Is Tapering Good For Gold?

Charles Oliver manages the Sprott Gold & Precious Minerals Fund, which invests principally in gold and silver mining and exploration companies.

The last time I spoke with Mr. Oliver, he said the fundamentals for gold still looked attractive, based on gold’s historical performance relative to the Dow Jones. I spoke with him recently in Toronto.

“Well, despite huge inflows of cash from the Fed onto banks’ balance sheets, the velocity of money, which strongly affects inflation, has not changed much. This explains why money printing has not translated into inflation.

“Governments have been lending at zero interest rates, and banks can make a small margin by lending that money back to the government. As a result, cash stays on bank balance sheets. But this could change soon.

“The Fed’s reduction of QE, which they have reduced from 85 billion to $35 billion per month would intuitively be negative for gold. But this also indicates that banks are becoming healthier, which could mean they will begin to push money out into the broad economy. The velocity of money could pick up as a result.

“The 70s were a classic example where banks – and companies – felt shaky about the economy overall, so they held onto cash at first. But when they got a whiff of inflation, they quickly looked for ways to spend that cash. Rising nominal prices made it a good idea to buy things right away – you would be paid to hold onto those things, such as real estate or oil, because their price was rising. This caused a vicious cycle with the U.S. dollar losing value.”

“I’d say $5,000 – by the end of the decade. Of course people look at you like you’re crazy when you come out with a big prediction. Really it is not that big, going off of the historic relationship between the price of gold and the level of the Dow Jones. Back in 2002, I was talking about $1,000 gold. When we hit that mark in ’05 and ’06 I began predicting that gold would rise to $2,000. Now, I’m saying gold will probably go to $5,000 in the next move up.

“Looking at the performance of gold from 1976 to 1980, the metal went up eight times. If we repeated that performance, gold would be at over $8,000 from today by the end of the decade. I don’t know if the same thing will happen this time, but it tells you that $5,000 per ounce is not unthinkable.

“The market is irrational. In 2013, the price fell by a lot, but looking at the fundamentals it’s hard to find what caused it to fall apart. Quantitative Easing was still going strong then. China was importing a lot of gold – around 40 percent of the worldwide gold production that year. And going forward, I see China continuing to be a major player, buying a lot of gold. This power shift will eventually result in the demise of the U.S. dollar too.”

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“By year-end, I’d say gold could reach $1,600 to $2,000 per ounce. But of course, I’ve been surprised by how long this market is taking to recover. I’m not sure when this market will wake up and come back to life.

“I see a brief window within the next few months where the gold price could recover, because the gold price tends to perform poorly from March through June. It tends to perform better in July and August, so I’d expect something to happen then if the gold price is going to take off this year.”

Written By: Commodity Trade Mantra