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General Market Commentary
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General Precious Metals
Where the 'Smart Money' of the gold space is going
The Gold Report: Frank, thanks for joining us today. Gold has been trading within a fairly narrow range over the last six months or so. What is your outlook for the near to mid term?
Frank Holmes: Gold has its own DNA of volatility. It's a non-event for gold to go up or down 20% in a rolling 12-month period. So, we could easily see gold run to $1,500 over the next 12 months.
There are two drivers for that: fear and love. The fear trade is what dominates most of the psyche of Europe and America. The biggest driver in the short term is the real interest rate: that is what a government is offering to pay you to buy their government bonds, deducting the consumer price index (CPI) number, which recalibrates every month.
Right now, two-year and five-year U.S. Treasury bonds are offering negative rates of return, so that's still attractive for gold. However, the 10-year bond has now gone positive because the CPI number fell, from 2.2 to 1.9. I think the CPI will probably trough here, and then we'll get negative rates again for those time periods.
Every time we've had negative interest rates for 2-year, 5-year and 10-year Treasury bonds, gold started a big rally.
TGR: That's the fear side. What's happening on the love side?
FH: The love trade is all about giving gold to those you love. You give it for weddings, anniversaries, birthdays. History also has many examples of the role of gold in tragedies that happen in countries, for instance, the Vietnamese boat people—those who got out had gold. More recently, in Syria the first people who got out were those who owned gold. They could buy their way out. So, not only can you wear gold on your wrist and your arms and your neck but, also, it can save your life if there's a turmoil in your country.
The love side had little love this time last year because India was going through turmoil, which particularly accelerated in the fall. But India is now back on the market and has been buying gold in very big buckets. The rising GDP per capita in China and India are highly correlated to gift giving for gold.
TGR: You have been in the gold investing field for many years. How has the world of gold investing changed since you started in the industry?
FH: The biggest macro factor is the tectonic shift of China going from being a price taker to price maker: the shift of big bricks of gold going from North America to Switzerland, being melted down into smaller bricks and showing up in China. China is buying gold for its central bank and China is buying with massive savings programs like the Dollar Cost Averaging program, where millions of people, with every paycheck, buy a gram of gold. That is a significant shift.
Also, the manipulation of bond prices is now more exposed. In fact, governments are doing it right now; by buying back 5-year bonds or 30-year bonds, they can manipulate the yield curve. And brokers and banks have been involved with manipulating gold and silver prices.
Gold is money, and it is the fourth most liquid asset in the world. So naturally, banks, especially central banks, are going to do anything to manage the price of gold because otherwise it exposes their runaway money printing. That's what we have to deal with, but it's a matter of time that it pops to a higher level.
TGR: How do individual investors fit into this market? How can they find the best opportunities?
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