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-- Posted Friday, 6 February 2009 | | Source: GoldSeek.com
(an interview with Marc Gugerli by Oliver Disler, 4 February 2009)
Marc Gugerli
Fund Manager & Advisor of Gold 2000 Ltd. And the Julius Baer Gold Equity Fund (gugerli@gold2000.ch)
Oliver Disler
Editor and publisher of the ADAD Newsletters (adad.newsletter@gmail.com) / http://www.youtube.com/user/oliverdisler
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O. Disler: Dear Mr. Gugerli you are a specialist for Gold and Gold mining stocks. Are you disappointed about the performance of the Gold price the recent months?
Marc Gugerli:
No, I am not. Gold has outperformed all major asset classes like bonds and shares. The Gold price calculated in South African Rand, Australian and Canadian Dollars, British Pound, EURO, Swiss Franc and some other currencies has just recently reached new highs. What is rather disappointing is the performance of gold mining companies’ shares.
O. Disler: We are facing one of the heaviest global financial crises, why is Gold not trading much higher?
Marc Gugerli:
Gold has primarily a function of conserving the value of purchasing power. Gold is money and goes hand-in-hand with the increase in money supply on a long-term basis. In recent months a lot of money has been destroyed, although to counteract this central banks are printing money. The various problems and issues we have in the financial markets have been recognized much too late and most central banks (especially the ECB) are “behind the curve” in reacting with adequate counter-measures. This is one of the reasons, why the gold price did not go up explosively.
O. Disler: What is the relation between the gold price and money supply precisely?
Marc Gugerli:
Yes. Gold was, is and remains, money. Gold supply and demand and the variation of paper money supply are two important parameters which have an impact on the price of gold. Before the financial crisis started in 2007, money supply was growing at a rate of roughly 10% in most industrialized western countries. Nowadays it is a multiple of ten percent. A lot of central banks try to get ahead of the curve by reducing interest rates and flooding the markets with new money. The gold price should reflect this already and trade around its inflation adjusted top of approximately USD 2,000. The market is currently behind the curve. USD 2,000 is my minimum target for the gold price! The inflation of gold (dilution) is about 1.6% (gold output) or 2,000 tonnes per year. The entire amount of gold ever mined in history is estimated to be about only 140,000 tons. Money supply growth is approximately 30% and exceeds even 100% in some specific cases. It is just a matter of time that Gold will rebalance this inequality.
O. Disler: Is Gold an alternative to treasury bonds, since the yields are so low?
Marc Gugerli:
That is a great question. Treasury bills are the next big bubble (to burst). Investors and most asset managers have an average of 20% in cash and 30% invested in short-term treasuries. For a certain period this might be the right asset allocation. Since the yields on cash and short-term treasuries are almost 0% in major currencies, Gold is getting more attractive as an investment. Now you have to ask yourself, if you should be fully invested in classical assets only, where the supply is exploding by the new money printed, or at least add some Gold to your portfolio which can’t be copied, printed and is nobody’s liability?
O. Disler: How shall somebody invest into Gold? Do you suggest Gold coins as well?
Marc Gugerli:
There are three possibilities, which are relatively safe:
1. You buy physical Gold and put it into a safe.
2. You could buy the Gold ETF from Zurich Kantonalbank (ZKB) which is traded at the Swiss Stock Exchange, which is the only ETF available which is fully covered by physical Gold. If needed you can exercise your right to receive the metal and get the Gold delivered within 10 days. There are similar products available, but as with bank metal depository accounts you run the risk that you have to wait a long time until you get your gold. A very important issue is to reduce to a minimum the counterparty and depository risk of a failure to exercise your right to receive the metal. [Note that the ZKB Gold ETF is not open to US citizens and Residents]
3. It makes absolute sense to purchase gold coins. Investors have to consider, however, that gold coins trade at elevated premiums and are almost not available anymore in some regions, such as the USA, Canada and Australia.
I suggest having a minimum investment of 10% of one’s total wealth/net worth in physical Gold. Consider this investment as an insurance policy which in a worst case scenario protects the rest of your holdings and assets.
O. Disler: This is interesting, but again, why is the price of Gold not trading much higher?
Marc Gugerli:
The majority of investors purchase “paper” Gold Futures on the COMEX. The sellers or counterparties of those Gold Futures are just a few very dominant players. Some of them have an unofficially close link to the US government. So far most of the investors didn’t exercise their Gold Futures and have accepted cash instead of physical settlement. This is about to change. I believe that the Comex will default and the entire paper gold market will “crash“ and gold could rise very quickly to USD 2000 to 3000. When this happens it will be too late to exercise your futures Gold contracts or to try purchasing physical gold. It’s a similar analogy to house insurance, which you need before house burns down, not afterwards!
O. Disler: What is your view about the price of Silver?
Marc Gugerli:
The situation in the paper Silver market is even worse. At current levels, Silver is extremely cheap and investors are divided if Silver is an industrial metal or a precious metal, or both. But looking at current prices, it is really being treated more like other industrial metals.
Silver is the Gold of the poor man. I believe that the price of Gold will become extremely expensive and will be considered rather as “store of wealth” than money. With Silver, I can imagine that, for example, China or Mexico could accept Silver as currency/money and the method of payment of choice (a de-facto Silver Standard). I expect that Silver could outperform the price of Gold. Silver takes much more space to store and in most countries you have to pay VAT on Silver purchases. I suggest the Silver ETF of ZKB in Switzerland, which is traded on the Swiss Stock Exchange. [Note that the ZKB Silver ETF is not open to US citizens and Residents]
O. Disler: What is your opinion about the US Dollar?
Marc Gugerli:
The question is always: compared to what? I believe that basically most industrial countries are trying to weaken their currencies with the goal of boosting exports. To remain competitive other countries need to do the same and start the money printing presses and then the devaluation “carousel” is launched. Central banks are devaluing their currencies against limited available and tangible hard assets like land, commodities and precious metals like Gold and/or Silver. The ECB is far behind the curve and the printing machine runs slower than the Federal Reserve’s! But all this can change very fast.
O. Disler: What is your opinion about the slogan “ too big to fail”?
Marc Gugerli:
You know that in the USA everything has been undertaken to prevent a recession. With only small indications of a weakening economy, Greenspan started to pump money into the system and reduced interest rates immediately. Economic problems have been suppressed artificially for years. This is the reason why many issues/companies became “too big to fail, save and solve“. For decades the formula has been the same: When there is a problem, money will be printed and debts increased and interest rates go down afterwards. This is the main reason for the current financial and economic crisis. But one day the bill MUST be settled!
O. Disler: What do you think about how, or if, the debts will be paid back?
Marc Gugerli:
There are three possible outcomes:
1. They will actually pay back the debts. But in reality, this situation is impossible.
2. They will default and declare bankruptcy. But this is not what they want – remember "too big to fail". Examples are the bail-outs of the automobile and banking industry.
3. Or through inflation. This option you can bet on.
O. Disler: Is there a risk of inflation, since economies are cooling-off or are already in a recession?
Marc Gugerli:
I believe the correct description of what we have to expect in the very near future is an inflationary recession, otherwise known as stagflation. As I mentioned already, everything will be done to stop this deflation scenario. I expect that we will see significant inflation, especially in the food and energy sector. But I expect that luxury items like yachts and Porsches will become much cheaper.
O. Disler: What should investors buy right now?
Marc Gugerli:
This year several USD 1,000 billion rescue packages will be rolled-out. The biggest part of this fresh money will pour into infrastructure projects. Of course there will be companies which will benefit from this. During the German “Weimar” hyperinflation period some stocks of industrial companies retained 70% of their purchasing power. Cash and government bonds became worthless. Remember in which asset classes the investors were mainly invested in those hyperinflation days? My top choices are companies in the commodity, food and energy sectors.
O. Disler: What about gold mining shares?
Marc Gugerli:
Good point! Have a look at industrial metals like nickel, zinc or crude oil. Some of them dropped more than 70% from last year’s peaks. The industrial metals mining companies share prices also tumbled 50 to 70%.
The price of Gold is trading only 10% below its highest historical level [over USD 1,000 in March 2008] and, as mentioned already, it is reaching new highs as calculated in many other currencies. But gold mining shares (XAU, HUI) are still trading 40 % below their peaks. I consider this to be a mis-pricing and a big buying opportunity.
Due to lower prices for energy, production costs are falling substantially and a Gold price close to its highest level means that profitability of gold mining companies will increase substantially. The Philadelphia Gold Index (XAU) and the HUI are trading at attractive levels and could double easily. From a historical valuation point of view and compared with the price of Gold the XAU and HUI are very cheap and my favorite investments for 2009.
O. Disler: Dear Mr. Gugerli, thanks for your time and the interesting interview!
-- Posted Friday, 6 February 2009 | Digg This Article | Source: GoldSeek.com
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