Dynamic Funds Portfolio Manager Robert Cohen believes there are five factors that will be positive for the gold price in 2014. He discusses the significant role played by the ETFs and describes what happened in the late 1990s that triggered a bit of a collective “heart attack” throughout the world in regards to this precious metal.
Interview Transcript:
Interviewer: Which catalysts do you think will drive the gold price for the remainder of 2014?
Robert Cohen: Well 2014, I suspect won’t be a huge catalyst year but we have about four or five factors that are working in favor of gold. One is the expansion of global equity. A lot of that is coming from invalid global trade. So basically countries like China on the back of being a huge export nation are building up massive amounts of foreign exchange reserves particularly in light of the fact they’re not letting the Renminbi rise aggressively.
Factor number Two, which is the second most important factor for gold, is real interest rates. When real interest rates are negative or even mildly positive, it basically tells you at the end of the day that inflation is either out of control or it’s mildly in control. If inflation is really not a problem at all, you will see real interest rates north of 2%. In that scenario, gold doesn’t do well, but where we are just in a mildly negative real interest rate territory right now, that is another positive factor for gold.
In recent weeks, we’ve seen geopolitical events also be factor for gold that has kind of come in and come back out of the gold price. I hate to counsel people to buy gold when, for example, the Russians are first going into Crimea and people are trying to understand what this all means. That really puts about a hundred dollars on the gold price. Now that it’s been a few weeks since that has occurred and the world is kind of getting a bit more back in neutral territory with respect to its views on that and it’s not spilling into World War III or something ridiculous, the gold price has normalized back to $1285 an ounce as we speak.
The other significant factor that hurt the gold price last year but it’s not really at play this year is the ETFs. The global gold ETFs were created around 2004 and between 2004 and 2012, they built up about 2600 tons of gold globally. 2600 tons rivals most central banks in the world, in fact that would be two and a half times as much as the Russians hold, or a quarter of the gold that’s held in Fort Knox in the U.S., so if the ETFs were say a country it would have been one of the most economic large super powers in terms of gold holdings, just behind Germany.
Last year on the back of a strong U.S. dollar, the herd mentality that gold is not needed pervaded into the ETFs, mostly not by that large distribution of ETF holders but mostly like a concentrated group of ETF holders, which were largely hedge funds and pension funds etc. When they decided to liquidate gold, they liquidated 900 tons of gold last year. 900 tons is very significant. Just to reflect back to the late 1990’s, there was a bit of a heart attack going on in the world prior to the formation of the Euro that the European central banks were no longer to use gold as the reserved asset and all that gold was going to be for sale.
Gold price went into a downward spiral until September of 1999 when the Washington Accord was signed, Washington Accord basically outlined to the world, “No, we are not selling our gold, we are trimming some gold and we are only going to do it at a maximum pace of 400 tons per year.” That really allayed a lot of fears and then the gold price started moving back up almost immediately.
Last year, 900 tons came out in just one year. That is very significant, it brought the ETF holdings from 2600 tons down to 1700 tons. At an annual global gold market, it’s around 4000 tons a year, 2500 tons is mined, 1500 is above ground stocks moving around. So you’re looking at almost like adding about three or four months to the year in terms of global supply of gold coming out all at once. That was significant. It did clear the market, obviously it had a massive price impact of a couple of hundred dollars an ounce. 2014 has basically started out a little differently. We are back into the ETFs into a net accumulation phase. Also one other thing is the Bank of India last year to defend the Rupee, made it illegal for Indians to purchase gold or import gold. The Bank of India is now relaxing some of those measures and opening up the Indian market to the ability to purchase gold again.
So now that the ETFs holding, selling is out of the way and the Indians aren’t putting such heavy restrictions on gold movement into their country. Again, with all the factors I’ve mentioned, it’s a lay up to at least be a constructive year for gold. I don’t see it shooting up hundreds and hundreds of dollars an ounce but I see it moving up constructively, say in the order of magnitude of about a hundred dollars an ounce U.S. per annum.
Interviewer: Where do you think gold will close at the end of 2014?
Robert Cohen: Well best guess I would say is close to US$1400 an ounce would be a constructive number. We kind of saw the gold price on about a $100 an ounce per annum track. In 2008, just when the financial crisis broke out, it got down drafted and then in 2009 when the resolutions to the financial crisis came about and the ETFs also simultaneously accumulating really put gold on a probably too steep of a track in hindsight going upward. What we’ve now seen between 2009 and 2012 is a bit more noise come out and now we can see 2014 and going forward is a bit more of a normalized environment for gold.
