NOOB
21st June 2010, 02:49 PM
Where gold is going - Ian McAvity: Author, Deliberations on World Markets
Gold likely to head toward $3,000 an ounce over the next two years but, be careful what you wish for
Interviewer: Geoff Candy
Wednesday, June 16, 2010
www.mineweb.com
GEOFF CANDY: Welcome to this weeks edition of Mineweb.com's Gold Weekly podcast and joining me on the line this week to help us navigate through what's been a very interesting time for gold. With me is Ian McAvity, one of the founders of Central Fund of Canada and the author of the acclaimed newsletter Deliberations on World Markets. Ian there's been a great deal of noise in the gold market at the moment. There's a lot of talk about inflation, of bubbles, there are concerns about currencies, and in particular the euro. What are the drivers that you look at in relation to the gold price?
IAN MCAVITY: Currency turbulence and currency credibility and the monetary aspects of gold are primary drivers. I look at the current period as being very comparable to a couple of periods in the past. I would say notably 1971 when the Americans closed the gold window and took America and basically destroyed the Bretton Woods agreement and also very much inclined to look back to 1978 when there was concerted action by the European Central Banks along with the US to arrest a decline in the US Dollar.
GEOFF CANDY: If we look at those examples from history, where does that place us now because there has been talk about the fact that this gold price is now heading toward bubble territory.
IAN MCAVITY: I love it when people talk about a bubble in current climate. To me this trend of the past decade really dates from the brown bottom of 2000 and in essence it's been a remarkably orderly uptrend with prolonged corrections and strong advances that is markedly different from the huge bubble run that we had in the 1970s. If you were to replicate the run of the 1970s in the current environment you'd be talking of something in excess of $5,000 on the gold price and I'm not prepared to go quite that far at this stage. But when I hear talk of a bubble, I look at the gold price today being about 50% above the peak that it made in 1980 while the Standard & Poor's is trading at 10 times its 1980 level and US credit market debt is 12 times the level of 1980.
GEOFF CANDY: So then where would you say we are in this uptrend.
IAN MCAVITY: If we were looking at a rerun of the 1970s and 1980s I would say we're somewhere around 1978 when gold was just breaking through the $300, $350, $400 area on its way to what became the blow off top. It's possible that that lies ahead of us in the next two or three years that knowing that the central bankers are out there - battling yesterday's headlines everyday. I couldn't put any timing on it.
GEOFF CANDY: What in terms of that and in terms of the central banks and the battling of the headlines, so to speak - what are you looking at now as possible hiccups or possible actions that could inhibit this rise in the gold price?
IAN MCAVITY: The most critical factor for the gold price is that for as long as so-called risk free capital has a negative real return, i.e. the yield on treasury bills - everyone's favourite choice for so-called risk free capital - as long as the yield on treasury bills is 40 to 50 basis points, then the perceived inflation rate is 200 to 300 basis points - basically holding paper is negative. And that is one of the strongest underlying features of the gold market and we basically have the central bankers and their quantitative easing load saying that they're going to try and keep interest rates as close to zero as possible, until they successfully borrow their way out of debt. The concept of borrowing your way out of debt is I guess, the new math that I haven't quite grasped yet.
GEOFF CANDY: In terms of the treasury bill, is there any scenario in which investors eventually do decide that they don't actually want any more of them?
IAN MCAVITY: That's probably the biggest single question mark that overhangs. Americans are delighted to talk about the probable demise of the euro without really thinking through the chaos that the actual demise of the euro might create. I think that the euro might survive - it's going through its first really major test at this point but the larger issue is the question of the credibility of the US Dollar when you've got just such massive debt burdens lying ahead of them and proposals for deficits that rise as far as the eye can see into the future. And it's the old line of 'follow the money' - basically it's Brazil, India, Russia and China that are the largest external holders of dollars, and for how long are they going to tolerate these American policies. It was comparable action by the French and the Swiss in 1971 that basically forced the US off of the gold standards and you have to wonder at what point the Chinese particularly, are going to say 'enough is enough'.
GEOFF CANDY: Two of those countries that you mentioned now, India and China - both have very strong relationships to gold.
IAN MCAVITY: Well they've got very long cultural relationships to it in the context to gold and in its most historic sense gold is running - basically it's the only historic asset that has no counter party liability and there is ongoing accumulation of gold, particularly by Russia which methodically they're adding to their gold reserves. The Indians rather famously bought that 200-ton chunk from the IMF and the Chinese recently bad-mouthing gold, which tells me that they're probably in the market as buyers below the market.
GEOFF CANDY: Is it a case at one level of 'be careful what you wish for' with a lot of pundits talking about $5,000 gold, or the gold price going up to significantly higher levels than this - would that indicate a significant change or decline in circumstances with regard to currencies like the dollar and the euro?
IAN MCAVITY: Absolutely - I speak to an awful lot of Americans and North Americans and also some European - what I call retail gold investor audiences - and I regularly say be very careful what you wish for because if gold does go to $2,500 or $3,000 or higher, you are not going to like the circumstances that create it. And I'm really quite fearful that everything I see being done to try and arrest the systemic threats to the financial system inevitably leads to the ultimate degradation of the paper currencies. So philosophically I'm a gold bug but it's a little bit like buying life insurance to make a short-term capital gain - it's the transaction costs you want to think about.
GEOFF CANDY: In terms of the euro itself, and we've been seeing a lot of small denominations of physical gold - gold bars, gold coins being bought in Europe, predominantly I would assume by retail investors concerned about the state of the euro - what is your take on that market? You said earlier that you do think the euro will survive - in what form though...
IAN MCAVITY: Eventually in what form is going to be the question because to me, the Eurocrats in Brussels made a huge mistake several years ago - by basically trying to expand too broadly and too rapidly. I gave a speech in Dublin in 1992 when they first announced the contest to name the new currency, and at that time my suggestion was that there was only one name that really applies. It should be called the Frankenstein, because it was going to be run by the French and the Germans no matter who has the ECB. And the problem they've got now is the Mediterranean countries can never compete with the French, the Germans, the Dutch and many of the other northern European economies and yet they've got themselves into a box where there's no mechanism to essentially inflate their own way out of their own debt problems. There is going to have to be some sort of debt restructuring for the Mediterranean debt levels. And I would add Italy to that equation - people don't focus on Italy all that much - the Italian bookkeeping miracles that were performed to include them in the euro always, I thought, were of Enron standards. There's going to have to be a restructuring of all of the debt - not just of the Mediterranean countries but also in a sense all the G-7 countries are essentially bankrupt. We've bankrupted the next generation.
GEOFF CANDY: You paint a relatively gloomy picture and an understandably gloomy picture. What would you say would be the best-case scenario here on in, both for the gold price and for world markets?
IAN MCAVITY: Unfortunately the best thing for the gold price would be for it not to go higher and unfortunately I think we're basically bent on a path that is almost an irrevocable path at this point because we're living beyond our means in the so-called G-7 countries and there's going to have to be a substantial reduction in the standard of living. You cannot live beyond your means to the extent that we have been in the US, the UK, all of Europe and Japan - and the ballgame is ultimately going to be determined by those that hold the external portions of those debts and that comes back to the Chinese, the Indians, the Russians and the Brazilians.
GEOFF CANDY: And how do you see those economies placed, because there's been a lot of talk about slowing growth in China for example be it that it's slowing to 8% or 9% still...
IAN MCAVITY: Exactly - the Chinese are going to have some very turbulent times because if you take the American consumer off the global stage, then all of the so-called BRIC countries are going to see severe slowdowns. The difference is to think of it in the context of a cycle within a secular trend. The Chinese are basically going through an industrial revolution in a generation and over the course of a secular trend you're going to have several vicious cycles in both directions and the Chinese I would say quite laudably at the moment are trying to slow things down because they've got some bubbles in real estate and a few other areas and they're trying to cool things off and basically if the American consumer retrenches later this year when the housing foreclosures pick up, I think that the Chinese economy is going to slow down probably more than they want. But on the other side of the valley that we're headed into, they're going to resume growth. They're going to resume growth to new highs while in North America and in Europe we're going to be resuming growth to lower highs as we methodically lower our standards of living over a period of time.
GEOFF CANDY: Just to close off with then, if you look over the next 18 to 24 months, where do you see the gold price going, in all of this context?
IAN MCAVITY: I'm afraid we're going to be north of the $2,500 to $3,000 level. The magnitude of the crisis that takes it higher, I just can't quantify because I have very little confidence of what I would call the outcome of quantitative easing as is being pursued by both the US and Europe. So we've got in a sense, the second half of the bear market that started three years ago - we're only just starting the second half of that now and you might say that the first half of it was arrested by the central bankers bailing things out. The problem that we've got now is the central bankers are wielding a bailing can that has no holes in it. It's the bailers that have now run out of credibility so I'm very skeptical on the outlook for virtually all of the financial markets for the next two of three years.
Gold likely to head toward $3,000 an ounce over the next two years but, be careful what you wish for
Interviewer: Geoff Candy
Wednesday, June 16, 2010
www.mineweb.com
GEOFF CANDY: Welcome to this weeks edition of Mineweb.com's Gold Weekly podcast and joining me on the line this week to help us navigate through what's been a very interesting time for gold. With me is Ian McAvity, one of the founders of Central Fund of Canada and the author of the acclaimed newsletter Deliberations on World Markets. Ian there's been a great deal of noise in the gold market at the moment. There's a lot of talk about inflation, of bubbles, there are concerns about currencies, and in particular the euro. What are the drivers that you look at in relation to the gold price?
IAN MCAVITY: Currency turbulence and currency credibility and the monetary aspects of gold are primary drivers. I look at the current period as being very comparable to a couple of periods in the past. I would say notably 1971 when the Americans closed the gold window and took America and basically destroyed the Bretton Woods agreement and also very much inclined to look back to 1978 when there was concerted action by the European Central Banks along with the US to arrest a decline in the US Dollar.
GEOFF CANDY: If we look at those examples from history, where does that place us now because there has been talk about the fact that this gold price is now heading toward bubble territory.
IAN MCAVITY: I love it when people talk about a bubble in current climate. To me this trend of the past decade really dates from the brown bottom of 2000 and in essence it's been a remarkably orderly uptrend with prolonged corrections and strong advances that is markedly different from the huge bubble run that we had in the 1970s. If you were to replicate the run of the 1970s in the current environment you'd be talking of something in excess of $5,000 on the gold price and I'm not prepared to go quite that far at this stage. But when I hear talk of a bubble, I look at the gold price today being about 50% above the peak that it made in 1980 while the Standard & Poor's is trading at 10 times its 1980 level and US credit market debt is 12 times the level of 1980.
GEOFF CANDY: So then where would you say we are in this uptrend.
IAN MCAVITY: If we were looking at a rerun of the 1970s and 1980s I would say we're somewhere around 1978 when gold was just breaking through the $300, $350, $400 area on its way to what became the blow off top. It's possible that that lies ahead of us in the next two or three years that knowing that the central bankers are out there - battling yesterday's headlines everyday. I couldn't put any timing on it.
GEOFF CANDY: What in terms of that and in terms of the central banks and the battling of the headlines, so to speak - what are you looking at now as possible hiccups or possible actions that could inhibit this rise in the gold price?
IAN MCAVITY: The most critical factor for the gold price is that for as long as so-called risk free capital has a negative real return, i.e. the yield on treasury bills - everyone's favourite choice for so-called risk free capital - as long as the yield on treasury bills is 40 to 50 basis points, then the perceived inflation rate is 200 to 300 basis points - basically holding paper is negative. And that is one of the strongest underlying features of the gold market and we basically have the central bankers and their quantitative easing load saying that they're going to try and keep interest rates as close to zero as possible, until they successfully borrow their way out of debt. The concept of borrowing your way out of debt is I guess, the new math that I haven't quite grasped yet.
GEOFF CANDY: In terms of the treasury bill, is there any scenario in which investors eventually do decide that they don't actually want any more of them?
IAN MCAVITY: That's probably the biggest single question mark that overhangs. Americans are delighted to talk about the probable demise of the euro without really thinking through the chaos that the actual demise of the euro might create. I think that the euro might survive - it's going through its first really major test at this point but the larger issue is the question of the credibility of the US Dollar when you've got just such massive debt burdens lying ahead of them and proposals for deficits that rise as far as the eye can see into the future. And it's the old line of 'follow the money' - basically it's Brazil, India, Russia and China that are the largest external holders of dollars, and for how long are they going to tolerate these American policies. It was comparable action by the French and the Swiss in 1971 that basically forced the US off of the gold standards and you have to wonder at what point the Chinese particularly, are going to say 'enough is enough'.
GEOFF CANDY: Two of those countries that you mentioned now, India and China - both have very strong relationships to gold.
IAN MCAVITY: Well they've got very long cultural relationships to it in the context to gold and in its most historic sense gold is running - basically it's the only historic asset that has no counter party liability and there is ongoing accumulation of gold, particularly by Russia which methodically they're adding to their gold reserves. The Indians rather famously bought that 200-ton chunk from the IMF and the Chinese recently bad-mouthing gold, which tells me that they're probably in the market as buyers below the market.
GEOFF CANDY: Is it a case at one level of 'be careful what you wish for' with a lot of pundits talking about $5,000 gold, or the gold price going up to significantly higher levels than this - would that indicate a significant change or decline in circumstances with regard to currencies like the dollar and the euro?
IAN MCAVITY: Absolutely - I speak to an awful lot of Americans and North Americans and also some European - what I call retail gold investor audiences - and I regularly say be very careful what you wish for because if gold does go to $2,500 or $3,000 or higher, you are not going to like the circumstances that create it. And I'm really quite fearful that everything I see being done to try and arrest the systemic threats to the financial system inevitably leads to the ultimate degradation of the paper currencies. So philosophically I'm a gold bug but it's a little bit like buying life insurance to make a short-term capital gain - it's the transaction costs you want to think about.
GEOFF CANDY: In terms of the euro itself, and we've been seeing a lot of small denominations of physical gold - gold bars, gold coins being bought in Europe, predominantly I would assume by retail investors concerned about the state of the euro - what is your take on that market? You said earlier that you do think the euro will survive - in what form though...
IAN MCAVITY: Eventually in what form is going to be the question because to me, the Eurocrats in Brussels made a huge mistake several years ago - by basically trying to expand too broadly and too rapidly. I gave a speech in Dublin in 1992 when they first announced the contest to name the new currency, and at that time my suggestion was that there was only one name that really applies. It should be called the Frankenstein, because it was going to be run by the French and the Germans no matter who has the ECB. And the problem they've got now is the Mediterranean countries can never compete with the French, the Germans, the Dutch and many of the other northern European economies and yet they've got themselves into a box where there's no mechanism to essentially inflate their own way out of their own debt problems. There is going to have to be some sort of debt restructuring for the Mediterranean debt levels. And I would add Italy to that equation - people don't focus on Italy all that much - the Italian bookkeeping miracles that were performed to include them in the euro always, I thought, were of Enron standards. There's going to have to be a restructuring of all of the debt - not just of the Mediterranean countries but also in a sense all the G-7 countries are essentially bankrupt. We've bankrupted the next generation.
GEOFF CANDY: You paint a relatively gloomy picture and an understandably gloomy picture. What would you say would be the best-case scenario here on in, both for the gold price and for world markets?
IAN MCAVITY: Unfortunately the best thing for the gold price would be for it not to go higher and unfortunately I think we're basically bent on a path that is almost an irrevocable path at this point because we're living beyond our means in the so-called G-7 countries and there's going to have to be a substantial reduction in the standard of living. You cannot live beyond your means to the extent that we have been in the US, the UK, all of Europe and Japan - and the ballgame is ultimately going to be determined by those that hold the external portions of those debts and that comes back to the Chinese, the Indians, the Russians and the Brazilians.
GEOFF CANDY: And how do you see those economies placed, because there's been a lot of talk about slowing growth in China for example be it that it's slowing to 8% or 9% still...
IAN MCAVITY: Exactly - the Chinese are going to have some very turbulent times because if you take the American consumer off the global stage, then all of the so-called BRIC countries are going to see severe slowdowns. The difference is to think of it in the context of a cycle within a secular trend. The Chinese are basically going through an industrial revolution in a generation and over the course of a secular trend you're going to have several vicious cycles in both directions and the Chinese I would say quite laudably at the moment are trying to slow things down because they've got some bubbles in real estate and a few other areas and they're trying to cool things off and basically if the American consumer retrenches later this year when the housing foreclosures pick up, I think that the Chinese economy is going to slow down probably more than they want. But on the other side of the valley that we're headed into, they're going to resume growth. They're going to resume growth to new highs while in North America and in Europe we're going to be resuming growth to lower highs as we methodically lower our standards of living over a period of time.
GEOFF CANDY: Just to close off with then, if you look over the next 18 to 24 months, where do you see the gold price going, in all of this context?
IAN MCAVITY: I'm afraid we're going to be north of the $2,500 to $3,000 level. The magnitude of the crisis that takes it higher, I just can't quantify because I have very little confidence of what I would call the outcome of quantitative easing as is being pursued by both the US and Europe. So we've got in a sense, the second half of the bear market that started three years ago - we're only just starting the second half of that now and you might say that the first half of it was arrested by the central bankers bailing things out. The problem that we've got now is the central bankers are wielding a bailing can that has no holes in it. It's the bailers that have now run out of credibility so I'm very skeptical on the outlook for virtually all of the financial markets for the next two of three years.