Are you ready for US$7K an ounce gold?

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In part one of a two part series on gold, Amanda Morrall talks to Socrates Fund Management's Charles Drace about why the best is yet to come when the worst happens

20th Nov 12, 2:59pm by Amanda Morrall

By Amanda Morrall

Three years ago when I interviewed Charles Drace in 2009, the gold specialist fund manager was calling for gold to hit US$5000 - US$7000 a ounce by 2015. At that time gold was selling for around US$930 a ounce. It's gone through some peaks and troughs along the way to reaching its current price of around US$1700.

I caught up with Mr. Drace recently to see whether he's revised his forecasts and to talk about some of the latest events and their impact on gold.

Here's a condensed transcript of our interview above. In the second part which I will post next week, we discuss some practical considerations for investors and the market for gold in New Zealand. For more news and analysis see interest.co.nz gold's section here.

Q) Do you still think we'll hit the highs of $5,000?

A) I'm absolutely certain of it. In fact I think it'll be closer to $7500 but I'd put the expectation for that price out a bit further. One of the dynamics of gold bulllion as a safety investment is extreme problems in the economy. If you look at the long term cycles, we're due to have a depression. We have everything we need to have one. We have the massive debt, imploding financial and economic worlds, we have governments who are totally without any clue about what to do about it (if they could, which I don't they can) I think the debt has gone too far for that. They're printing money and holding off the day of reckoning. You can see this so clearly in Spain in particular. And we see it in Greece and America. Figures out last week from America say as a percentage of GDP America has more debt than Greece. Governments will push out the depression as long as they can but the further you push it out, the bigger the problem will become, the bigger the problem, the higher gold prices.

Q) How long do these cycles last?

The average is 16 years but it's almost never the average. So when the markets and the economy broke down in 1929, it was 1949 before it picked up and we had massive debt in 1929, less so than now but still massive. When the markets broke down in '66/'68 the finish of that cycle was '81/82. It wasn't that long but they didn't have the debt we see now. So I'm thinking instead of the denouement in 2016-2017 it's more like 2020/2022, which is more in line with what we have in the '30 and '40s. Let's just hope we don't have a war like we had back then.

Q) How do these cycles track?

A) It broke down in 2006 and went flat for two years, then broke down again in early 2008 and didn't get back until half way through 2009 then we had a steady climb, which we didn't enjoy any benefit from because our currency climbed at the same time. So there was no benefit for Kiwis. At the end of July/August 2011 it had a substantial drop and it's been going sideways since then. It had a bit of recovery early this year but it couldn't hold it. It's a common thing, these ups and downs. We saw this in the '70s with gold. What was really interesting is that when it finally decided it was going to go up, it went up massively. And that's what I would expect to happen with this cycle given the high levels of debt right now. Then people will buy.

Q) Is now a good time to buy?

A) Yes, I think so. I recently put more money into my own fund because I thought the opportunity was so good.

Q) What about suggestions bullion banks are driving prices down by shorting the market?

A) It happens on a regular basis. You can see this happening at least once a week, they go in and short it massively. You'll have a progressive climb and then this bounce. It'll happen in an hour. It usually happens at the close of the London market. Sometimes they'll do it in the Hong Kong markets too. You can see it going sideways and then there's a a big drop but more often when it comes up they short it like mad which triggers a bunch of trading programmes where we see a sell out, pushing prices down. Then they come back in and buy out their shorts and make money on the way back.

Q) Should investors be concerned about these trading strategies?

A) No, but it does drive you crazy.

Q) How are central banks impacting on gold markets?

A) Central banks are always way behind the times. We had gold climb up in the '70s until 1980s then it kept falling until 2001, until it hit its lowest point US$251 an ounce that's when England sold massive amounts of gold from its central bank. It couldn't have been worse timing. And then right after that gold took off. It wasn't until 2010, two years ago that there recognised gold is in a long term cycle and starting buying again. Last year, Central banks bought 455,000 metric tonnes of gold, that's the largest central bank purchases since 1964. And this year they're predicted to do 493 tonnes, more than a 10% increase. It's right around the world. You've got China, Brazil, Turkey, South Korea, the Philippines all getting in big time along with Kazakhstan, Russia, Mexico. This will be the beginning of the programme. They'll be buying and buying for years to come.

Q) Consumers make up a lot of demand too. Is there enough to fill demand?

A) While central banks bought less than what's been produced a shortage is going to hit and when it does we'll have a classic supply and demand situation and will see that driving prices even higher. The bullion banks are shorting the market because they don't have enough gold to supply their contracts and all through the '80 and '90s when gold was going down people didn't get delivery on their contracts because they didn't need the gold. (Sources in Switzerland) say the four major bullion banks have only 6% of the gold they say they have. They would have made those contracts when gold was $600 - 700 an ounce now they have to buy it at $1,600 $1700 an ounce, if they can drive the price down even for a few hours, it gives them a opportunity to cut their losses but some day they won't be able to do that. Demand will go up so fast and so far they won't be able to drive the price down. Then you won't have that limit anymore; central banks are like a cap on the market.

Q) How about the fiscal cliff? What effect will that have if it comes to pass?

A) It's a hard one. I don't really know. You get one lot of commentators saying Democrats and Republicans can't afford to let it happen. I agree with that but that's my opinion. At the moment they're really juggling for position and they're pushing each other as hard as they can. If, for some reason, they refused a compromise didn't happen it would knock several percent off GDP in American which would trigger a world-wide slowdown. What's more likely is they'll come to a compromise and they'll agree on a few issues and put the rest off for a few years. It really depends on how the market sees that. The first thing will be a sigh of relief and you always get this. When central bank in Europe makes a comment about how they're going to save Spain or something everybody breaths a sign of relief and the market goes up and then three of four days later the analysts come out and say actually we haven't solved this problem, and that will have negative effect on the market but it won't have that negative effect on the economy. If they don't come to some kind of terms the risks are just so high and they'll be blamed for it.

Q) )Will this bode well for gold investors?

A) Yes just not right away.

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20 Comments

by Justice | 20th Nov 12, 6:21pm 1353388867

Won't happen WITHOUT war. That's a guarantee! If it EVER got to such highs then the world economy would be in utter collapse and turmoil. Gold won't save you from the violence.

I would also say, NEVER trust interviews from those who have a clear vested interest in their belief . No different than talking to a RE agent about property prices........

And remember a little piece of US history where ALL personal hoarding of gold was outlawed and had to be traded in for USD's or .........prison.

http://www.the-privateer.com/1933-gold-confiscation.html

by economist | 20th Nov 12, 9:06pm 1353398760

Justice,

1. It won't happen without a currency war you mean. It doesn't have to come to violence. It just means

the ptb continue running deficits funded by printing more and more or
it means they stop printing and the international banking system implodes

Either one of those options will do it.

2. Gold confiscation is just nonsense. It's totally impractical for another gold confiscation these days. To start with, practically no one actually owns it in their possession in any real quantities. 99% of investors in it just hold paper contracts on the price (not the physical). Unlike 1933 when it was in circulation as currency in the US as gold was a fixed price to USD by definition, making it exchangable for goods and services and therefore it was common for people to carry around gold coins in their pocket.

Perhaps you should give some thought to why it would not happen? - eg.. the major powers in the world sort out and solve their financial messes, balance their books, and the credit debt bubble deflates in a relatively painless way and prosperity and growth return to the world economy... peace and love rule the planet once more and all is well...

by Justice | 20th Nov 12, 10:10pm 1353402644

No..........i mean WAR. You state "Gold confiscation is just nonsense." You also state "practically no one actually owns it in their possession in any real quantities.

Two things:

1: Not everyone would need to own it to effect the world economy, IF the richest decide this is their safe haven (once again) then you will see drastic economic effects and soon would follow drastic government ones.

2: A 'nonsense' normally refers to a train of thought that either 'has never' happen or just won't......A classic example of this was 'pre' the CHCH earthquakes! Funny thing is.............it does happen and HAS happen once before. The "nonsense" is believing anything has really changed since those times. Fore if it really had, we would NOT be in this global situation YET AGAIN. The worlds economic experts are proven frauds, liars, and just plain wrong.

I take it you like many other people calling themsleves "economists" (people who live in la la land) are a born optimist with a total disregard to reality and post history?

Time will tell who is right

by scarfie | 21st Nov 12, 8:24am 1353439476

Just a point of clarification, gold wasn't confiscated but compulsorily aquired. People didn't lose it, they were paid for it. I read an explanation as to why it won't happen this time around and that is because in the 1930's it was their way of quantitative easing. Gold was money and they wanted it circulating.

by economist | 21st Nov 12, 5:26pm 1353471968

Yes thats correct scarfie, and the gold that was collected was volunteerily handed in. People got paid in full for it, otherwise they would never had handed it in. (At the old price that is, before the US government revalued it up - or more correctly devalued the USD). Many believe most people never handed their gold in anyway. Today many people seem to think - look out - soldiers will come to your door, smash it down and steal your gold away - so therefore don't buy it! This is just silly - it didnt happen. Practically no one owns the physical these days - it would be more likely the government (and much much easier) would just confiscate your land, at least they know who owns it - they just need a visit to the land registery office... land transactions are traced, gold is not. Gold protects you from currency debasement or currency collapse, it doesnt protect you from war (although wars can give birth to currency collapses). I mean dont buy gold - you cant eat it (which is also just as silly a common comment), you can't eat paper money either - so dont save it!

Your reading of the explanation doesn't make full sense - the US was removing gold from domestic cilculation in 1933. Roosevelt promised the USD would not be fiat and they had to maintain international convertibility. It was just theft, plain and simple, from the american people, they knew exactly what they were doing.

Nixon later removed the international convertablility to gold in 1971, in part, as the US didnt want the world to become totally dependant on Middle East oil and they needed the price to rise above what the Arabs would take to fund US exploration of oil - which they knew was there but uneconomicly extracted at such cheap prices as the Arabs where selling at. The way to get the oil price to rise was remove the USD link to gold, that and France called their bluff and wanted gold, not USD paper (after the US has paid for the Vietnam war by printing)....

by Stephen Hulme | 21st Nov 12, 5:37pm 1353472668

Practically no one owns the physical these days

I suggest you think again - most serious international players take allocated delivery into loco London/Zurich repositories. Then there are local branches of the more famous operators dotted around the world.

The biggest problem has been an alarming trend of legal institutionalised theft of ones numbered holdings due to rehypothecation practices undertaken by prime banks' on behalf of their myriad clients.

by economist | 22nd Nov 12, 3:31pm 1353551460

Practically no one owns the physical these days

I suggest you think again as these serious players make up only a tiny tiny fraction of the overall all market. Most of the billions are in ETFs and even there is much evidence the GLD (the largest gold EFT in the US) has been paper settling though the COMEX. It is only the smart big money taking actual delivery Stephen. Historically speaking hardly anyone actually owns physical gold these days.... and Im sure in the future many will find out that gold they thought they had has multiple owners behind it. While its not uncommon for commodities to trade 10x 20x and even 100x the underlying physical. Traders who say trade oil dont usually take delivery of their contract, they are just spectulating on the price, in a crisis they will sell their contract. Gold is different. In a crisis they will want delivery, delivery which isnt physically there.

by scarfie | 21st Nov 12, 6:16pm 1353475019

I had to dig around but here is the quote on gold being the equivalent of QE.

In the 1930s gold was to the monetary system what QE is today, a means of increasing the supply of money for Fed and Treasury discretionary use. The US Secretary of the Treasury and President Roosevelt set the gold price higher at their daily breakfast together arbitrarily. Higher because to create money then the system required a higher value of gold to have more money outstanding. This is why Roosevelt ordered the confiscation of gold in order to unfold his type of monetary stimulation, his QE. This is what confiscationophiles simply do not know.

http://www.jsmineset.com/2012/10/30/gold-confiscation-rumor-control/

by economist | 22nd Nov 12, 4:44pm 1353555855

This is why Roosevelt ordered the confiscation of gold in order to unfold his type of monetary stimulation, his QE.

Really scarfie? Is that what you believe is the truth? Refixing the price of USD to gold at a lower exchange rate - that was his QE. Confiscation was something else. That is why I said above your reference doesnt make sense. Again, to be clear, you dont need to confiscate the gold to produce a 'QE' effect - just lower the USD/Gold exchange rate.

by economist | 22nd Nov 12, 4:46pm 1353556008

... and I had to dig around on my bookshelf scarfie for Roosevelts actual speech (just for you) LOL :-)

In the 30s depositors realised banks lost money to speculators. Some banks lost significant money and where insolvent in fact. Many depositors were so distrustful of the financial system they attempted to exchange their money for gold, which they were entitled to do of course. The Federal Reserve had already created so many extra dollars, (NB it had already done 'QE' before the gold price/USD reset or confiscation), there wasnt enough gold in the treasury to redeem the FED notes. It was for this reason the President seized private gold and erased the gold clause from all existing contracts. [Very similar principal to why Brown sold the bank of Englands gold infact - I point this out because this sort of thing happens again and again and again for the same reason].

Here is the relevant bits of Roosevelts disingenuous explanation (let's go direct to the horse's mouth so to speak):

"Let me make the facts very simple and my policy very clear. In this first place, government credit and government currency are really one and the same thing. Behind government bonds there is only a promise to pay. Behind government currency we have, in addition to the promise to pay, a reserve of gold and a small reserve of silver.... In this connection it is worthwhile remembering that in the past the government has agreed to redeem nearly 30 billions of its debts and its currency in gold, and private corporations in this country have agreed to redeem another 60 or 70 billions of securities and mortgages in gold. The government and private corporations were making these agreements when they knew full well that all of the gold in the United States amounted to only between 3 and 4 billions and that all of the gold in all of the world amounted to only about 11 billions...If the holders of these promises to pay started in to demand gold the first comers would get gold for a few days and they would amount to about one twenty-five of the holders of the securities and the currency. The other 24 people out of 25, who did not happen to be at the top of the line, would be told politely that there was no more gold left. We have decided to treat all 25 in the same way in the interest of justice and the exercise of the constitutional powers of this government. We have places every one on the same basis in order that the general good may be preserved...."

by economist | 21st Nov 12, 5:03pm 1353470583

Hi Justice,

I think if you read many of my previous posts on this site (although it was a little while ago, I just got busy at work...) you'll see that I'm not living in la la land.

1. The richest are the ones who control governments, sorry to point this out, and they will always need a 'safe haven'. Most rich still dont own gold, they own derivatives on the price. Even in Switzerland they have passed laws that the banks dont have to give you gold (even if it is allocated) they can choose to just pay you out in fiat.

2. The coming great depression will prove many 'experts' wrong (again). Often the 'experts' do know, but for political reasons they cant say publically. They are not as stupid as they often make out, it just that the higher you go up the less it becomes about economics and the more it becomes a confidence game.

3. Yes time will prove all. But gold is not gone up from 260 to 1700 because of some WAR but because its the only traded currency (traded in the trillions every year -just in the London market) that isn't and can not be debased. In the last bull peak in 1981, 15% of americans where in gold investments (bullion or shares) and many of the big players today (China, Russia, Asia, etc..) were not even in the game. These days still less than 2% of americans own gold investments, and the rest of the world is waking up ... this bull run is only beginning.. 7500 is very, very conservative. If you adjust for purcahsing power from 1981 in the US golds previous high is 8000 and it will well pass that in the end. When the bond market collapses, as Alan Greenspan has said, fiat only has one place to run, gold. I say hes correct, but most people dont have the patience to ride the full bull market. This is nothing compared to whats comingdown the track...

:-)

by Chris_J | 20th Nov 12, 7:13pm 1353392039

Charles Drace has zero credibility.

Remember his 1998 book "How to Survive the New Zealand Property Crash"

http://www.wheelers.co.nz/books/9780958376204-how-to-survive-the-new-ze…

In 1999 he went around ranting about 40% declines coming in NZ property prices - within 3 years prices were soaring, in many places prices trebled.

Why do these guys get away with peddling nonsense? Bernard included...

by Stephen Hulme | 20th Nov 12, 7:23pm 1353392615

Because they never actually trade the markets they profess to know about - trading is markedly different from talking and thus they live to talk another day.

by Wolly | 21st Nov 12, 5:37am 1353429437

I thought about Gold as a safe store of value and then recognised the nz power pollies are deeply into property both renters and capital gainers...no contest.

Property is not going to be stolen from you, although Cera and local councils can grab what they want and pay peanuts.

by steven | 21st Nov 12, 7:43am 1353436980

Neither are safe stores of wealth ALL of he time...the key for me is to recognise when to be in them and when to exit. If we are seeing inflation like it was in the past then yes housing. When housing by any sensible neasure looks like 100% over-valued and wages stagnant I cant see that as safe. Gold is a funny thing, a pure capital appreciation play, the ultimate in hype....for me when even fools rush into it to "make a killing" thats also a ponzi scheme....think tulips.

But with things to weird you never know.

regards

by splineman | 21st Nov 12, 7:58am 1353437905

Gold is insurance. Very worthwhile insurance. Property should be an investment.

As far as price they are just numbers....remember that floating currencies are anchored to nothing. The strong dollar policy of the US is a long forgotten joke.

Gold is slowly being remonetized and will need to form part of the reserves of a restructuring of world debt/money. State debts cannot be repaid, so won't be repaid.

As debts are defaulted on so are savings on the other side of the balance sheet. Gold has no debt obligation attached, it is money, as opposed to debt.

Property prices are most directly linked to bank lending. The more banks can/will lend the higher prices will go. This is not an investment but a ponzi type system. FWIW hoping for capital gains while the banks make a killing on interest, for me, is a game for mugs.

Just my opinion.

Cheers

by economist | 22nd Nov 12, 5:10pm 1353557450

Please answer these questions:

Why is the Gold price increasing ?.................All believe it is valuable, but only generally those who have some small understanding of international finance realise its true worth. The general public will be kept from this until its too late for them.

What will save the world financial crash ? .................... Revalue Gold to $5000, nope that's not high enough to estinguish or back the ever increasing sovereign debts snippy, it will have to be much higher. Look at the sovereigns holding of gold and debt, try doing the math again.

Can you trade with a property when no one wants it ? ..............Not every one needs a house, you can board or dubble up in hard times !, Board or double up with who, someone who has a house? Why do that when you can get your own... so people will want one... its just at what price?

Remember after War years ? ?, No, I'm 42, before my time.

by steven | 22nd Nov 12, 6:07pm 1353560827

Why is the Gold price increasing ?

a) because non-keynesian ppl think with "money printing" there will be inflation so they want to store their wealth....rather than at the zero bound there will be none....

b) speculation, as the price goes up ppl buy thinking will make them rich.

c) They live in la la land

What will save the world financial crash?

The bubble driven by 30 years of voodoo economics is so large and the debt overhang so big I dont think it can be. Then the interest to be paid back is based on more growth and more fossil fuel use which cant happen....

Trade? not really at the moment, but who knows....

regards

by Stephen Hulme | 22nd Nov 12, 7:30pm 1353565819

I sold one bloke USD 350 million of silver ~7.50 ozs average price back in the middle to late eighties - delivered into the family vault in Zurich which was later sold to a major - at the same time his brother took delivery USD 750 million of platinum. More could have been bought without my knowledge as I moved on to other instruments.

I firmly believe they still have the position @ approximately 4 times the purchase value.

NB - it was not my metal - I was just a bullion trader.

by Muppet King | 21st Nov 12, 10:48am 1353448134

I reckon this guy's views are a bit loony, gold may go up or it may go down, who cares, you keep it just in case, it is the ultimate insurance policy. Gold (and silver to a point) will always be seen as a store of value, as it has for the last thousands of years. Ive said this before, its not an investment. Looks nice though and you know that it has good value. They dont say "good as gold" for no reason.