partner of the CPM Group and a gold expert of note is in Johannesburg, in fact, in our studio this morning. There’s a lot to talk about on the gold market, Jeff, although it doesn’t look too exciting. This year after peaking at 1775 the gold price has been working in a channel, somewhere between 1550 and 1625. Now, the gold bugs are saying it’s going to break out upwards, the bears of course saying it’s going the other way. What’s your take on it?
JEFF CHRISTIAN: Well, our view is that it’s somewhat range bound but it’s more likely to break out on a downside. There are bears who are looking at…there’s a 1530 support level that’s held since last September and there are bears who think that if you break 1530 you could see a spike down as low as 1120. Our view is that you could see the price break below 1530, July, August, maybe even into September but that the price probably would only fall to like 1480 or maybe 1450.
ALEC HOGG: Why are you seeing softening? Is this a seasonal issue?
JEFF CHRISTIAN: Part of it is a seasonal issue, part of it is that I think there’s a major shift in investor attitudes away from this crisis mode - I have to buy gold today regardless of the price because tomorrow the euro is going to collapse - toward a more nuanced view that, no, the real crisis I have to worry about is what we have now, stagnant growth, sub-par growth, high unemployment, continuing debt and trade imbalances and political issues.
ALEC HOGG: In South Africa we keep a close eye on the East, being a member of the BRICS now. Our president, in fact, is having discussions today with the president of China and the Chinese economy seems to be continuing to roll along nicely. How is that reflected in demand for gold from China and perhaps India?
JEFF CHRISTIAN: Well, China and India are both seeing very volatile demand on the part of both investors and jewellery buyers right now and in India that reflects both the high gold price and the volatile gold price but also the weak rupee, which has made gold even more expensive there. It also has to do with domestic economic conditions. In China you have a more stable economic view, there are people who keep talking about China crashing and burning. China hasn’t crashed and burned since the Cultural Revolution and it’s probably not going to this time. We’re looking for about 8% real GDP per year over the next several years in China. People say, well, it has slowed remarkably. Yes, it has slowed remarkably down to the long-term trend that the Chinese government has always wanted in GDP. So what we’re seeing in China is relatively steady economic growth, there are some problems that are there but Chinese demand for gold has held up relatively well.
ALEC HOGG: It’s interesting going through your latest report to see that the Chinese gold production is now nearly double South Africa’s and South Africa slipping to number four in the list. What’s caused this in China that they’ve got their act together in the mining side?
JEFF CHRISTIAN: Well, prior to, say, the late 1990s, early part of this century, gold was primarily mined by the people’s army in China and it was very small, artisanal mining. What you’ve seen over the last 20 years is the Chinese economy has been liberalised and opened up to private enterprise, is that you have a variety of companies, mostly Chinese companies, some overseas mining companies, coming in there, applying modern mining techniques, applying modern exploration techniques and developing these mines to be much more important. So you’d have a people’s army brigade that would say, well, we need to mine a ton of gold from this deposit each year to support our operation. Now you have a company that comes in and says, well, this is a very interesting deposit and we can actually mine three or four or even six tons of gold per year here and make some profit. So that’s really what you’re seeing.
ALEC HOGG: Is there lots more gold in China?
JEFF CHRISTIAN: The exploration of natural resources in China is coming along a pace but there’s a tremendous of amount of exploration yet to be done. They’ve just a few years ago come out with their first preliminary geological assessment of the Tibetan Plateau. So our expectation and most geologists’ expectation is there are tremendous resources across commodities yet to be discovered in China.
ALEC HOGG: But isn’t that a bear factor as well for the gold price if there is a lot more production coming out of that part of the world?
JEFF CHRISTIAN: It is a bear factor for the gold price and it’s one of the reasons why we think that you’re seeing gold prices come off over the last nine months and likely to come off over the next couple of years.
ALEC HOGG: Jeff, I’d like to explore an issue that’s been raised amongst a lot of gold watchers recently. After the disclosure of the Libor manipulation and the departure of Bob Diamond from Barclays many of the gold watchers have been saying, well, there’s proof for you that these important rates, these important areas are manipulated and that what they’ve been saying for years about the gold price being manipulated is now supported. What’s your view?
JEFF CHRISTIAN: I think there’s a big disconnect there. First off, one of the things that’s amazing for us, as people in the business, is that there has been discussion about Libor being misrepresentative of true interest rates for at least half a decade and probably for a decade. Libor has only been around for 25 years and if we have the time I’ll deep dive into what has been said because it’s very interesting what’s been said about the way Libor has been manipulated but it’s aside from gold. But Libor is a very important number and for a bank to try and manipulate Libor is very significant to its bottom line. Gold is relatively insignificant to these banks and I’m shocked and appalled that these guys would go so far and risk their banking charters around the world with Libor. I don’t think they would risk their banking charters for gold because there’s not enough money for a bank to be made in gold.
ALEC HOGG: The other part, kind of following through that thread, that some are using is saying when Britain sold all of its gold at below US$300 an ounce, an appalling decision was made there, that Gordon Brown, the Treasury Secretary at the time, his office was managed by the wife of Gavyn Davies, who was the chief economist at Goldman Sachs, the name that always comes up with gold price manipulation. I see you smiling; do you think that the guys are on the wrong track here, the Gatters [? 6:38] of this world?
JEFF CHRISTIAN: I don’t know Gavyn’s wife, I know Gavyn. I was part of the team at Goldman Sachs that brought him into Goldman Sachs in the mid-1980s as a currency analyst. So I know him, I know Gordon Brown. I think that they are barking up the wrong tree, one of the amazing things is the stoicism of Gordon Brown; he has really fallen on the sword on this. We were advisors to the Bank of England in the late 1980s, early 1990s when they made a decision to have their gold – long before Gordon Brown was around, I guess he was probably in Parliament at the time – that decision was made in the early 1990s. Then there was a gentlemanly decision on the part of the Bank of England to wait until 1999 after the banks and governments that had opted into the euro were done selling their gold, before the Bank of England would sell its gold. So Gordon inherited that policy, he was not the author of the decision and Gavyn Davies’ wife, I have no idea where she was at that time but it’s amazing that he has allowed himself to be so vilified for something that he really was simply executing that had been done really six, eight years earlier.
ALEC HOGG: Thanks for those insights, perhaps that will take a little of the vilification away from him. Your projection, just looking at the gold price overall, again from your research, is remaining in this channel for quite a long period.
JEFF CHRISTIAN: The way we’ve been verbalising it is we’re saying that gold has reached a cyclical peak in a secular bull market. We don’t see gold falling sharply, we don’t see it falling really below $1400 over the next few years but then we see it rising. What we’re seeing is that investors continue to buy gold but they’re much more price sensitive. We expect investors to buy about as much gold this year as they did last year but last year they were chasing the price up, gold prices are rising and the world is going to collapse, I have to buy gold regardless of the price. This year and since last September what you’re seeing is investors have stopped chasing the price higher, when the price rises, as it did in November to 1800 or $790 in February, investors pulled back from their purchases and when it comes down to 1530 they start stocking up. You can see this in the coin market, in the bullion market, in the futures market, so what we’re seeing is that investors are still very much interested in gold but they’re much more price sensitive. We think that the economic and political environment will continue to give investors plenty of reasons to buy gold but they will just be a little bit more price intelligent about it.
ALEC HOGG: Many small investors like to coat-tail, we’ve heard of John Paulson, who was a big gold bull at a period in time, perhaps lightening his holding. George Soros, on the other hand, seems to have remained positive about the metal. What’s your latest reading of, first of all should you be coat-tailing these guys and secondly, what are they thinking?
JEFF CHRISTIAN: I am very hesitant to speak about other people, regardless of whether or not they’re clients. I think there’s a big misconception about Paulson, from what I can tell John is still very bullish on gold and most of his gold assets remain in place. He is taking a lot of pressure from some of his investors for that but I think that he still remains committed to the idea of gold. What happened in 2009, I believe, he allowed his investors to choose how they wanted to denominate their investments in the Paulson funds. They could always choose the dollar to have their investments denominated in dollars, euros, Swiss franc, yen or pounds sterling. In early 2009 he said you could also have your investment denominated in gold. About 15%, I believe, 10%, 15% of his assets under management opted to be denominated in gold; in January 2009 it made sense. He hedged that exposure that he had by buying the ETFs, so he has enormous gold investments, the ETF position largely was a hedge of his clients’ or investors’ decision to denominate their investments in gold. Over the last 18 months he’s suffered withdrawals and losses and people, as they’ve pulled out some money, they’ve also opted sometimes to shift out of gold investment, gold denominated investment, into other currencies because gold has risen, it was $900 in January of 2009. It was $1900 last year. So as they opted out of having their investments denominated in gold he sold ETFs, which were a hedge of those decisions. So that ETF position was large but it was largely a passive hedge on his part. It doesn’t necessarily suggest that he and his fund are bearish on gold.
ALEC HOGG: Those ETF positions, you do an analysis of COMEX and the exchange traded funds and the holdings that are there, can you give us an update on both of those?
JEFF CHRISTIAN: Well, I think what we’re seeing is COMEX is relatively flat, you’ve actually had a significant amount of gold come into COMEX over the last several years and that I think reflects increased volumes and trading volumes, and open interest in COMEX. The fact that in late 2008 when you couldn’t get credit to trade in the OTC market, you could trade on the COMEX because it has a clearing house behind it and it didn’t have any of the credit restraints that the OTC market was experiencing at that time. So COMEX is doing well and then the ETFs have actually held up very well. We have seen over the last, say, nine months, we’ve seen a few of the larger hedge funds that are hot money momentum traders that were following the gold price up liquidate their ETF positions but total holdings have held up relatively well and actually, I believe, increased a little bit because as those guys were selling there were other longer-term investors, who stepped up and said, okay, as you’re selling you see the price come off, we’ll take this opportunity of a lower price to build our own positions.
ALEC HOGG: Central bank buying?
JEFF CHRISTIAN: Central banks right now on a net basis year to date through June are just about flat in terms of their gold. We’ve seen a few central banks like Turkey buy several hundred thousand ounces. The pattern over the last three or four years has been that central banks are net buyers of 10m, 11m, 12m ounces. Our expectation has been that they would be net buyers of about 11m ounces for the full year but right now it’s looking like we’re way too high.
ALEC HOGG: So overall not a lot of excitement going in the gold market but potential for some sliding?
JEFF CHRISTIAN: We had a tremendous amount of excitement last year, really if you look at last year from January through June the gold market was relatively calm and boring, steadily rising and then July, August and September you had this tremendous amount of action and then we’ve had a downside. Now we’re consolidating, we think that we’ll see the price come down and test that 1530. If it breaks below that you could see a lot of excitement.
ALEC HOGG: Jeff Christian is the managing partner of CPM Group.
