Gold Investing News interviewed Scott Carter, CEO of Lear Capital, to get a reading on where gold is at right now. In the interview below, Carter weighs in on a number of world events impacting the price of gold, including: a potential military strike on Syria, a tapering of quantitative easing, the currency crisis in India, and the strength in physical demand for gold, including the purchase of gold and silver coins.
Gold Investing News: Scott, the biggest question right now on gold traders’ minds has to be what’s going to happen with Syria. Last week gold was up to a three-month high, on speculation the US might do some kind of military intervention in Syria. So, if Congress does vote yes in favor of some kind of intervention, how high could gold go? (Ed. note: This interview was conducted a few hours prior to the announcement that Syria has accepted a Russian plan to surrender control of its chemical weapons stockpile – which could allow the US to swerve a military strike).
Scott Carter: Well, I think that you’ve seen historically that when there’s military conflict, especially in the Middle East, there are two impacts that are economically related. One is the oil price spikes which hurts our economy. And the second is that there’s a move to safe haven assets, and gold has been the beneficiary of that. So if we we are to take action, one, there’s never been much of a clean action, meaning once we’re in there, it tends to drag on for an extended period of time. I think you’ll see the price of gold go up. I don’t know that that would be the only reason why gold is going up right now, but it would probably accelerate the pace in which it appreciates.
GIN: Right, I saw an article last week where analysts were divided on what the impact could be.
SC: I tend to agree with that. I don’t believe it is that clear-cut, because I don’t think it’s going to be major all-out war. There seems to be not much appetite for it, period. So it may not even happen. And I don’t believe there’s much of a premium being priced into gold right now on the prospect that it’s happening. I think the bigger issues that are driving gold have to do with, probably the upcoming debt ceiling in our own economy and what’s going to happen in that regard, than it is for Syria. One interesting final point I’ll make on that topic, Andrew, though, is that we find ourselves at odds with China and Russia again. And we tend to look at China as the main buyer of US debt. Now the relationship is symbiotic in a way. They need our economy. We need their purchasing power to buy our debt. But to the extent that we get at odds with China and Russia on Syria, and it becomes a major issue between nations, then we will be economically impacted.
GIN: The question of US debt brings up another important issue re the gold market: quantitative easing. Syria seems to have pushed the future of QE off the top of the agenda for gold right now. But as you know, a decision whether to extend the stimulus program is expected this month. What do you think is going to happen with QE? Do you think there will be a taper?
SC: I do think that there will be a taper. I think the central bank has sent the signals very strongly that now is the time to taper, and that the economy has improved. And for them to back away from it, I think would be somewhat embarrassing for them. So I think what we’re going to get is the headline that says we’ve begun to taper, but the amount of taper per month could be in the range of $10 billion. Out of $85 billion, it will be so small it will be almost negligible. But they’ll be able to trumpet the fact that they started tapering.
GIN: Okay. And what’s that going to do to gold, do you think?
SC: I think that you will see an initial drop, frankly, if they do begin the taper. But the number will be so small, and the impact will be so negligible that I don’t believe it will, long-term, impact the trend line of gold. And the bottom line is that the economy is not doing well. The bond yields are going up and it’s negatively impacting the homeowner market. It’s impacting our GDP growth rate and it won’t be long before there will be some additional program, whether it’s from the Federal Reserve or from the US government, to try to stimulate the economy. And that long-term will be bullish for gold. So frankly, I think that gold is sitting in a good position right now, having clawed back some of its losses over the last year and a half, but still with a significant uptrend potential due to the debt, due to a modest QE tapering, and due to an economy that’s frankly, still struggling.
GIN: The gold miners’ strike in South Africa was short-lived. Most of the affected gold miners have settled. Do you think stability in South Africa in the gold mining sector will have a positive effect on the price?
SC: I don’t believe that this is going to have a huge effect the price of gold on the spot market. I think that there’s traditional supply and demand issues that affect gold. But I think it’s less about mining that’s driving the supply and demand, and more about the difference between the paper gold market and the physical market.
And the price of gold, in my view, will be impacted more by the unwind, if you will, of paper contracts when the physical gold doesn’t exist, than it will be whether we’re going to get mining shutdowns or a slowdown in mining production in a particular year. So I think the fact is it does not have much of an impact on the price, although it does get the headline that reinforces the idea that this is a supply and demand asset.
GIN: Right, just sticking with one more macro issue, India. As you know, India is the largest gold consumer. And I’ve been reading that the Indian government’s attempt to stifle gold imports hasn’t really worked. The Indian rupee is tanking, but the gold price in Indian rupees is skyrocketing. So can you explain what’s going on with India and why should gold investors care about it?
SC: Absolutely, it’s a very interesting dynamic. One, the Indian culture and citizens hold gold in high esteem as an asset class. So I think that that’s the first sort of backdrop point that assets held in gold are above 10 percent in India. So it’s a very important asset component.
The premise behind the Indian Central Bank when they began last January to set increased tariffs, or premiums on gold, had the opposite effect of what they wanted to occur. Basically, what it did was shine a light on the fact that the Indian rupee had been overprinted and it had less value. So they tried to drive their citizens away from gold, and I think there were 10 different events from January up till now, to try to limit gold. The last one being, outright, you can’t import it. You can’t own it. And what that did was to say to Indians, the rupee isn’t of much value. It said that gold is the chief asset class here and we need to own more of it.
So it’s a significant case study, Andrew, that we have to look out for our own debt. The more that we try to limit the holding of hard assets like gold or silver, the more it’s going to shine a light on the predominance of the dollars being printed, and not really related, to the amount of gold that the US government owns. So India, although it’s smaller, is a microcosm of what happens to a country when their debt gets way out of proportion to, and their rupee printing gets way out of proportion to, what their economy can sustain.
GIN: We’ve seen a lot of physical buying in Asia because of the lower gold price, but Standard Bank said last week that it thinks there will be a lot of resistance at $1,400 per ounce because physical demand in Asia will dry up above this price. Do you agree with that?
SC: No I don’t. I think we’re still seeing significant demand. I think that gold is still in, what they call, backwardation, which means that there’s a tight supply of physical gold to meet futures contracts out there. So we’re not seeing that at all. In fact, you see that the US Mint just reported that they have sold a record number of silver coins compared to last year, and we’re only into September of this year. So they’ve already oversold what was sold last year to individual investors looking to buy physical gold and silver. And I think that that will continue. So Asia is an important component of demand in the world with regard to gold and silver, but that demand doesn’t seem to be subsiding. And the fact that Central Banks are buying it is another strong indication that gold is an asset class to own when you want to diversify away from fiat currencies like the dollar.
GIN: That’s interesting. You mentioned the uptick in coin demand, but yet there’s this tremendous outflow that’s occurred in ETFs. So I suppose that really gold needs another resurgence in investment demand. But ETFs are down 26 percent. They’ve lost billions in value this year. What will it take for investors to start buying ETFs again?
SC: I think what you would see is the economic issues facing the country becoming headlines. That the economy is not performing as well as it should, and that the Fed will have to continue to be the backstop, if you will, for quantitative easing, more significantly than what they’ve done, or continuing on longer than they’ve done. I think that you would see then, GLD (NYSEARCA:GLD) and SLV (NYSEARCA:SLV) pick up the pace again. What’s interesting of note is that even though the ETFs have lost value, the physical demand, meaning that year over year, actually taking possession of physical gold, is up almost 30 percent. There are 42 contracts out there for every one ounce of gold, so if the paper market moves one way or the other, that’s going to drive the price much more so than the physical component.
GIN: There’s a lot of potential gold investors sitting on the sidelines right now waiting to see what happens with world events. We mentioned Syria. We mentioned QE. We mentioned India. So keeping in mind there’s a looming threat of a drop in the price with a potential taper, would you advise investors to wait it out, or to get in?
SC: Well, prices are up 20 percent over the last two months. So an investor who buys now didn’t pick the bottom. But right now still is a very good time to get in. If you try to pick the bottom, and think that with a QE taper the price is going to drop a little bit, maybe you can get a more attractive price in a month or two. But the real view here for investors is where is the price of gold going to be five years now, or 10 years or now.
Are things going to change that would cause you not to want to own this asset class? I would contend that they aren’t. In fact, I would contend that the issues facing the investor with regard to increased debt, with regard to inflation, with regard to a slow economy, are all strong indicators that gold and silver should be a component of your portfolio for the future.
GIN: Right. I was wondering about your views on gold stocks. If an investor was to leap into gold right now, what do you think about gold equities?
SC: If your buying motivation is to own an asset and not have a counterparty risk, then you need to buy physical gold. When you’re buying a gold stock company, you’re buying the management and you’re buying the long-term view of gold. But you’re not necessarily just buying on whether you think the price of gold will appreciate or not. That’s why gold mining stocks are down. You have the gold price below, or close to, the mining costs, and these companies have expenses to deal with. So it’s not necessarily a great return at the moment, and won’t be until the price of gold gets to a higher level. So it’s not a negative against investing in gold mining stocks, but if your motivation is to own gold, then own gold. Don’t own a stock. Own the physical gold.
GIN: I was noticing that the Gold Bugs index (INDEXNYSEGIS:HUI) and the Gold Miners (INDEXNYSEGIS:GMI index are both up over the last month, about 7.5%. Do you think we might be seeing a beginning of an upturn in gold mining stocks?
SC: Yes. And they were hard hit. So they’re coming off of a pretty low bottom. I find it interesting that two months ago, I’ve never heard the noise so bearish on gold. You had JPMorgan (NYSE:JPM) and Goldman Sachs (NYSE:GS) advising clients to get out. And now JPMorgan, this past Friday, quietly announced that they have positioned to go long commodities. So 60 days ago, everybody was shorting gold, and now there’s a consensus view that we should be long commodities. And so, like gold mining stocks on a bottom, like gold that hit a bottom at around $1,280, I think you’re starting to see the momentum to be bullish for precious metals.
GIN: What do you think changed their minds? Has there been a change in the market that you would point to?
SC: I think that under the headline covers, I think the change in the market is that the economy’s not strong. I think the unemployment numbers are scary. I think that the GDP growth was revised downward. I think last quarter, or the last two months, unemployment was revised downward. And I think that the Fed is in a position where they’re going to have a tough time unwinding the quantitative easing.
I think they will have a difficult time pulling away the punch bowl from Wall Street without it being a negative effect. So as a result of that, they won’t do it. Meaning they’ll continue with the easy money policy and that will be very bullish for hard assets, gold and silver. And the smartest people in the room out in Wall Street recognize that, and that’s changed their view on precious metals to be negative or bearish to bullish.
GIN: Well, that’s a good thing. Scott, thanks for speaking with me and getting your insights on the current gold market.
SC: You’re welcome, Andrew.
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