Also see: Five Minutes with Jeffrey M. Christian (April 2012)
Jeffrey M. Christian is the managing director and founder of CPM Group, which offers commodities research, consulting, asset management and investment banking services. He is well known for his research and analysis of copper, gold, and other commodities and writes and speaks extensively about precious metals as well as world economic conditions. He sat down with JLN Metals editor Sarah Rudolph in his New York offices recently to talk about the outlook for gold demand, the effects of recent central bank actions, the jewelry markets in China and India, and why GATA is so angry at him.
Q: What do you think will be the effect of QE3 on the demand for gold and metals prices?
A: Our analysis regarding monetary accommodation, whether it’s quantitative easing or what the Fed calls “large scale asset purchases,” or maturity extension programs like that of the ECB or the Bank of Japan, the first thing you have to note is that since 2008 or 2009, each time the Fed or other monetary authorities have done a large scale asset purchase program, the economic results have diminished from the previous round, and the effects on asset markets – including gold and silver and copper and oil – have been diminished. So what you’re seeing, which the Fed has talked about during the past year, is diminishing returns, both in the real economic benefits the Fed seeks to promote, and in the asset prices, including commodities.
Our view is that the most recent asset purchase program will have very little positive effect on the economy and on metals prices, and that most of the effect on metals prices is already priced into the market. In addition, part of the effect on asset prices has been the inflationary expectations. But over the last three and a half years there has been no inflationary implication to these asset purchase programs. What you’ve actually seen is inflation deteriorating, and the threat of deflation becoming greater today in the U.S. and globally. These things could be inflationary at some point in the future, but monetary authorities know how to sterilize that inflationary implication should it start to appear.
One of the things you’re seeing in the markets right now is institutional investors saying, “In the past I bought into the inflationary thesis promoted by people selling assets (brokers and banks), so when I’ve seen these Fed programs I’ve gotten excited thinking that it’s going to be inflationary, and it hasn’t been. So when they come screaming at me, ‘You’ve gotta buy gold, you’ve gotta buy silver, you’ve gotta buy oil and copper’ because of the inflationary indications of the latest round of Fed monetary accommodation, I’m just drinking decaf coffee and saying, wake me when we see the inflationary implications.”
Q: You mentioned in a previous interview that central banks have become net buyers of gold when they used to be net sellers. Can you elaborate on that?
A: Central banks were net buyers up through 1965 because we were on the dollar gold standard, so you used gold to settle international trade balances. Starting in 1966 central banks became net sellers, and from then until 2008, central banks were net sellers of the gold they had accumulated under the Bretton Woods program. There were a few years in the 1970s when we immediately went off the dollar gold standard when the U.S. Treasury and the IMF sold a little bit of gold, so you had some net purchases in those years when other central banks were buying, and then you had petrodollar sterilization in the early ‘80s, and the bank of China in Taiwan bought some gold in 1987 or ‘88 to sterilize the dollar’s influence on their trade balance. But by in large from 1966 to 2008 central banks were net sellers of gold, and those central banks who had amassed large amounts of gold prior to that were selling gold, and basically have sold all the gold they wanted to sell. So gross sales by European and other central banks that had gold are gone. Meanwhile, other central banks didn’t have a lot of gold in the past, or had it and lost it through revolutions and changes in government. Those central banks in emerging markets with current account surpluses, mostly denominated in dollars and Euros, are converting some of that inflow into gold. So you’re seeing increased purchases of gold by newly emerging central bank powers and diminished gross sales by the old industrialized countries, and as a result you’ve seen net purchases. This will probably continue.
Q: When you spoke with my predecessor at JLN Metals, Nicole Rohr, back in April, you talked about mining production “exploding.” These days we are hearing so much about strikes and unrest in South Africa and elsewhere. What is your outlook for the mining sector these days?
A: There is a tremendous amount of mining capacity under development on a global basis. You’re talking about probably more than 20 million oz. of capacity that’s in the pipeline now slated to come on-stream over the next five years. This is in a gold mining industry that produces about 78 million ounces of gold a year. That’s a significant pipeline of gold products under development. This year, we thought we’d see about a 2.5 or 3 percent increase in mine production. In fact, mining production is running pretty flat this year because there are so many legal, regulatory, managerial and supply constraints that are causing delay in these projects. Some of the projects will come to fruition, but they’re coming together much more slowly than the mining companies thought and more slowly than we thought. Mining production is growing in the long term, but these problems continue.
In addition, one of the biggest problems is resource nationalism. You are finding governments and local populations becoming much more resistant to having mines developed in their countries.
Q: The Marikana mine strike in South Africa seems to have been settled, but the unrest is expanding to other mines. Do you think the domino effect will continue?
A: There are a number of problems in South Africa – labor, safety issues, wage rates, living conditions, relations between the mining companies and the government, relations with the state-owned electricity company. These things have taken a turn for the worse, and will probably continue to be bad. I’m not quite sure how they get resolved. Higher prices don’t resolve things — they probably actually exacerbate a lot of these issues. Platinum and palladium prices have risen sharply over the last couple of months because of the labor unrest. As the price rises, labor can make the argument that the company is earning more from their metal so they can pay labor more. Mining companies can of course respond, “No, we’re not earning more because you’re not mining anything, so we’re not selling it.” In general, higher prices put more pressures on the mining companies to improve safety and working conditions, pay higher salaries and higher taxes. So higher prices don’t necessarily solve the problems the South African mining industry is facing.
Q: What is your outlook for China’s and India’s jewelry markets? I think you mentioned that jewelry makes up about 50 percent of the demand for gold worldwide. There has been a lot of talk about China’s economy, which was booming, seeming a little shakier lately.
A: Chinese jewelry demand is rising modestly this year. There has been some jewelry reduction, but I think what you’ll find is that when people pull back on large scale purchases, so they’re not buying a new house or a new car, their discretionary savings sometimes increase and they sometimes will buy more jewelry, and I think we’re seeing that in China. In India, the rupee has fallen sharply over the past year. There is a great deal of economic uncertainty and gold prices are relatively high. The gold price in rupee terms is at record levels. You are seeing a decline in jewelry demand as a result.
Q: Is gold jewelry as popular in China as it is in India?
A: It’s probably not quite as popular. In India you have a substantial part of the population that still uses gold jewelry as a form of savings. So if you go into the gold bullion market – the souk – in Mumbai or Hyderabad, you’ll find ladies buying or selling gold jewelry on a daily basis. If they need to buy some groceries they might sell a piece of jewelry. I don’t think you see that use of gold jewelry in China so much anymore. China’s economy is a bit more developed and you have less use of gold as a form of savings, but you still have a very strong appetite for gold jewelry both as a luxury item and as a form of gold investment.
Q: What is the origin of GATA’s quarrel with you? For example, they talk about your mentioning on the Financial Sense Newshour that the paper to physical gold market is about 100-to-1, and they believe that was an acknowledgement on your part that there is manipulation or a conspiracy going on.
A: GATA [The Gold Anti-Trust Action Committee] has many problems, mostly emotional but also intellectual. When they first came along they started a publicity stunt challenging various groups within the gold industry to a public debate, and those groups took the industry standard approach of not even responding. A major gold mining company went to GATA in about 2001 and said, “We will finance an internationally broadcast debate with you. And GATA said, “Great!” And they said, “…with Jeff Christian.” At which point GATA said no thank you, we won’t debate him in public, and they dropped those challenges for several years.
In 2008 I gave a speech about silver market conspiracies and I said the problem with conspiracy theories is – well, there are a couple of problems. One problem is that they are all hogwash. You can study them as much as you want, and unless you are a “True Believer,” and reality and statistics don’t matter to you, you’re going to see there’s just nothing there. But much more importantly, they’re a giant distraction. GATA and Ted Butler make their living hawking conspiracy theories. You will not stop them from their job by providing evidence that there’s no conspiracy. They are the True Believers, in Eric Hoffer’s coining of that term, and as Hoffer said, no amount of reason or logic or evidence or personal experience will cause a True Believer to change his beliefs.
But you have a lot of other investors who look around the world and see problems in the banking industry. I’ve been a major inside critic of certain aspects of the banking industry since the 1980s, so it’s kind of ironic that GATA criticizes me because I criticized the banks based on what they are really doing wrong, and these guys see me as an apologist for the banks.
There are a lot of ordinary investors who watch the markets and say, “I’ve been told that gold’s an inflation hedge and I’ve been told that the consumer price index is rigged and that inflation is much higher. And maybe I feel that on a certain level because my gasoline prices are higher,” even though the amount of money that people spend on gasoline is about 5 percent of their income now as opposed to 15 percent 30 years ago. So, viscerally, they think, “Maybe something’s wrong here, and these guys are telling me there is a conspiracy so maybe I should believe them.”
But these conspiracy theories tend to be a giant distraction for legitimate investors. You can look at the gold price since last September. The price of gold got to $1920, it came down to $1530, it went up to $1800, it came down to $1530. It went up to $1790, it came down to $1530 and now it’s $1788 today. Smart investors sold at $1920, bought back at $1530, sold at $1800, bought back at $1530. But there are people who buy into this theory and say, it’s gone to $1800 so the next stop is $2,000 or $5,000 or 10,000. It’s just gibberish, and it causes these investors to lose money time and time again.
In 2008 I gave a speech saying these conspiracies are a distraction. And GATA took umbrage with that and told people, “Send us money because we want to challenge Jeff Christian to a debate.” But they never challenged me. I testified before the CFTC, explaining that the derivatives to underlying annual supply in gold and silver is about 100-1. If you compare that to other commodities and other financial markets you see that gold and silver trade like financial assets. When you find that kind of ratio in the dollar, in Treasury bonds and Treasury bills, this is a financial asset. It’s not a commodity like corn or cotton. That is the point I was making.
However, GATA took what I said as a ratio of derivatives trading to underlying annual supply and they said, “Oh, the banks are trading at 100-1 leverage.” I didn’t say anything about individual entities. Actually, I may have, and what I probably said is that most banks use a leverage factor of about 8-1, the same as they do with currencies. If you’re a bank, the OCC [Office of the Comptroller of the Currency] requires you to use a “prudent” reserve requirement. You decide what “prudent” is. If you are not a bank you don’t come under the OCC guidelines.
But GATA decided, for the purpose of getting people to give them money to carry on their crusade, that they would say that I had said banks were using 100-1 leverage. They just continue with their lies.
Q: The Republicans recently talked about pushing for a gold standard. Do you think there is any chance they will actually push that through if the Republicans win the election?
A: In 1980 when they called for a gold standard, which was only nine years after Nixon had gone off the gold standard, the upshot was they convened a presidential commission on gold and gold’s monetary role, and that commission decided that it didn’t make sense for gold to have a role as a denominator of the dollar’s value. So if the Republicans win, I think the most you can expect is another presidential commission which will probably reach the same conclusion.
Q: Is the gold market being driven by fear mongering?
A: I think the gold market is driven by fear and greed. It’s funny, because 20 years ago we were in discussions with some financial newsletter publishers who expressed some interest in having us produce a precious metals newsletter for smaller investors. They eventually decided against it because, they said, “People by gold because of either fear or greed. Your research is aimed at people who buy gold for the purpose of greed –they are looking to make money — and we sell newsletters to people who buy gold out of fear. We write letters about how Hillary Clinton is a lesbian and she’s going to make men and women share bathrooms, so therefore you should buy gold. We can’t go to our readers and say, ‘You should buy gold because the fundamentals or the macroeconomic conditions suggest the price is going to rise.’ That doesn’t sell newsletters.”
We are proud of the fact that our clients have made money both in rising markets and by shorting gold during periods of declining prices. And we’re very proud of the fact that we have clients that are long gold, but as they were buying gold in a rising market they were buying puts, and when the price would fall back on a short term basis they would sell those puts back and reduce their net effective price. So they have been much more profitable being long gold than they would have been if they simply bought gold. So we are proud of the fact that we drive our clients to better returns out of greed…for want of a better word.
That said, I think there are a lot of people who buy gold out of fear.