Brien Lundin is the President and CEO of the New Orleans Investment Conference and publisher of Gold Newsletter. I recently spoke with him about gold’s future after a two-year price fall and a summer with glimmers of hope.
“With prices rising since the end of June, I’m hearing the argument that rising interest rates could be good for gold,” says Lundin. “The exact same argument was being touted as a reason to sell the yellow metal a few months earlier, with gold on the decline.”
So what’s really happening with gold?
“After two years of a declining market, I believe we’ve reached a turning point in the gold market, brought on by the ‘flash crash’ we saw earlier this year, where the yellow metal dropped from around $1,600 at the start of April, to nearly $1,200 by July.”
“We talk about this war of the West versus the East, and ‘paper’ versus ‘real,’ physical gold — we said that there was a huge discrepancy between these two markets. Traders retorted that it didn’t really matter who was buying the yellow metal or who was selling. When gold was falling, it didn’t matter why. The only thing that mattered was the price.”
“But now, I believe equilibrium must be reached between the two markets – and I believe this should drive the price of gold higher than where it is today,” Lundin explains.
“Half of the world has been driving the yellow metal down, selling it hand over fist,” says Lundin. “The other side, in India and Asia, is buying just as vigorously and is also willing to buy at much higher prices. Since the June 27 low, the price of gold has moved upwards towards equilibrium between these two forces.”
Will the physical buyers prevail and raise the price of gold?
“Western speculators and bullion banks that have been leasing gold have created a gold price that seems inconsistent, to me, with the level of demand in the world. So I think that the yellow metal will reach a higher price level than today. “
“Germany recently announced that it was going to repatriate its gold from overseas. The Federal Reserve has stated that it will take seven years to complete this transaction — a first indication that there is a lack of physical gold available.”
“Another blow to gold came from the news that Quantitative Easing might end. But the result of this was that global demand for gold increased significantly. The outflows in ETFs were more than absorbed by Eastern gold buyers.”
“As David Franklin reported in Sprott’s Thoughts, the amount of gold put up on the Shanghai gold exchange for delivery was almost 1,100 tons in the first half of 2013, which nearly matched all the gold delivered for the whole of 2012 – which was itself a record year. Asian markets were soaking up more than all the yellow metal flowing away from the West.”
Would the appetite for physical gold continue if the price were to continue to rise?
“Buyers in Asia were certainly motivated by the low gold price. In Eastern countries, the appetite for gold is a cultural norm. Their citizens are under monetary stress and are observing real price inflation that is above official government statistics. I think that the exceptional level of demand we had over the past few months will eventually taper off somewhat, but citizens in the East will remain a steady consumer of gold. Even at a higher price, the yellow metal will continue to flow from West to East.”
“I always recommend you have your core holdings in physical gold or certificated bullion. This summer, the low gold price has also created exceptional opportunities across the board in gold stocks, from junior exploration companies to major miners.”
What will happen to those Western speculators? Will they reverse their positions?
“I think we’ll see increased buying in the futures markets in the U.S., and speculators will change their short positions to long positions over time. The exciting possibility is that a short-covering rally could drive the yellow metal up. Another faint chance for an explosive move upwards is of a delivery default on the COMEX. That’s a long shot, but it would certainly cause a much higher gold price to emerge.”
Courtesy: Sprott Group
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