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LBMA: Little cheer for gold investors from LBMA conference panel

Lawrie Williams

It was almost a sense of déjà vu.  At September’s Denver Gold Forum a panel discussion looking at paper gold brought forth a general consensus from the panel members that gold was overvalued and would likely fall below $1,000 perhaps to around $800 – with one dissenter in Doug Pollitt.  Today at the LBMA/LPPM gold conference in Vienna, a panel discussion on gold investment came up with almost an identical consensus – gold will fall back to $1,000 and below – perhaps down to $800 or less – with one dissenter – Diego Parilla!  So little cheer here for the gold investor.

Perhaps the one positive for gold is that in the aftermath to the Denver event, despite the consensus opinion, the gold price picked up quite substantially from its August low and was still sitting at above the $1,170 level at the time of writing – around $100 above the recent low point.  Can we expect the same kind of performance following the LBMA event?  Gold investors will hope so – but obviously most of the panel would disagree and one has to say perhaps the odds would favour the latter!  But then gold frequently confounds.  We will see.

We will also be able to see how the very diverse LBMA meeting audience reckons gold will perform over the next year.  The sophisticated electronic feedback system utilised at the event enabled members of the audience at the opening session to make their individual predictions of where the gold price will be at next year’s event to be held in Singapore.  The average will be announced by Ruth Crowell, the LBMA chief executive at the closing session on Tuesday.

Looking at the arguments, Charlie Morris of Atlas Pulse, although professing to be a gold believer came up with three measures as to whether gold was overvalued or undervalued.  The first was that its performance in relation to commodities suggested it was 62% overvalued.  In relation to the bond market it was 30% above its fair value and in terms of the golden constant concept – i.e. comparing gold against changes in prices, property etc, gold was 34% overvalued.  Overall he suggested that thus gold would likely continue in the bear market down to the $800 level before it might recover.

However he did concede that gold does still act as catastrophe insurance and that could colour the future pricing performance given the current degree of global instability.  As a long term investment he viewed it positively but reckoned it has still to reach its bottom – an almost identical view to the Denver panel mentioned at the beginning of this article.

Two other panel members – Michael Sheehan of Orion Commodities Management and Jon Spall of G Cubed Metals were equally bearish in predicting gold is headed for the $800 level in the short to medium term, although these panel views were having little impact on the gold price today, which was holding firm around the $1,175 level.

Spall introduced the term investment ‘tourists’ into the equation as being those who came into the market when gold seemed to be heading ever upwards in the first half of 2012.  The subsequent fall in the gold price will probably have meant that these significant drivers of the price back then would be unlikely to move back in having once got their fingers burnt.

Sheehan felt that the US economic performance is being underestimated by economists with the percentage of debt to disposable income falling sharply from 35% back in 2005 down to around 15% now, although that in Europe remains in the high 20s and in Canada in the mid 50s.  He remains convinced that the Fed will start to raise interest rates this year and is looking to a gold price target level of between $850-900.  If China crashes he feels the appetite for gold will fall even further – although some believe the contrary.

The one panellist on the more positive side Diego Parilla of Dymon Asia Capital did present a rather different argument – including the opposite opinion to Sheehan with regard to the likely effects on gold of a China crash.  He touched on the various stages of Quantitative Easing in the US.  QE1 was justified, QE2 arguable and QE3 a mistake in his view.  He is worried that the Central Banks now have nowhere to go should there be another financial crisis.  The recently suggested idea of prohibiting cash (probably unworkable) and negative interest rates he saw as scary.

The panel touched on pgms and silver again too.  With the former they looked at the potential fallout from the Volkswagen emissions testing software manipulation which they felt boded ill for platinum – indeed Michael Sheehan felt that the trend was towards price parity between the two principal platinum group metals. He said one needed to view the trend and take into account not only some lack of confidence in the diesel market (the big market for platinum) but potential moves to restrict diesel usage in cities and tax changes which may make diesel less competitive.

John Spall noted also that even if the nitrous oxide emission problems inherent in diesel technology can be overcome, will the buying public believe this anyway?

Indeed none of the panel had anything positive to say about platinum!

On silver, again none of the panel was confident of better things for the price barring an increase in the gold price – and if gold does fall to $800 Charlie Morris wouldn’t rule out silver falling to $8.  Looking at the gold:silver ratio Jon Spall called the silver bulls belief that it might go back to the historic 16 or 17:1 ratio as ‘nonsensical’.

Other points of discussion were gold ETFs – which enabled some institutions which had previously been unable to trade in physical metal – the chance to get involved with a totally related derivative.  The ETFs were thus seen as something of a buffer to short term precious metals investment.

Overall the panel majority felt that the bear market in gold and other precious metals therefore had not yet reached its end, indeed might have a few more years to run – but the excellent panel moderator – John Authers, who had earlier given a brief speech as part of the opening keynote presentations – did sum up by commenting that when the consensus for a continuing fall is this strong tends to be dangerous and could represent the bottom.  Beware of unknown unknowns.

19 Oct 2015 | Categories: Gold

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