Jeffrey Christian of CPM Group bullish on gold – post-2015

The following article is reprinted with permission from CMJ’s sister publication Mining Markets.



The following article is reprinted with permission from CMJ’s sister publication Mining Markets.

Negative sentiment regarding gold and fears over the US Federal Reserve Board “tapering” its QE3 stimulus program have pushed the gold price down to US$1,241 per oz as of Monday afternoon from close to US$1,700 at the start of the year.

But Jeffrey Christian, managing partner at commodities consultancy CPM Group, says all the factors that have encouraged investors to pile into gold since the early 2000s are still in place.

“There are any number of massive financial, economic and political imbalances that have caused all of the economic problems over the last twelve years – not just 2008-09, but 2000-01 and everything in between,” Christian said in an interview in December. “None of those issues have been dealt with effectively.”

While he says the United States, Europe, Japan and China are in a slightly better economic position at present, the underlying structural issues are still there, and could send gold prices climbing again, starting in 2016.

“Our expectation is that by 2016-17, investor concerns over those longer term imbalances will resurface,” Christian says.

At the same time investor demand starts to intensify again, CPM Group expects the market will likely see mine supply shrink as a result of the cuts gold miners are having to make now in response to lower gold prices.

CPM Group forecasts that the gold price will rise sharply from 2016 to 2023. Christian says he would not be surprised to see new nominal highs over the US$1,921 all-time high in September 2011 in eight to 10 years’ time.

“We think that we're at the cyclical bottom for gold,” Christian said in a late October talk in Toronto, sponsored by the Denver Gold Group.

Over the next couple of years, however, gold’s performance is expected to be middling. There could be spikes below US$1,300 and above US$1,500, but during 2014 and 2015, but CPM Group expects gold to trade between US$1,240 and US$1,500 for the next couple of years.

Christian noted that investor demand for gold has been above 20 million oz per year – the marker for a gold bull market – since 2000-01, with investors buying a total of 390 million oz since that time.

Investors have reduced their gold purchases by 25% this year, but they still bought nearly 30 million oz.

“Our view is that investors will continue to buy more than 20 million oz of gold year in, year out for at least the next 10 years.”

Both investors and central banks, another important buyer, have become very price sensitive, but CPM Group doesn’t see either group withdrawing from gold completely.

Among investors, Christian says some groups have left gold, but could flood back into gold relatively quickly.

For instance, investors who initially bought gold because of fears over the collapse of the US dollar or hyperinflation, and may have temporarily exited gold when neither scenario materialized, may be back when signs of economic trouble flare up again.

But some hedge funds that were long gold between 2007 and 2011, and short gold during 2012, are now out of gold completely now that there’s no momentum either way in the gold market.

Positive economic numbers out of the United States last week, including an unemployment figure of 7%, down from 7.3% in October, raised fears that the Fed could taper its US$85-billion a month asset buying program in early 2014. However, Christian believes that tapering is already priced into the gold price.

“We think that the market is spending far too much attention on it – it’s become the flavour of the month,” he said.

Christian expects the Fed will begin to pull back on QE3 sometime in the first half of 2014, but that any reduction in purchases will be very modest until the US economy exhibits more strength.

Gold miners

Although gold miners are responding to the decline in the gold price, cash costs have still increased by 15% on an industry average basis this year, with total costs up 2.8%, Christian noted in October. But the miners' cost cutting measures will start to yield results soon, he predicted.

“The easy immediate cuts are in exploration, development, general and administrative expenses – and they're being made,” he said. “We think the market will be very much surprised to see lower cash costs and total all-in sustaining costs across the industry over the next few years, which should help the industry start to re-attract investors.”

In the meantime, Christian shared an anecdote in October that illustrates just how far gold has fallen out of favour.

CPM Group had a reputable client who was looking to buy a privately owned, profitable gold mine this year, so the group structured a $15-million prepaid forward contract and went to large investors in the United States, Asia and Europe who have been interested in gold over the past five years.

For $15 million, the investor would get 17,600 oz of gold or the cash equivalent over the next five years at an average price of US$850 an oz. A put option would be attached, so if the price fell below US$850, the investor would still get US$850.

“Not a single investor would touch it,” Christian said. “That's scary to me because that is telling me the extent to which these large participants as buy side investors in gold have moved away from gold and have the view right now – which I think is incorrect – that gold has had its day and they'd rather be in stock or short bonds than long gold.”

Gold misconceptions

During his talk, Christian, who says part of CPM Group’s job as a non-biased consultancy is education, addressed several common myths about gold, including the allegation that gold prices are manipulated.

There have been multiple occasions this year when large gold trades of more than 1 million oz took place within a 10-minute period, significantly moving the gold price, Christian noted. Many media reports have quoted sources that blamed large entities for slamming the market and manipulating the price downward.

“There has been all kinds of speculation as to who is doing this and the speculation is almost universally inaccurate,” he said.

“What you're seeing is not the consequence of a single agent," he continued. "You're seeing the consequence of the fact that 99% of financial market trades are now algorithmically driven and that algorithms are developed by people who went to the same schools and worked at the same funds and they used the same models – so they're responding to the same uptick or downtick in the market and you have this massive flood of electronic trades that come in from around the world at certain points.”

For Christian's full "State of the Gold Market" presentation, visit the Denver Gold Group's website.

To go to the Mining Markets website, click here


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