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,”
“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.
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.
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 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,”
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.