Gold and silver a little ahead of themselves

Gold and silver a little ahead of themselves - Nichols

In the short term gold and silver are likely to decline but, according to Jeff Nichols looking out beyond the next month or two, both will be in a renewed cyclical upswing

Interviewer: Geoff Candy

GEOFF CANDY: Welcome to this week's edition of Mineweb.com's Gold Weekly podcast. Joining me on the line is Jeffrey Nichols. He's the managing director of American Precious Metals Advisors and senior economic advisor to Rosland Capital. There's an old market cliché that gets trotted out every year around this time and I thought if I don't do it someone else is going to and given that gold is at $1,500 an ounce and it's the beginning of May, is it time to sell and go away?

JEFFREY NICHOLS: In the short run this year in particular, the markets for gold and silver have gotten a little ahead of themselves - the run up that we have seen in the last month or two has come to an end - we are now in a correction phase and in the very short run gold and especially silver will probably go a little lower but looking out beyond the next month or two - gold and silver will be in a renewed cyclical upswing and I expect prices by year end to be significantly higher than they are today for both metals.

GEOFF CANDY: You talk about a cyclical uptrend and perhaps reaching a peak at this stage. How much of a downside are we likely to see in the cycle and where are we in the greater cycle if you will with gold and silver?

JEFFREY NICHOLS: On the greater cycle we have a long way to go and several years ahead of us of generally rising prices for gold and silver. In the short run the markets, as I said, have gotten ahead of themselves. Silver especially has been driven in large measure in recent weeks by short term speculative buying and momentum buying. Now that the momentum has switched into reverse many of those who went long silver are now going short silver and we could see quite a correction back down perhaps to $35 or $38 an ounce.

GEOFF CANDY: On the gold side of things, how much lower is it likely to get because there was a very interesting piece of research that came out of RBC today talking about cash costs and the miners themselves have a lot of work to do on the cost side because costs have increased so much. Is there a floor in sight above $1,000, I suppose is a better way to put it.

JEFFREY NICHOLS: We could easily see a $10 or $20 drop in the price of gold in the next week or two but beyond that the fundamentals are so overwhelmingly positive for gold and there's a long list of them that are going to support gold over the next year or two or three. Those are the main operators, the main drivers. At the top of the list you have US monetary and fiscal policy but there are a lot of other factors that are also not so much related to the US. The growth in Chinese demand is likely to continue, the growth in Indian demand is likely to continue, the growth for continued buying by central banks is likely to continue and we have also a growing market for gold with new participants coming into the gold market - people in institutions who weren't investing in gold in past cycles are now beginning to invest, taking a look at gold and some are buying in significant quantities. We have seen some institutional buyers buy gold by the tonne, literally in the last half year. That type of buying activity is likely to continue and most of these are very long term holders, particularly ones that are taking delivery and holding bullion in their own vaults or in bank vaults are very unlikely to sell any time soon. These are long term holders.

GEOFF CANDY: Who are these holders? Where are they coming from?

JEFFREY NICHOLS: The most obvious in the last few weeks, we saw an announcement by the Texas University Endowment Fund which is the second largest endowment in the US after the Harvard University Endowment Fund - announced that they had bought some 20 tonnes of gold and were taking delivery, putting it in a HSBC warehouse in New York City and planning to hold onto it for a while. We have seen some hedge funds do likewise and even some insurance companies in the last year or two have begun to invest in gold. A few years ago that would have been unheard of.

GEOFF CANDY: Are we seeing a trend towards more physical delivery of gold do you think or is that something to continue going forward or are we likely to see the rise of other instruments and perhaps jewellery as well.

JEFFREY NICHOLS: Really all of the above. You will see more individuals and institutions taking physical delivery or participating through vehicles that assure them that there is real gold held in a vault some place on their behalf, whether it's an ETF in which the gold isn't specifically allocated to a particular investor or some of the gold trusts that have sprung up or have grown in the last few years which are actually holding gold in a safe deposit box or in a vault on behalf of a particular investor. So these new mechanisms that have come into play in the last few years are having a significant impact and they are taking physical gold and putting it in depositories or in bank vaults where it is off the market for a period of time, so it's much different from the purchaser of a derivative whether it's a future's contract or an option or some other instrument who is very apt to sell at the first negative turn in the market.

GEOFF CANDY: Looking at recent events and clearly the death of Osama Bin Laden is likely to heighten geo-political risk over the short to medium term, how do you see this playing out with regard to the safe haven play?

JEFFREY NICHOLS: I think the world is still vulnerable to terrorism with or without Osama Bin Laden and in the very short run it is even more apt if we have some reaction from some terrorists in the US or elsewhere - but over time I don't think it's going to really much matter. We are in an age of terrorism. It's something that people are in a sense maybe getting used to and it's unlikely to have any significant long term or lasting impact on gold or silver prices. I suppose if you had an attack of some sort there might be a quick reaction but I don't think it will last. Really the market is driven by fundamentals, supply and demand and those are the fundamentals that are likely to govern in the next few years.

GEOFF CANDY: Two questions to close off with. The Akshaya Tritiya Festival is happening on 6 May in India. There has been a lot of buying ahead of that on any dips that we have seen. How important is this festival in particular but the festival season coming up for the gold market at this stage?

JEFFREY NICHOLS: It's very important. India is one of the largest markets for gold and silver for that matter, in first or second place with China. The market continues to grow as the economy does well - as more people in India enter the middle class and have more disposable income, some of that is likely to go into gold - some of it is likely to go into silver. There is as you said, heightened buying during the Festival season coming up which is a big plus. On the other side of the coin you have rising interest rates in India and just in the last day or two the Reserve Bank of India jacked up rates again. That may have some short term negative impact but over time the real driver in India, as in China, is growing income, growing wealth some of which as a matter of custom and tradition goes into gold and silver but increasingly there's a new wave of investment in both of these countries. Part of it is also related to the introduction and growing popularity of new investment vehicles in both countries and suit their populations including ETFs and bank deposit programmes and other new vehicles that are going to aid Indian and Chinese and other in South East Asia to participate in the gold market in a way they haven't in the past.

GEOFF CANDY: Finally, if we look at the US market and there were a lot of understandable implications with regard to S&P's credit watch in terms of US sovereign debt, how do you see this playing out with regard to inflation and currency weakness in the US?

JEFFREY NICHOLS: I see it really as being quite significant. In fact it may be the single most important driver of gold prices in the next couple of years. The inability of the US to get its federal budget under control and to at least have some promises of reducing the significant debt overhanging the US economy is really a troubling matter and is putting the Federal Reserve in a position of literally having to finance the US federal deficit through the printing of money. It's very inflationary. It's depreciating the value of the dollar against foreign currencies and it's one of the main driving factors supporting the rising gold trend.