Paul Walker: CEO, GFMS, London

MONEYWEB, Erika van der Merwe, 14 September 2006

Gold bulls have had to grin and bear it through the past week or so.

What’s going on?

MONEYWEB: We welcome in the studio Paul Walker, CEO of GFMS in London. Paul, you don’t look at all as I expected. Where’s the suit and the cropped hair?

PAUL WALKER: I’m working on that one. It’s been about a 20-year project. I don’t think it’s going to be any more successful than it’s been over the last 20 years.

MONEYWEB: You look like Durban surfer – you and Arthur together. What a combination!

PAUL WALKER: We have a secret that we haven’t really shared with the rest of the world yet. You can get away with not looking the way people expect you to look all the time.

MONEYWEB: That’s welcome news.

ARTHUR BUCHNER: That’s why we hide behind our screens. So you don’t open outcry on the floor any more.

PAUL WALKER: That’s why we both have faces for radio.

MONEYWEB: Oh, not at all. Now Paul, gold bulls have had to grin and bear it through the past week or so, when the price dropped to below $600/oz. What’s going on?

PAUL WALKER: I think there’s just a process of consolidation in the market. There’s news that’s come through that’s shaken a few people. I think there was a lot of speculation at one stage that the central banks, the European central banks, those signatories to the central bank gold agreement, had been possibly selling a little bit in the towards the end of the central bank gold agreement. The number of calls I got from people asking that question suggested that there were a number of people out there who were thinking that was a realistic scenario. I think you’ve just seen some of the longs coming out of this market. The short term corrections of volatility we’ve seen over not just the last couple of weeks but the last couple of months, and indeed the last year or so, are going to be a feature of this market going forward. But I think this is a temporary drop and I think we’re going to see the turnaround coming fairly shortly.

MONEYWEB: So you talk about short-term corrections. Is that sort of clean talk for volatility?

PAUL WALKER: Well, it is volatility and I think, you know, people are looking in this market on a short-term basis for any reason to explain or try and trade on gold. So if the oil price goes down, people think there’s going to be a benign reconciliation of a variety of factors and say, the US economy, that’s maybe not as bad as we thought it was going to be. And on that basis people will trade gold down. But if you have a look at, for example, the correlations between gold and oil, it’s not really there on a long-term basis but on a short term basis. I had lunch today with somebody and we were talking about this very thing. People will trade on it. If you told me that oil was going to drop by another $10, I would definitely short gold. But, you know, that’s a short-term phenomenon and I think the longer-term fundamentals of this market, the investment case for gold, are still very much intact.

MONEYWEB: Well, let’s talk about that – the long-term view. What are the supporting factors?

PAUL WALKER: Well it goes back to a point I’ve made on this show over the last year and a half, and we haven’t really changed our story at all. It’s the US economy, and the fact that sooner or later there has to be a day of reckoning in that market, where the dollar’s going to weaken, people are going to pull out their cash – these are foreign investors from US equities and US debt – and they’re going to be looking for alternatives. That’s going to manifest itself in a weaker dollar, but it’s really the investment flows on the back of a correction in the US – that we’ll see at least a significant portion, a small but significant portion of that money going into gold.

MONEYWEB: Now you talk of the “day of reckoning”. Is this similar to the interview we’ve just had – a day of reckoning in response to the US deficits.

PAUL WALKER: Sure, well, you know, I think The Economist magazine described it as the “slow hiss of the housing bubble that’s starting to burst in the US”. And, you know, if you were to take an Economics 101 student and say: “Here are the outlines of an economy, what are the sorts of mechanisms that you would expect to see in place to bring about an equilibrium?” This is unsustainable in the longer term. And it’s going to be through a collapse in housing prices, there’s going to be a wealth effect from there, there’s going to be an effect on US equities. The flow-through to that is that foreign investors in the US are going to be looking for another home for their cash. Where do you put it in this market? The European markets aren’t looking particularly great. Japan is going through a recovery, but maybe has gone a little bit too far too fast, so there’s downside risk on Japan. What’s going to happen to the yen? Maybe it’s going to strengthen. When you go through all the alternatives there, there are alternatives – and I think those markets will certainly see the benefit from any correction in the US. But gold is still a significant issue on people’s radar screens, and I think you’ll see cash going into that and driving the price higher.

MONEYWEB: Now, Paul, your case is based on the demand element –the value for gold as an alternative asset or as an asset class, as opposed to jewellery demand, say.

PAUL WALKER: That’s true, but don’t forget, this is where the benefits of gold lie – that on the downside risk and currently where we’re trading, I don’t know what the price is at the moment, say $585, $590, you’re looking I would imagine at considerable demand coming out of the Asian market. So you have as an investor a safety net on the downside. I don’t think investors are ready to head for the doors and leave the gold market. There’s been an active two-way market in gold for some considerable time. The first half of this year our data – we do a lot of research with the private banks in Switzerland and elsewhere – it’s been a two-way and a very active two way market. But the investors are not running for the doors. People are being fairly astute in their investments in gold, getting in at the right time, getting out at the right time. But the bottom line of this is that there’s a bedrock of good physical demand at prices under $600. That’s going to mitigate your downside risk. And then you ask the question – if we do see what I think is an increasingly consensus view about the US economy, where does the gold price go? It goes up.

MONEYWEB: I know we’re always asking this, Paul – I think it’s a hazard of your job. Your view on the gold price? You’re quoted as saying that you expect a better level next year. What is your forecast for the end of next year?

PAUL WALKER: Well the end of this year we I think we’ll see $700 gold, or certainly very close to $700 gold before the end of this year. I think it’s going to be a bit of a roller-coaster in the next three or four months in this market. As we go into 2007 – again, to make a call on when the US economy is really going to turn. Now I’ve indicated in the past that I think the US economy is showing the strains. Sooner or later this is going to break, and if it does break in the near term then $800 is very much on the cards next year. But I think a best-case scenario is that you see the dollar weakening, you see these corrections coming about in the US economy, and that means to us certainly $600-plus averages for the rest of this year, quite possibly touching the $700s. And if the dollar really does crack, then the sky’s the limit.

MONEYWEB: Arthur, you’re nodding sagely.

ARTHUR BUCHNER: Well, yes, and you know one thing that saved the gold bulls over the last two or three weeks is the fact that the rand has weakened. If you take the rand price of gold, I think it’s sitting at around R4450, somewhere around there, and even though this gold price has pulled back that’s actually gone up. So if you’re a South African investor that is long on gold or likes gold, and you buy into a GLD, which is the rand listed price of gold, or you buy into a Gold Fields or whatever you want your exposure to, you do have a dual hedge. You have a currency hedge first of all, and then you’re also bullish on gold. And that’s really saved you and protected you over all these pull-backs. Every single pull-back we’ve found the rand’s actually continued to weaken with that pull-back. So it hasn’t been that volatile for you as a holder of the gold itself, but it’s been quite volatile if you’ve been a holder of the stock. And that’s basically it.

MONEYWEB: Paul, you refer to the investor flows and investor demand for gold as being a significant factor in your argument. What does the retail investor demand for gold look like?

PAUL WALKER: Well that’s a good question because I think the reason we haven’t seen $800 gold is because the retail investors really haven’t come into this market yet, and that’s the wildcard out there. If you have a look at our data on bar-hoarding, which is a kind of proxy for retail buying in the Asian markets, Japan were net sellers in the first two quarters of this year. If you have a look at the US market, there was a little bit of a blip earlier this year when they launched the .9999 coin there, the Buffalo. But really, there’s been no real action on that side of the market. And if we are going to see $800 or $900 gold prices, there’s no doubt that we’re going to have to do this on the back of retail investors. And I think this is the time perhaps, when the US economy starts to show signs of weakness, people are going to be looking for a hedge against that. And those who do have spare cash – and, trust me, there are not going to be that many people in the US who will have spare cash when this bubble starts to burst – but those who do will be looking for an alternative home, and gold is going to be a very good hedge against, if you like, the strength of the dollar and the wealth preservation for those in the US. If that happens, then we’ll definitely see something well north of $700. Possibly the highs that we saw 20 years ago.

ARTHUR BUCHNER: Well, we have a fantastic contrary indicator trade on our desk. About two and a half years ago my wife and her friends decided that gold was no longer really good jewellery, and they moved into platinum. And it started the first pull-back in platinum and it started the bull market in gold. So the minute my wife switches back into gold, we’re going to start selling. She hasn’t done that yet.

MONEYWEB: Hasn’t said a word?

ARTHUR BUCHNER: No, she hasn’t said a word. She’s still holding on to her platinum, which hasn’t done too badly, but when she switches into gold that’s when we’re starting to sell.

MONEYWEB: Well Barbara, there’s the next person to chat to in our gold slot – Arthur’s wife!

ARTHUR BUCHNER: She’s really good.

MONEYWEB: Well, Paul, it’s been delightful having you here. Thanks for coming into the studio, all the way from London.

PAUL WALKER: It’s a pleasure and good to see you.

MONEYWEB: All the way from London.

PAUL WALKER: Thank you.

MONEYWEB: Paul Walker, CEO of GFMS in London.

Posted in Market commentary

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