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Physical gold buying to lead the way in 2011 - Julian Philips
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Demand from emerging markets will continue to boost gold but its role as a measure of value going forward should not be underestimated
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GEOFF CANDY: Welcome to this week's edition of Mineweb.com's Gold weekly Podcast in this the very first edition of the 2011-year. With me is Julian Phillips - he's the founder of Gold Forecaster. Julian, we're 11 day's into the New Year and it's already been a roller coaster ride for gold. A lot of focus has again been on the US, and in particular whether or not the US is recovering - what do you make of the beginning of the year?
JULIAN PHILLIPS: There is a tremendous hunger on the part of investors and commentators to see something positive. We've had years of bad news and it doesn't seem to want to go away and as you say the beginning of the year seems to point that out. There we were on Friday 7 January expecting superb job figures - we were disappointed with far lower figures coming out. Then Mr Ben Bernanke, quite rightly said that it would take years before the employment picture in the United States picks up. What it does tell me is that we are in this rather strange world where there is a disjoint between the developed world, emerging world and indeed between different countries. If you look at the United States they've focussed almost entirely on the internal economy and it's not doing very well at the bottom levels. We know that their recovery can't really gain solid traction until the consumer has disposable income in its pocket and is pretty certain about his job and sees his house prices start to rise, and that's not on the screen at the moment - we keep looking at Wall Street and we keep looking at the banks but the blood's got to get down to the capillaries - down to the man in the street. It's not doing that at the moment, the focus is on the centre of the system and that is not doing very well in people's eyes. If you take one major underlying theme - that I actually heard on Mineweb - where how China by 2020 will be the world's largest economy. I don't think people have really factored that in - we're talking about 1.4 billion people as opposed to say 400 million in Europe, and 300 million in America. China will not simply be the world's biggest economy - it will be a dominant economy by then, and that leaves a lot of frightening changes ahead of us - and I don't think that has been recognised - so we are going to see a period where uncertainty and lack of confidence is going to grow. When I worked for Chase Manhattan way back in the 1980's they used to every quarter have a look at the state of the family as a precursor to their quarterly reports, because they believed that the state in the family had a direct impact on the quality of their earnings in the future growth - I believe the same is true today but if you look at the same picture you're seeing a break down in confidence, growing uncertainty, growing volatility and this is now a major trend - we've had it since the credit crunch began, but there's been no reformation, there's been no rectification, there's been patch-up jobs here and there - but there is no genuine at the ground reform which is needed to stave off what I believe is a rather explosive future and indeed one of the themes that I'm covering in my newsletter over the next few weeks, is this concept of a financial earthquake. You can take, say, five major trends that are changing the world at the same time, and when they start to bump into each other you're going to get far more than simply the five, they're going to spawn, each one, a greater crisis and a greater breakdown unless attended to rapidly and decisively - China will be the most powerful economy in the world in a world that's fragmenting fast. That is the background for gold because, really to be quite frank, the gold price isn't about gold - it's about the state of the world - the state of the financial world - the monetary system. You very kindly published an article of mine on means of exchange and measure of value, which discussed whether there would be euro collapse, a dollar collapse, or gold collapse, and thereby hangs the tail. We're moving to an area where of course, currencies won't collapse they are the means of exchange - no matter what condition they're in, they're all we've got - but they will fail in accurately being a measure of value and I believe that's a very sad state of affairs that one won't change - how it affects gold and precious metals I believe they will grow in importance as a measure of value. If you look at London today, London has been dominating the gold price, and the gold market clearly is focusing on London and it's become a bigger global market in terms of numbers of participants so I watch the gold fix now as a definer of the day's value of the gold price. That trend adds to what I've already said and you'll see that continue and that whole focus will shift the demand and gold market will go there.
GEOFF CANDY: How much of this has to do with what you mentioned at the beginning in terms of the disjuncture between the emerging world, the developed world and indeed as you say between countries themselves if the London fix is becoming the centre point of the day's gold trade - where is the beginning and where is the end and where are the big drivers coming in.
JULIAN PHILLIPS: The big drivers are coming from emerging markets, I believe, and just as China will be a biggest economy by 2020, so they will be the biggest gold market by far with India following pretty hard behind. If you talk to any man who's never been wealthy and suddenly becomes wealthy, he tends to keep his basic values and his basic trust - it takes a long time for him to be turned into a man used to his power - so likewise the East believes that gold is money. They don't trust governments - they don't trust printed money issued by governments - they believe if it's safe and it's sound, and it's hidden away it can't be touched, it can't be damaged it can't be confiscated, therefore it is something to trust no matter what's going on outside. That trend will continue because as the gold price rises, so that trend is re-enforced. So the big driver has to come from the East and as the West diminishes, I don't think we will see a huge drop off in jewellery demand, after all it's already picked up in the last year despite the negatives. However, if the West does genuinely recover, then you're going to see even more growth on that side, just as you would so in your markets. Let's put it frankly, a growing world - East and West - is too much for the resources of this world to cope with, therefore there will have to be volatility, spikes in various commodities and returning to something that can be trusted as a means of exchange globally, so I believe that gold's monetary role, even if it's off stage will grow, and I keep watching the BIS numbers on the gold front very carefully. We mentioned at our last assessment the IMF gold is off the market and with that off the market that's about 400 tonnes gone from the market - so no wonder central banks are holding hard. You mentioned earlier about the record premiums on gold bars - this reflects this overall trend that many people in the West particularly in Europe are realising that the developed world's fine when it works, but we've seen it in the last century or so, break down several times and at those times gold was the thing that stood its ground and was exchangeable internationally when few other things were - and that concept will pervade, firstly Europe in a greater way and once the Americans realise that they too are in this global economy, I believe they will rush to gold and will probably be the rushing herd when they do - but we're looking at a very frightening future...
GEOFF CANDY: In terms of that, the manner in which people are potentially going to be looking to gold and the value they place on it - how are they going to invest in that gold - are we likely to see an uptick again in things like ETF's or will it be in the actual physical gold bars as we can see the demand for those going up in the likes of China already?
JULIAN PHILLIPS: I personally believe that the physical demand will dominate - that is another reason why London will grow as a gold centre because it is essentially a physical market. If you look at the ETF's, the gold is held by the banks - there are shares - the tie to allocated physical gold is not as strong as it should be and therefore with the banks steadily over the last few years - unfortunately losing a lot of their reputation as trustworthy custodians of the financial system and showing themselves as opportunists - people are saying "Sorry, we're going to move a little bit away." Further, if you go to the East, banks are synonymous with government and exposure of your wealth and vulnerability of your wealth - so again another reason to turn to physical just to keep it away from the system, as it were - and I believe that trend will also grow.
GEOFF CANDY: Two final questions to close off with, the first revolves around GATA (Gold Anti-Trust Action Committee) and the kind of court cases that they've been involved with, with the Federal Reserve and trying to get some sense of gold holdings and that kind of thing - there was a development this week where they did have a relatively favourable ruling - what do you make of all of that?
JULIAN PHILLIPS: If you see it in the light of my last comments about banks losing public confidence to some extent what GATA has been saying - and they've done a huge amount of work on this, and no matter what people think of them, there are few people who have done nearly as much work, or who have tried as hard as they have to bring transparency to the gold market, and for that they should be commended because a bank should be able to face the public eye with no fear of danger. Yes, there is a certain need for confidence, but when it invades the public confidence in them - it should be rectified straight away. I think that there is a clash between the developed world banking system and transparency on gold, after all the two were almost in opposition to each other - the banks need to be able to have people use credit cards and use the banks for all their financial transactions and the gold system as it was originally - before there was a gold standard - prevented that. I believe gold does have a role even under the developed world system, but it hasn't yet been harnessed, so there is doubt there about the behaviour or even central banks and I think some of that persists - there is a fear that something that is wrong and it would be very opportune for all such banks, including the Federal Reserve, to clear away that doubt if they wish to retain the confidence of the public.
GEOFF CANDY: To close off with and to play devil's advocate slightly - you've painted a not particularly optimistic view of what's going to happen at the macro-economic front, but clearly a lot of it is good for the gold price - how do you respond to the view that perhaps as the US recovers - as we begin to see a nascent recovery in Europe as well, and those kinds of developments that the investment demand might wane or begin to wane for gold and we might see a drop in the price rather than a strengthening?
JULIAN PHILLIPS: The developed world had a wonderful boom from about 1985 right through to 2007. The games that were played by governments and central banks on gold ceased in 1999 with the Washington agreement. Thereafter from 2000 when gold was at around about $275 - gold moved through to make $1,200 in 2007 - that's in the face of a booming developed world set of economies - and it was in the face of a slowly rising China. If we were to see the same economic growth at this time in the developed world, and add to that Chinese development you would see the oil price at higher that $145 as it was at its peak and there is absolutely no reason until there is a reformation of the monetary system why gold and gold investments should diminish, in fact if the developed world increased its investment capabilities through growth, I believe the demand for all such sound investment instruments will actually grow - so I don't buy the story that growth should lead to a drop in investment demand - it just doesn't fit history - it doesn't fix economic sense or monetary sense.
Physical gold buying to lead the way in 2011 - Julian Philips
Demand from emerging markets will continue to boost gold but its role as a measure of value going forward should not be underestimated
Download this interview
GEOFF CANDY: Welcome to this week's edition of Mineweb.com's Gold weekly Podcast in this the very first edition of the 2011-year. With me is Julian Phillips - he's the founder of Gold Forecaster. Julian, we're 11 day's into the New Year and it's already been a roller coaster ride for gold. A lot of focus has again been on the US, and in particular whether or not the US is recovering - what do you make of the beginning of the year?
JULIAN PHILLIPS: There is a tremendous hunger on the part of investors and commentators to see something positive. We've had years of bad news and it doesn't seem to want to go away and as you say the beginning of the year seems to point that out. There we were on Friday 7 January expecting superb job figures - we were disappointed with far lower figures coming out. Then Mr Ben Bernanke, quite rightly said that it would take years before the employment picture in the United States picks up. What it does tell me is that we are in this rather strange world where there is a disjoint between the developed world, emerging world and indeed between different countries. If you look at the United States they've focussed almost entirely on the internal economy and it's not doing very well at the bottom levels. We know that their recovery can't really gain solid traction until the consumer has disposable income in its pocket and is pretty certain about his job and sees his house prices start to rise, and that's not on the screen at the moment - we keep looking at Wall Street and we keep looking at the banks but the blood's got to get down to the capillaries - down to the man in the street. It's not doing that at the moment, the focus is on the centre of the system and that is not doing very well in people's eyes. If you take one major underlying theme - that I actually heard on Mineweb - where how China by 2020 will be the world's largest economy. I don't think people have really factored that in - we're talking about 1.4 billion people as opposed to say 400 million in Europe, and 300 million in America. China will not simply be the world's biggest economy - it will be a dominant economy by then, and that leaves a lot of frightening changes ahead of us - and I don't think that has been recognised - so we are going to see a period where uncertainty and lack of confidence is going to grow. When I worked for Chase Manhattan way back in the 1980's they used to every quarter have a look at the state of the family as a precursor to their quarterly reports, because they believed that the state in the family had a direct impact on the quality of their earnings in the future growth - I believe the same is true today but if you look at the same picture you're seeing a break down in confidence, growing uncertainty, growing volatility and this is now a major trend - we've had it since the credit crunch began, but there's been no reformation, there's been no rectification, there's been patch-up jobs here and there - but there is no genuine at the ground reform which is needed to stave off what I believe is a rather explosive future and indeed one of the themes that I'm covering in my newsletter over the next few weeks, is this concept of a financial earthquake. You can take, say, five major trends that are changing the world at the same time, and when they start to bump into each other you're going to get far more than simply the five, they're going to spawn, each one, a greater crisis and a greater breakdown unless attended to rapidly and decisively - China will be the most powerful economy in the world in a world that's fragmenting fast. That is the background for gold because, really to be quite frank, the gold price isn't about gold - it's about the state of the world - the state of the financial world - the monetary system. You very kindly published an article of mine on means of exchange and measure of value, which discussed whether there would be euro collapse, a dollar collapse, or gold collapse, and thereby hangs the tail. We're moving to an area where of course, currencies won't collapse they are the means of exchange - no matter what condition they're in, they're all we've got - but they will fail in accurately being a measure of value and I believe that's a very sad state of affairs that one won't change - how it affects gold and precious metals I believe they will grow in importance as a measure of value. If you look at London today, London has been dominating the gold price, and the gold market clearly is focusing on London and it's become a bigger global market in terms of numbers of participants so I watch the gold fix now as a definer of the day's value of the gold price. That trend adds to what I've already said and you'll see that continue and that whole focus will shift the demand and gold market will go there.
GEOFF CANDY: How much of this has to do with what you mentioned at the beginning in terms of the disjuncture between the emerging world, the developed world and indeed as you say between countries themselves if the London fix is becoming the centre point of the day's gold trade - where is the beginning and where is the end and where are the big drivers coming in.
JULIAN PHILLIPS: The big drivers are coming from emerging markets, I believe, and just as China will be a biggest economy by 2020, so they will be the biggest gold market by far with India following pretty hard behind. If you talk to any man who's never been wealthy and suddenly becomes wealthy, he tends to keep his basic values and his basic trust - it takes a long time for him to be turned into a man used to his power - so likewise the East believes that gold is money. They don't trust governments - they don't trust printed money issued by governments - they believe if it's safe and it's sound, and it's hidden away it can't be touched, it can't be damaged it can't be confiscated, therefore it is something to trust no matter what's going on outside. That trend will continue because as the gold price rises, so that trend is re-enforced. So the big driver has to come from the East and as the West diminishes, I don't think we will see a huge drop off in jewellery demand, after all it's already picked up in the last year despite the negatives. However, if the West does genuinely recover, then you're going to see even more growth on that side, just as you would so in your markets. Let's put it frankly, a growing world - East and West - is too much for the resources of this world to cope with, therefore there will have to be volatility, spikes in various commodities and returning to something that can be trusted as a means of exchange globally, so I believe that gold's monetary role, even if it's off stage will grow, and I keep watching the BIS numbers on the gold front very carefully. We mentioned at our last assessment the IMF gold is off the market and with that off the market that's about 400 tonnes gone from the market - so no wonder central banks are holding hard. You mentioned earlier about the record premiums on gold bars - this reflects this overall trend that many people in the West particularly in Europe are realising that the developed world's fine when it works, but we've seen it in the last century or so, break down several times and at those times gold was the thing that stood its ground and was exchangeable internationally when few other things were - and that concept will pervade, firstly Europe in a greater way and once the Americans realise that they too are in this global economy, I believe they will rush to gold and will probably be the rushing herd when they do - but we're looking at a very frightening future...
GEOFF CANDY: In terms of that, the manner in which people are potentially going to be looking to gold and the value they place on it - how are they going to invest in that gold - are we likely to see an uptick again in things like ETF's or will it be in the actual physical gold bars as we can see the demand for those going up in the likes of China already?
JULIAN PHILLIPS: I personally believe that the physical demand will dominate - that is another reason why London will grow as a gold centre because it is essentially a physical market. If you look at the ETF's, the gold is held by the banks - there are shares - the tie to allocated physical gold is not as strong as it should be and therefore with the banks steadily over the last few years - unfortunately losing a lot of their reputation as trustworthy custodians of the financial system and showing themselves as opportunists - people are saying "Sorry, we're going to move a little bit away." Further, if you go to the East, banks are synonymous with government and exposure of your wealth and vulnerability of your wealth - so again another reason to turn to physical just to keep it away from the system, as it were - and I believe that trend will also grow.
GEOFF CANDY: Two final questions to close off with, the first revolves around GATA (Gold Anti-Trust Action Committee) and the kind of court cases that they've been involved with, with the Federal Reserve and trying to get some sense of gold holdings and that kind of thing - there was a development this week where they did have a relatively favourable ruling - what do you make of all of that?
JULIAN PHILLIPS: If you see it in the light of my last comments about banks losing public confidence to some extent what GATA has been saying - and they've done a huge amount of work on this, and no matter what people think of them, there are few people who have done nearly as much work, or who have tried as hard as they have to bring transparency to the gold market, and for that they should be commended because a bank should be able to face the public eye with no fear of danger. Yes, there is a certain need for confidence, but when it invades the public confidence in them - it should be rectified straight away. I think that there is a clash between the developed world banking system and transparency on gold, after all the two were almost in opposition to each other - the banks need to be able to have people use credit cards and use the banks for all their financial transactions and the gold system as it was originally - before there was a gold standard - prevented that. I believe gold does have a role even under the developed world system, but it hasn't yet been harnessed, so there is doubt there about the behaviour or even central banks and I think some of that persists - there is a fear that something that is wrong and it would be very opportune for all such banks, including the Federal Reserve, to clear away that doubt if they wish to retain the confidence of the public.
GEOFF CANDY: To close off with and to play devil's advocate slightly - you've painted a not particularly optimistic view of what's going to happen at the macro-economic front, but clearly a lot of it is good for the gold price - how do you respond to the view that perhaps as the US recovers - as we begin to see a nascent recovery in Europe as well, and those kinds of developments that the investment demand might wane or begin to wane for gold and we might see a drop in the price rather than a strengthening?
JULIAN PHILLIPS: The developed world had a wonderful boom from about 1985 right through to 2007. The games that were played by governments and central banks on gold ceased in 1999 with the Washington agreement. Thereafter from 2000 when gold was at around about $275 - gold moved through to make $1,200 in 2007 - that's in the face of a booming developed world set of economies - and it was in the face of a slowly rising China. If we were to see the same economic growth at this time in the developed world, and add to that Chinese development you would see the oil price at higher that $145 as it was at its peak and there is absolutely no reason until there is a reformation of the monetary system why gold and gold investments should diminish, in fact if the developed world increased its investment capabilities through growth, I believe the demand for all such sound investment instruments will actually grow - so I don't buy the story that growth should lead to a drop in investment demand - it just doesn't fit history - it doesn't fix economic sense or monetary sense.
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