Charles Oliver joined Sprott Asset Management LP in
January 2008. He focuses on gold and silver investments as a portfolio manager
for the Sprott Gold & Precious Minerals Fund and the Silver Equities Class.
When I spoke to Mr. Oliver last summer, he said the
weakness in the gold price in the face of unprecedented money printing from the
Fed had taken him by surprise.
Have we passed a decisive point since then? Is gold
heading up?
“I believed throughout 2013, with the price of gold
coming down, the fundamentals were only getting better,” he answered. “During
that time, the Chinese bought like mad and the Fed printed another trillion
dollars through QE. Nonetheless, heavy selling took the gold price
down.
“Today, the difference is that the sellers are
exhausted, and physical demand is catching up. One of the numbers we are
looking at is the quantity of registered inventories on the COMEX for gold.
That’s the amount of physical gold that is available when someone asks for
physical delivery instead of a cash settlement.”
In the following chart from Bloomberg,
we can see inventories of physical gold on the COMEX (in ounces) have declined
dramatically, falling by around 30% in the past year:
Please note these are total eligible reserves,
which can become registered by the banks in order to settle futures contracts
for physical delivery.
Mr. Oliver continues: “One day, we might see
someone try to break the market on the physical side, by demanding delivery of
more tons than can be supplied – hence driving the price up.
“Because of this threat, I would tell investors in
the metals to stick to ‘fully-allocated’ products, where you have a claim to a
specific amount of metal that is physically held in a vault, not lent out or
hypothecated.”
So have we reached a point where physical demand
will drive the price of gold up?
“The demand coming from China boggles the mind. Imports of gold through Beijing
were somewhere on the order of 100 tons a month last fall.1 Assuming
this trend continues, China might import 1,200 tons or more this year. That is
nearly half of the world’s annual mine production of around 2,600, whereas 5
years ago, they hardly imported any. I believe a good portion of the 800 tons2 that
were sold from ETF holdings subsequently were shipped to Asia.”
Gold and associated stocks have attracted
value-oriented investors to the space, he adds.
“I’ve noted interest from the ‘big money’ in the
U.S., partly because gold stock valuations are the cheapest they have been in
25 years. Last fall, big mining companies were paying dividends as high as 5%
according to my numbers, whereas they usually paid under 1% — if anything — a
decade ago. Price appreciation and companies cutting their dividends have
brought them back to lower levels generally since then.
“Asian entities have been eyeing gold companies for
the last decade. Last year we saw the Chinese make a few acquisitions in the
Australian market, and they continue to show interest in gold companies in many
different jurisdictions. And of course, Sprott itself recently launched two
important partnerships with
major sovereign and semi-sovereign funds in South Korea and China.”
Could gold head lower in the near-term?
“As far as the price going down again, we already
saw gold bounce off from $1,180 in December, which represented a 39 % retracement
from the peak – a significant number from a technical perspective. Certainly
another powerful support level would be around $1,000. There were several times
before 2008 when gold hit that level and came back. I believe that would be a
very firm support level for gold if it dropped again.”
Where is gold headed a few years out?
“In 1980, when the gold price peaked at $800, it
took 1 ounce of gold to buy the Dow Jones Index. After 1980, financial assets
took the lead over hard assets. In 1999, it took 44 ounces of gold to buy the
Dow Jones, at a gold price of $250. If gold were to regain the position it held
in 1980, we could easily see a 3:1 ratio – gold at $5,000 given the current
level of the Dow Jones, or even $15,000 if gold returns to the 1:1 level.
“Ultimately, I believe that the gold price could
reach $5,000 within a few years, and perhaps go well beyond. Deficits and
rising debts, exacerbated by demographic issues, are here to stay. And money
printing and higher gold demand along with them.”
P.S.: Want to discuss investing with someone from
the Sprott team? For U.S., and all non-Canadian investors, contact us at contact@sprottglobal.com, or call
1.800.477.7853. Canadian residents may contact Michael Kosowan at MKosowan@sprottwealth.com.
Charles Oliver joined
Sprott Asset Management LP in 2008. He is Lead Portfolio Manager of the Sprott
Gold & Precious Mineral Fund and co-manager of Sprott Silver Equities
Class. Charles combines a big picture approach with a bottom-up process, and
focuses on strong management teams with sound strategy.
1 http://www.bloomberg.com/news/2014-01-27/china-s-gold-imports-from-hong-kong-climb-to-record.html
2 http://www.mineweb.com/mineweb/content/en/mineweb-gold-analysis?oid=221870&sn=Detail
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