Gold Is the Canary in Coal Mine - GFMS CEO By Daniela Cambone
of Kitco News | April 20, 2011
(Kitco News) -- Under current conditions,
the year-end $1,600 gold price forecast by metals consultancy
GFMS suddenly becomes a readily attainable goal, according
to the company’s chief executive officer.
“I use the analogy of gold as being
the canary in the coal mine, it really is a fierce indicator
that something is awry in the market – something is
not working properly,” Paul Walker, GFMS’ CEO
told Kitco News fresh off the heels of its Gold Survey 2011
release.
GFMS, one of the world’s foremost
metals consultancy firms, reiterated its bullish outlook
on gold bullion due to a myriad of economic and political
factors. Comex gold futures prices were trading higher Wednesday
morning and hit another fresh all-time record high of $1,506.20.
Walker said that he has been bullish on
gold since 2003 – but was still cautious observing
the market, believing that the central banks of the world
and the fiscal authorities would take the necessary hard
steps sooner rather than later to correct the imbalances.
“What shocked me is the unwillingness
of the central banks and fiscal authorities to tackle the
problems. The British are one of the few that have taken
a sharp knife to the fiscal side of things and cut into
expenditure programs,” Walker told Kitco News.
“Where we find ourselves now is the
unbelievable situation where the IMF comes out and says,
‘they don’t believe that the US debt policy
is credible or sustainable,’ – it is just a
mind-boggling state of affairs,” he said.
The International Monetary Fund recently
noted that the US economy “appears sufficiently strong”
to withstand greater austerity measures and tax increases,
adding that the benefit of last year’s stimulus package
“is likely to be low relative to its costs.”
As long as a rising real interest rate environment
doesn’t occur, it is bullish for gold, noted Walker.
U.S. Federal Reserve Chairman Ben Bernanke
convenes his first press conference next week and is expected
to emphasize he is serious about keeping interest rates
low for an "extended period." Rather, some analysts
had predicted higher interest rates in the U.S. by summer.
Walker said it is all a matter of degree.
“If you take it from the current range of zero to
0.25, I look at this and say, that is just a laughable number,”
he said. “For them to put up interest rates by 25
basis points is completely insufficient and will remain
insufficient until monetary authorities send the right signals,”
said Walker.
“If you tell people that you have
negative real interest rates then the incentive is either
to spend and then you get to a state where people get worried
about imbalances and move away from spending and put any
spare cash into gold,” Walker noted.
Indian demand
Despite the relentless rise in the gold
price, the price sensitive market witnessed a phenomenal
physical off take last year, said Walker.
“We had close to record levels of
demand, levels that we last saw when the gold price was
a fifth of what it is today in Indian rupee terms,”
said Walker.
The Indian factor was the most surprising
element in 2010 for the CEO. The surge in Indian demand
is an indication that the Indian market feels we are in
for a long bull phase in the gold market, he said.
Mine Production
Walker was not surprised that mine production
went up in 2010. World mine supply posted a solid gain in
2010 said GFMS, with every major producing region contributing
to last year’s higher total. GFMS noted this is the
first time this has occurred since 1988.
“Our view has always been that in
a rising gold price environment, we have seen rising mine
gold production,” Walker said.
Walker said confusion may have taken place
on the analytical and commentary side of the market.
“They don’t have day to day
details on this and were confusing declines in for example
South African gold mine production – and thought that
if South Africa was seeing a relentless decline in gold
mine production and there is no major new mine coming on
stream the logical conclusion was that mine production was
going to fall,” Walker said.
Rather, said Walker, with the rising gold
prices the market has seen an uptake on exploration. “You
have seen people re-start operations – there has been
a huge grassroots increase in mine production globally and
often outside of the traditional big producers,” he
said.
Mine production generally offers a relatively
smooth gold flow into the market and in turn, no major price
fluctuations. “We are looking at 220-230 tons a month
depending on seasonality – that is a flow that comes
out fairly smoothly over the course of the month,”
said Walker.
The firm launched its 44th edition of the
GFMS Gold Survey last week. Its findings highlighted that
gold investment demand continued to drive gold prices higher,
which rose by close to 26% in 2010.
The real issue in the gold market is what
happens when you see surges in investment demand or a surge
in Indian jewelry demand, he said. “It can amount
to 100 tons (ETF) in a matter of hours, in the case of Indian
demand in a matter of days,” said Walker.
“So where the real price pressure
comes from is from those kinds of flows. If suddenly people
get extremely bullish about gold, you could literally have
hundreds of tons of gold demand in a short space of time
and that is what really drives the price,” he said.