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Double shot interview: Amanda Morrall talks to Pathfinder's John Berry about the unrelenting rush for gold and what investors should be watching for

Double shot interview: Amanda Morrall talks to Pathfinder's John Berry about the unrelenting rush for gold and what investors should be watching for

By Amanda Morrall

Amid global economic uncertainty, and unrelenting market volatility gold would appear to have found a safe and shiny place in the investor's portfolio.

Throw in the wedding season in India, which has driven gold prices there to an all time high, and it's an asset class whose glow rivals that of the proverbial blushing bride.

Investors just can't get enough.

According to the World Gold Council's (WGC) Gold Demand Trends report released Thursday, gold demand for the third quarter of 2011, hit 1,053.9 tonnes, up 6% compared to the same time last year. In dollar terms that translates to US$57.7 billion.

The WGC, in its report, says investment demand is the big driver. It's up 33% year-on-year. Overall, 39% of current demand is investor generated. That compares to 10%, 10 years ago.

John Berry, executive director of Auckland-based Pathfinder Asset Management said gold is desirable for a number of reasons, the least of which are its currency-like characteristics.

"It's regarded as a store of value;  a medium of exchange; and if you accept that then you can value gold differently than any other commodity.''

In the last decade, the rise in gold prices have been meteoric. They've risen from US$300 an ounce to US$1,700-US$1,800. Some gold bugs predict it could hit US$5,000 at the height of the present bull period. (See Unstable times see gold in vogue)

Current conditions bode well for that projection. Gold's shiniest moments historically have tended to be a low points for stock markets and sluggish economic growth.

"It's really around uncertainty,'' said Berry.

"If you look at the U.S.there's a lack of confidence. Consumers aren't spending their money, businesses aren't hiring, there are very high debt levels. If we look at Europe, it's an even bleaker story.; zero growth, possibly a mild recession, very high sovereign debt levels and banks need recapitalising. And if we look at emerging markets; they're still growing but there are concerns particularly in China where they've been raising interest rates to try to slow growth down but have they slowed it too fast? That's the question at the moment. Everywhere you look globally there is uncertainty and that's why people are looking at gold as a way of protecting themselves against it.''

But just how safe is it as an investment? And what are the dangers of buying into it when it's red hot?

Berry said investors have good reason to be cautious and should be aware of the risks.

'What is gold really worth?'

"Most investors look at the gold price and say 'What was it last week?' They assume if risk has gone up it must be worth more this week, but that doesn't actually answer the question: fundamentally what is gold worth?"

To answer that question, Pathfinder came up with a nine-point metric relating gold to historical prices, against various economic indicators, assets classes (including equities and commodities) and also comparing it to the cost of production.

It was a close call, said Berry.

"Of nine indicators five were telling us it's overpriced and four of nine were saying it's fair value. So we're kind of in that territory where people are asking whether gold is in a bubble. An asset can't keep going up forever because if you transact the same amount of gold each year and the price is going up you need more and more money to sustain that rally. And where's that money going to come from?

"So there will be a point where the gold price comes off. And the problem we have with bubbles is that when a bubble pricks, it isn't a gentle, gradual deflation of pricing, it's a very sudden and painful collapse of the price."

The indicators, in this case, may not be particularly helpful for an investor trying to decide whether to buy or sell.

Berry said the decision ultimately comes down to one's view on where the world is headed and when, if at all, it is going to return to "normal.''

"We're in a very unusual environment at the moment marked by high levels of uncertainty and very low interest rates where every country is trying to debase its currency by printing more money.''

Take away those factors and investors would see the shine come off gold.

"The big question is when is that going to happen,'' said Berry. "No one knows. ''

The estimates are anywhere two and eight years.

"The reality is that it won't be happening any time soon. Don't expect world markets to turn around within 12 months and the world to be a happy place.''

The currency issues

In the meanwhile, Berry said investors with an interest or share in gold, should acquaint themselves with the underlining currency issues tied to gold prices.

"The biggest thing people should concern themselves with is currency and to think about what the NZ dollar is doing in relation to the U.S. dollar because gold is priced in U.S. dollars. Typically the relationship between the U.S. dollar and gold is such that if the U.S. dollar is going down, gold is going up. We're seen the NZ dollar going up and in terms of gold that erodes your returns."

Since 2006, the difference between hedging and not hedging (for a New Zealand gold investor) would have been about a 22% different to your return, said Berry.

 

"People should consult with a financial adviser and work out what's best for them,'' recommends Berry.

'Stocks or physical or futures or funds'

Those conversations would include whether it would be best to buy in the form of stocks (in gold producers), physical gold, exchange traded funds (ETFs) or futures. Each investment proposition was unique, said Berry.

"In very broad terms, you can look at buying shares in producers, because they generally track the gold prices although there can be periods where they behave differently to gold prices. There are shares so when equities sell off, gold producers go down and gold prices might be going up. Because they are companies they might also have borrowings or other activities. They might also mine copper or do other things so they can behave differently to gold prices.''

Taking ownership of coins may be one of the simplest ways to invest, however Berry cautioned investors against getting stung on the differential between buy and sell prices, which is close to 10% in some cases.

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20 Comments

Question - where can one purchase and store allocated bullion ingots in New Zealand? 

And Johnson Mathey still opreate in NZ.

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Not sure how reputable? Expect other readers will give you a steer.

http://gogold.co.nz/

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Amanda - "Gold Bug' is a term that no longer seems appropriate. Investing in PMs  is no longer a hobby. It's serious stuff.

Storage of the value of your labour has never (again) been more critical.

It's solid - more solid than paper IOUs.

And it shines. The more-so in dark times!

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Make a placard...."this time its different"  put it above your computer.....

 

regards

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Ahh Steven you are catching on, no fiat currency before 1970 still exists today.  To think a governments wont debase their currencies into oblivion this time is insane!  Humans are weird.

 

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No where the Govn can find it and take it........thats a stupid place IMHO, you'll wake up one morning and find a IOU for the gold from the Govn.....

regards

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The main thing about gold is its a mechanism to protect your wealth through an event, but there is a right time to buy.

Im convinced we will go through another Great Depression....and in the middle of that the US took away ppls gold and issued them paper....so putting gold near any official organisation is, IMHO stupid.....also buying it from anyone where there is a record....so if I had money to buy gold I would store it at home and pay cash....only.....so the logical time to buy for me anyway is when we are at the bottom of the depression, say 5 or 6 years hence......deflation will have stopped/finished and the only thing left is inflation or stagnation.   Then though I dont wonder with house prices as low as they will be in decades at that point that the money isnt safest in housing.....lots of ppl will be renting as lots of ppl will be bankrupt.

If you see inflation, well buying gold now makes sense....but no one I read who's sensble suggests anything less than a recession....and depression is most likely....

The Govn can also stop the hording of paper money by issueing a different legal tender, gold protects against that...I like that about it.....so hoarding cash is risky IMHO....

regards

 

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Steven - the New Zealand government did not confiscate gold in the 1930s like the US government.  There is not enough of it in the country to be worth their while.  We have a currency backed by commodities.  The unlike other countries, the NZ government does not need gold in an extreme economic crisis because we have food, milk, timber etc available for sale.  I would be more worried about confiscation if I was a farmer.  But highly unlikely.  The internet allows for information to be spread to millions in a split second - it would be much more difficult to convince people to hand over their gold or confiscate anything for the greater good these days compared with the 1930s.

Another point - gold is not much of a hedge against inflation.  The 1980-90s showed a decline in gold from $875 to $250 all through steady inflation.  Inflation needs to reach hyperinflationary levels before it offers good protection.   Gold works best as a hedge against political mismanagement, so yes given the situation of the world at the moment it is a good idea to hold some.  But if you look through history, gold actually performs better during deflation than it does during inflation.  The nominal price may decline, but the purchasing power increases compared to other goods and services.

Interesting that this interest.co.nz article on gold only receives a handful of comments, compared to an olly newland article on realestate which receives hundreds of comments.  Just shows the public is not in gold....yet.  The mania phase of this gold bull market still lies ahead.  When we see olly newland writing about his latest gold shares and the public hanging off his ever word we will know the top in gold is near.  However, we are some years away from this.

 

 

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Thanks for the thoughtful reply. I enjoy thinking on what thinking ppl have said....

Consider that the coming event is without precidence.....the closet is the Great Depression.....therefore anything that happened in the GD and more could well happen here....

Internet etc....yes ppl are far more educated and worldly wise....but consider that Greece has a Govn that encompases all the parties, so there is no practical change of govn to vote in/out.  Someone coined it up well "The Long Emergency"

NZ Govn, because they didnt last time does not mean they will not this time......especially as there is far more interest today from the public in owning gold.  Also gold is a hedge, a protection of a hopefully unlikely event....therefore protecting that against another unlikely event ie the Govn calling it in is "sensible" IMHO...now I dont see the need for gold myself.....if there is we will be in such a bad position that the Govn confiscating it has to be considered as a risk. If you are that paranoid to buy gold, you have to consider how to retain it IMHO. If I owned gold I would keep pyhisical ownership of it myself.....it wouldnt be much anyway...and I would probably go silver or platimun....(latter) not gold.

Commodities, yes we do.....the whole point of any method of exchange is it is used to buy energy in one form or another so yes our currency is backed by an abundance of food/commodities....I hope so anyway.   Others will buy....I am assuming that foreign govns will want to hoard gold.....so weither they allow it to exit their country and come to ours is questionable.....

Gold as a hedge against inflation.....you pick one event the 1980s.....I think you need to consider all events from the Long Depression in the 1870s and forwards...but right now its looking like a Depression. The Great Depression reached bottom in 3 years....but many US corps are cash rich....so they can weather some time before it really bites I ****think**** (in the stock market fear is a funny thing)  I agree on gold though....its only best in a hyper-inflation scenario, and that isnt on the cards IMHO.....hence I own no gold what so ever......

I agree gold doesnt do badly in a depression, so ppl are buying for the wrong reason, but Im cash as that does best of all....

Property v gold, thats easy, property is clearly a huge bubble waiting to pop....on the one hand we have ppl like me who think its a disaster and on the other we have the PIs most of which seem blind to the risks.....hence so many posts.  I dont think property the drop will be less than 50%.....I even think an under-shoot to 75% is probable...with a mean of 60%....it all hangs on the effect this will have on wages....

Mania phase of gold, IMHO its been that for 3 years....it could now go either way when the depression gets under way.....in any event the whole point of gold is to protect your wealth for the period of ownership and the event itself.....so when I buy (if I buy) at $1000 or $3000 it doesnt matter as long as its roughly worth the same when I come to sell it.....that will be at the end of the drop into the depression...but .at that point property will be cheap and thats probably a better bet IMHO.

Thanks for making me think! 

regards

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One thing to consider is if there is an oil blockade for what ever reason, there might not be the shipping available to take our commodities to market. Heck there might not even be a reliable market to sell into. What do we take as payment?

Or on the flip side, and probably something more realistic, is that we won't see civil unrest here until we see people hungry. I envisage the food being seconded to feed troops somewhere while people in our cities starve. Or simply that food becomes so valuable due to shortage that it is too expensive here.

As you point out there isn't really a precedent for what we face.

But I think we are at a stage where it is print or default. Not any other realistic options I can see. Now I can see the print option being the preferred option still. We have seen that banks will be bailed at the expense of the taxpayers. Why would the next solution to the problem be any different to that? I don't think it will be until we see serious enough civil unrest in one of the PIIGS countries, essentially coming to a point where the taxpayers revolt. 

Revolt doesn't seem to be on the horizon yet, so they will print and commodities will continue to be inflated by that. Watch the NZD hit parity.

It would not suprise me if the Fed prints and keeps credit lines open to Europe. It has to really because if Europe goes then the US goes also. By printing then the USD stays deflated and helps US exports. Maybe that is too simplisitc.

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"If you see inflation, well buying gold now makes sense....but no one I read who's sensble suggests anything less than a recession....and depression is most likely...."

Those that see a recession/depression coming often see inflation too!  They are not mutually exclusive.

 

-bb

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AH but the key is when....sure I can see inflation at the end of the depression.....maybe once we hit bottom in some things......the point is going into the 10% per year gold will probably drop in price also.....cash will not.....now once at the bottom you want to move out of cash so the Govn cant take it by what ever means they decide on.

regards

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You can store them at my place, resonable storage charges.

 

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Thanks

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Everyone knows that the only safe investment is real estate not gold, afterall 75% of our total overseas liabilities is debt against residential property. All those people can't be wrong right?

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Yep right....

As part of the property investment strategy they should of course be picking a nice bridge to live under as a fall back move......

regards

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Nice interview Amanda, thank you.
 

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The price of gold cant go up forever, want a bet, it depends on what it is measured in, what was the last price of gold in Zimbabwe dolars?

Great interview, interesting that this guy is expecting to go back to normal growth, I will bet you this guy cant explain the process in which money is bought into existence.

 

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There was a video link to Kaiser the other day suggesting all the Occupay Movement had to do was keep buying ounces of physical silver and that they would eventualy collapse Wall Street that way.

Just thought is was an interesting point and relevant for a thread like this.

But perhaps the discussion should be more along the lines of what do we replace our broken money system with?

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