Jeff Nichols Interview on South Africa’s MoneyWeb Radio (November 19, 2008)
Here’s the text of my November 19th interview with Geoff Candy of South Africa’s MoneyWeb Radio. For a podcast of the interview click here. The bottom line quote: “It wouldn’t surprise me if in our lifetimes we never see gold back below $700/oz.”
GEOFF CANDY: Jeff Nichols joins us now. He is the MD of he American Precious Metals Advisors. Jeff, I was reading one of your blogs, NicholsOnGold.com, about where gold might go, and whether we’re at an interesting turning point in gold.
But there was also a report out by the World Gold Council, saying that third-quarter demand for gold is the highest on record, at around $32bn, which is 45% higher than the last record in terms of quarterly demand. The price not reflecting that?
JEFF NICHOLS: Yes, I think we’ve seen a dichotomy or a divergence in the gold market between what’s going on in the physical world and what’s going on in the paper markets, and between dealers and institutional players.
On the one hand, what I call the household sector, individuals and families, are buying gold like it’s going out of style. That’s now been confirmed by the World Gold Council, but it’s something that we’ve known all along because reports on gold coin sales, for example, have been very positive. Retailers have been lacking inventory, and mints have been working flat out to deliver coins, and they are still trading at premiums. Similarly, gold-bar demand, particularly those bars that are popular in the Middle East and in India, refiners report that they are fabricating at 100% capacity, and still delivery times are stretching and premiums are rising.
And so we see individuals and households worried about the future, worried about prospective inflation, uncertain about where the world economy is going in the next few years, buying gold as a hedge and safe haven.
On the other hand, operating in the other direction have been large hedge funds that have been invested in various baskets and indexes of commodities, and those indexes have included some gold - not principally gold, not principally precious metals. But when they’ve liquidated those baskets of commodities, it’s taken gold down with it.
GEOFF CANDY: Jeff, what about the ETFs? How do those fit in? They seem to almost straddle the retail, the local investor…
JEFF NICHOLS: I think you’re right. It’s a little of both. But ETFs have grown rapidly over the last year. In the last month they’ve sort of been flat, but it’s been a positive and it has contributed, certainly to a strong physical offtake because ETFs, after all, take gold out of the market and put it in bullion vaults where it’s not traded, but sits and reduces availability of gold for other purposes and other investors.
Still, what’s overwhelmed the market has been trading by bullion dealers on the short side, and disinvestment in commodity baskets and commodity indexes by hedge funds. I would say that may be near and end, and when it does come to an end I think we are going to see gold snap back up.
GEOFF CANDY: Why is that? Where is the level where the supply-demand fundamentals or the traditional influences that affect gold come back into play?
JEFF NICHOLS: Well, I think when hedge funds have disinvested what there is to disinvest, when they have sold what there is to sell, when other large-scale holders who have been on the short side of the market have sold what they have, gold will snap back and begin to register once again its very positive fundamentals.
I think I should add one point: there has been some private net disinvestment, also by wealthy individuals, and also wealthy households, largely to cover equity-market losses. Just like some of the funds and institutions have been doing, some wealthy families have been selling as well. And I think that process is running out, in part because their holdings of gold are running out.
GEOFF CANDY: Jeff, where does that leave us in terms of the gold price over the next 12 months?
JEFF NICHOLS: I’m still very bullish about the next 12 months, and I think in that time frame we’ll see gold back over $1,000/oz.
GEOFF CANDY: And is it likely to fall much further before it starts going back up again?
JEFF NICHOLS: I don’t think so. The market is volatile and vulnerable - if only because the psychology is one of nervousness - and in that type of environment you could have a quick sell-off that would bring us back to the recent lows. But, day by day, I think that becomes less likely and, day by day, I think the base is building for a recovery. It wouldn’t surprise me if in our lifetimes we never see gold back below $700/oz.
