Interview courtesy: Sprott Global Resource Investments.
If there was a recession in China, would people still buy gold?
I think, if the Chinese economy imploded, it is likely that the currency would begin the weaken (the Yuan). Or that the government would implement a devaluation of the Yuan. If that were the case, I think that Chinese individual investors would rather shift of their money in gold (which they can buy in China nowadays) then keep the funds in the local currency. I think that trouble in Asia and geopolitical unrest in Asia, along with [economic] problems in the rest of the world, may actually lead to higher gold demand rather than lower gold demand.
On the ongoing Asian conflicts and the impact on natural resources:
My view is this. We wouldn’t have a conflict in Asia if there was no intervention by the US. The US has the security pact with Japan and military and naval bases all over Asia. The Chinese economy is highly vulnerable in the interruptions in the supply of metals and oil, because 47% of global metals consumption is nowadays coming from China (up from 4% in 1990 and 10% in the year 2000). It has become a huge factor; for their industry, they need iron ore from Australia, copper from Australia, oil from the Middle East, etc. The Chinese are very concerned about interruptions of supplies. Over time, the Chinese would want to control the East and South China Sea. I do not think that they have any aggression plans. The US would not be particularly happy if the Chinese or the Russians would have military bases in the Carribean, Mexico, Canada, … The Chinese cannot accept to be encircled by military bases by the US in Central Asia, in North East Asia and in South Asia. So I believe the tensions will increase over time.
On the fundamentals of gold in the light of the 2 year downtrend:
Basically we had a huge run up in prices between 1999 (255 USD) to early September 2011 (1920 USD). We have been in a correction period. Now I think the correction period was partly justified because there was too much enthusiasm and speculation, leading to the peak of 2011. But I think that there have been some market manipulation, it could be. My sense is that the correction has probably come to an end, because if anything the fundamentals are much better today than they were at that time. But the price is down.
Every investor understand the principle buy low and sell high. When prices are low, nobody wants to buy. We also had very negative sentiment recently. I am not so sure about asset markets as we could one day after this colossal asset inflation of the last 20 to 30 years, also have asset deflation. But when I compare gold shares and the price of gold to the S&P 500, the S&P is up substantially since 2011 and gold is down. So if you compare the performance of gold shares to the S&P, I think it’s been a disaster for gold shares. When I look around (asset prices, real estate, bonds, equities, collectibles, etc) I think the price of gold is one of the few assets that are relatively inexpensive.
On current bull and bear markets:
In a free market economy, you will always have price fluctuation. The Federal Reserve today, artificially manipulates asset prices up. It’s a huge mistake, but that is what they do. To answer your question specifically, we had a bear market that ended March 6th, 2009 (S&P at 666). We are at 1800 now, almost three times higher. Over the last 2 years, most equity markets around the world, most markets have been down (they are not following to the upside), but in the US an increasing number of shares are breaking down, we have had very heavy insider selling recently, high valuations and extremely high corporate profits from historical standards. My view is that in a month time, the bull market will be 5 years old. That’s the second longest bull market in the last 100 years. I would not buy shares. Can the market go up another 20%? It’s like the Nasdaq in late 1999, where the Nasdaq went up another 30% between January and March. People were crying afterwards with their losses.
So markets go up and down. I think that the upside potential now is very limited and there is considerable downside risk, probably much more downside risk than most investors consider.
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