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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?
Greg Weldon: 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 fixed.
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 Monetary Fund.
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 away.
TGR: 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 resource stocks?
Grant Williams: 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 (B), 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.
TGR: How high could gold and silver go in 2012?
GWilliams: 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 lot higher.
TGR: Greg, what are your predictions for 2012?
GWeldon: 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.
TGR: 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?
GWilliams: 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.
TGR: 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?
GWeldon: 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.
TGR: 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?
GWeldon: 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 comfortable.
TGR: Mining equities haven't been able to keep pace with the price of
gold. Do you see that changing?
GWilliams: 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.
TGR: 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?
GWeldon: 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 downward.
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.
GWilliams: 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 despite low headline 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.
TGR: 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 (ETF) or buying equities?
GWilliams: It depends. I think protecting
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
that.
TGR: 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 and 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.
Weldon published 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 @ www.weldononline.com.
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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