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-- Posted Thursday, 9 September 2010 | | Source: GoldSeek.com
What do politics have to do with precious metals? A lot, according to Brien Lundin, who writes Gold Newsletter. In this exclusive interview with The Gold Report, Brien reveals how the November elections will be pivotal to gold and why President Obama's policies could provide a big boost to the yellow metal.
The Gold Report: Recent reports are signaling that consumer confidence and sentiment are up and that the balance sheets of U.S. corporations are stronger. Yet, gold is going up at the same time. What's happening with the gold market right now?
Brien Lundin: It's a bit deceiving that some sentiment surveys show what appear to be dramatic increases because they're still at very low levels, historically, and have been for months and even years. A sentiment index goes up a couple points compared to the previous month and it makes for headlines in the financial media. However, the smart money recognizes the fact that there hasn't been the level of increase in consumer sentiment that will lead to any kind of an economic rebound.
TGR: Could these small, incremental increases be a precursor to a larger recovery?
BL: They could be. The economic environment is really unique right now, because it's sharply split between the bulls and the bears. There's no clear trend. Positive economic indicators point toward a rebound and the stock market will soar. Then the next week, sentiment takes a 180-degree turn and the market heads in the opposite direction.
There's been talk recently of the "Hindenburg Omen"—an indicator said to predict stock market crashes that uses 52-week stock highs and lows and the moving averages of the New York Stock Exchange. This technical anomaly, or pattern, was triggered a few weeks ago. That's precisely what the Hindenburg Omen is meant to highlight—a situation in the market wherein sentiment is sharply split.
Essentially, this is a trendless market defined by very brief trends that are cut off and reversed periodically. So, it's a tough investing environment. The good news for gold investors is that no matter what happens, no matter which way the economy heads, there's a very good argument for significantly higher gold prices.
TGR: Most arguments that favor gold hinge on inflation caused by an economic rebound, or due to quantitative easing (QE) devaluing the dollar. If we are in a trendless market with the economy essentially moving sideways, are we in a so-called "growth recession?"
BL: Yes, and it's possible we will remain in a growth recession wherein the economy is growing so little it isn't enough to overcome the economic friction of inflation or enough to improve people's quality of life. But right now, the economy is on a razor edge with the potential to fall rapidly on either side of the equation. I really think that this trendless market is going to break one way or another fairly soon.
TGR: What will cause it to break?
BL: It just can't keep muddling along as it is. At some point, the government has to jump-start the economy. The Federal Reserve may panic and expand the money supply dramatically through more QE, which will produce a powerful growth in the amount of currency and a corresponding rise in gold prices.
There's another tactic that Fed Chairman Ben Bernanke hinted at during the Fed's Jackson Hole conference in August. He suggested unlocking excess banking reserves that are now sitting at the Fed earning about a quarter-point interest.
It's been difficult for banks to loan their reserves out, given the severe banking regulations that have come down. But the Fed can force their hand by taking the interest rate it's paying on the nearly $1 trillion in excess reserves. The Fed can cut the interest rate from about 0.25% to 0% and, in the extreme, can impose a holding charge. There can actually be negative interest rates on those reserves. If the Fed does that, I think money will come scurrying out of their coffers and back into banks to be put to work in the market. The end result would be a shot of adrenaline into the economy. I think there would be a dramatic effect on inflation rates and gold prices, as well.
TGR: Are we so far down the line that the only result is a high inflation rate?
BL: The current level of spending, the debt already baked into the cake, is too large to "grow" our way out of. That leaves the time-tested option that governments have always resorted to—inflate away the debt. If there is a 10% rate of monetary inflation, for example, then that debt is cut in half in about eight years. I think that is the only option remaining for the government. Even if Washington doesn't opt for more stimulus and spending, we could see significantly higher inflation rates purely as a result of the debt load that's already been amassed.
TGR: Could the U.S. experience hyperinflation like that experienced in the Weimar Republic of Germany in the 1920s?
BL: I don't think there will be hyperinflation in the U.S. There are really two types of inflation—price and monetary. Price inflation is not the cause, but rather the symptom of monetary inflation—just too much currency out there chasing too little goods. We don't need to have as high a level of price inflation as we had in the 1970s to see commodities and gold rise in value. In fact, I don't think there will be that level of price inflation because, unlike the 1970s, we have export economies like China, Thailand, Vietnam and India with very low labor costs that are restraining the Consumer Price Index (CPI). We can go to Wal-Mart or Costco and buy items at much lower prices compared to the options available to us in the 1970s. That directly impacts price inflation.
TGR: What effect will an export economy like China's have over the next year or two?
BL: I think China will have a significant and prominent influence. The rebound in Asia has been a remarkable story. The rest of the world caught pneumonia in 2008, but Asia seems to have had only a few sniffles.
China has also highlighted some new themes and trends in Asia. China is just beginning to experience a relative shortage of cheap labor, which is driving up wages and benefits across the board. While this has removed some of its economic advantages as an exporting nation, it's also correspondingly building greater domestic demand in China. Domestic consumer and business demand are going to become important drivers for China and other Asian export economies.
There will still be bubbles inflating and popping here and there in Asia, but I don't foresee these economic engines suffering major collapses in the near future. I think Asia is going to be a continuing story for commodities and particularly for base metals, including copper.
TGR: We are entering the Indian wedding season, China is motivating its population to buy gold coins and the holiday season is coming up. What's your prediction for gold in the fourth quarter?
BL: It is the traditional season for demand in precious metals to ramp up, but this type of demand is price sensitive. Seasonal buying, particularly in India, will dampen if gold prices go much higher than they are now. Previously, I think I predicted gold would be $1,350–$1,500 an ounce by year-end. Now, I think $1,500 is a long way to go from here. It would require a weaker dollar and some indication that the Fed's going to undertake additional quantitative easing to get gold prices to those levels before the end of the year.
Asia will still have demand for gold and that will support prices. In order to drive the market ahead, however, it's going to be a story of what's happening with the Western economies and will there be more monetary and quantitative easing. The good news for gold investors is that type of monetary and quantitative easing is very likely.
TGR: How do you think the November elections could impact the timing of any monetary and quantitative easing?
BL: In my view, the upcoming midterm elections in the U.S. actually represent the greatest near-term risk to gold. I believe the country is going to experience a dramatic backlash toward the conservative/Libertarian side of the political spectrum. Therefore, the markets are going to factor in restraint in spending, restraint in Keynesian stimulus policies and the type of gridlock in Washington that has proven positive for business and the economy. A short-term reaction will likely be a stronger dollar and weaker gold.
Long term, there are other political risks that I think will be positive for gold. There will be a lame duck, unaccountable Congress that could force through some dramatic spending and social plans. President Obama could go into full campaign mode; he's already campaigning, but you haven't seen anything yet. He's really going to be campaigning toward 2012. I think he is married to a political and economic philosophy that will end up being very good for gold and probably very bad for the U.S. economy.
They say it took President Nixon to go to China in the same way it took President Clinton and a Republican Congress to reform welfare, balance the budget and cut taxes. But Obama hasn't shown any inclination to triangulate like the more pragmatic Clinton. He's a true believer in a world where government runs the economy and picks the winners and losers. He's not going to back down, and he'll retain control of the Treasury and, to some extent, the Fed. Obama will still be able to cause some economic mischief, and he'll try his hardest to do so. For gold bugs, at least, that's going to be a good thing because it's going to lead to higher gold prices over the long term. But investors need to look at those midterm elections in November as being a stumbling block for gold along the way.
TGR: Gold prices have increased substantially since the beginning of August. You said in one of your alerts that, even though gold's low price may be behind us, junior resource stocks have yet to respond. Why are the juniors lagging?
BL: One refreshing thing about this summer is that a sense of normalcy has returned to the gold market. It's been a couple of years since that happened. Historically, gold prices bottom somewhere between mid-July and mid-August in a bull market. Juniors follow along a little bit later in August or September.
Interestingly, some shares have started to wake up since I wrote that the juniors had failed to respond. In fact, some have begun to soar. I really see a turnaround in the market. There are some bargains that remain, but they're not as prevalent as before.
TGR: One of the arguments that I've heard posed for rare earth plays is that the winners will be those that can get to production first and be low-cost producers because there is more than enough metal out there. What's your viewpoint on that?
BL: The market for these metals will grow strongly. There will be a period over the next three or four years in which there may actually be a shortage. The best cure for a supply shortage, of course, is high prices, and the market will eventually return to equilibrium or, more likely, to oversupply at some point. But investors aren't buying these junior rare earth plays for 10- or 20-year investments. They're buying them for the next two years, three years at the outside. In that timeframe, I think these companies have the potential to absolutely explode in value.
TGR: Could there be supply saturation in three years?
BL: I don't know that it would happen in three years. It could take two or three years before these deposits are even brought into production. I do think we're in the sweet spot for investors the next couple of years as these companies develop and expand their projects and as rare earth metals prices increase.
TGR: Should investors also wait for share prices to settle during winter?
BL: Companies that work in environments where they can't operate year-round often begin to see a decline in share price when the news flow stops in winter. There is also some tax-loss selling at the end of the year. The problem with some of the more successful plays is that the share prices don't come back due to tax-loss selling because people have gains in the stock. You see an opposite effect where the stocks may come back a little bit in the beginning of the New Year as people try to defer their capital gains.
TGR: You mentioned that investors in the rare earth sector should try to play with trading positions. Would you also recommend that with the junior gold sector?
BL: I would recommend it in companies that are somewhat cyclical. For example, a company that has some projects in the northern latitudes and goes silent for a while in the winter. But if investors have a good company with a good deposit that stands to grow, they don't want to be too smart by half. Investors should maintain a core position in these top-quality companies for the long term—so they can maximize returns by holding it through the cycles—until the ultimate takeout or realization of gains. That said, investors can have trading positions in these companies, and I think it's important for them to distinguish between the two positions. Perhaps take risk profits off the table, but don't sell it all out—maintain a core position. If you're an active investor and you watch the market on a daily basis, you can have trading positions in these stocks that also can be very profitable.
TGR: You organized and will be speaking at the New Orleans Investment Conference, which is coming up on Oct. 27. Can you tell me what you hope investors will learn there?
BL: This is a crucial stage in the gold market. I tried to develop an agenda and a roster of speakers at this year's event that will prepare investors for the new renaissance in the gold market and the dramatic changes going on both geopolitically and in the economy. There will be speakers like Newt Gingrich, former Congressman Dick Armey and political commentator Charles Krauthammer. Charles is one of the smartest people in Washington and knows what's going on in Congress and the administration that dramatically affects private wealth and the economy. David Walker, who is a former U.S. comptroller general, will be there to discuss the effects of our exploding debt. Eric Sprott, arguably the most successful gold investor in the world during this bull market, is speaking this year. This will be an opportunity for investors to hear firsthand what Eric likes about the market and what stocks he is buying.
This is a different kind of investment event than most people are familiar with. At the New Orleans Conference, there's a sense of being among the most sophisticated investors and experts that can be gathered in one place on the topic. Our speakers save their best picks and really work their hardest on their presentations for the New Orleans Conference. As a result, some extraordinary winners have come out of this event. We're talking stocks that will multiply 4x, 5x—even 10x after the event. It's a place to really find those hidden treasures and tomorrow's winners.
TGR: It sounds like an excellent educational opportunity. Thanks for your time today, Brien.
With a career spanning three decades in the investment markets, Brien Lundin serves as president and CEO of Jefferson Financial, a highly regarded publisher of market analyses and producer of investment-oriented events. Under the Jefferson Financial umbrella, Brien publishes and edits Gold Newsletter, a cornerstone of precious metals advisories since 1971; he digs into not only small caps of every type but also macroeconomics and geopolitical issues that ultimately affect every resource investor. Brien also hosts the New Orleans Investment Conference, the oldest and most respected investment event of its kind, which each year brings the giants of investing, economics and geopolitics. On the agenda for the 2010 conference—scheduled for October 27-30—is another star-studded array of speakers that includes a lot of names very well known to the Gold Report crowd: Mary Anne and Pamela Aden, Gary Alexander, Gene Arensberg, Dick Armey, Andrew Barron, Thom Calandra, Doug Casey, David Coffin, Brent Cook, Adrian Day, Marc Faber, Dennis Gartman, Steven Hochberg, Frank Holmes, Charles Krauthammer, Stephen Leeb, Ian McAvity, Robert Meier, Bill Murphy, Chris Powell, Robert Pretcher, Lawrence Roulston, Rick Rule, Jeff Siegel, Mark Skousen, Eric Sprott, Frank Trotter, David Walker and—of course—Brien Lundin. Streetwise - The Gold Report is Copyright © 2010 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part. The GOLD Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report. From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise. Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported. Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734. Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.
-- Posted Thursday, 9 September 2010 | Digg This Article | Source: GoldSeek.com
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