Alec Hogg speaks to Jeff Nichols, MD of American Precious Metals Advisors

ALEC HOGG:  In this special podcast we speak with Jeff Nichols - he's the managing director of American Precious Metals Advisors.  Jeff as we're looking at the gold price today, its down $100 from the peak that it hit just a few days ago.  Some people are baffled by this - you aren't...

JEFF NICHOLS:  No, not at all - firstly let me say that the market was over bought and due for a correction, and if we had gone up to today's level without going higher, people would be raving about how high the price is.  But now that it's come back down from what was really a price too soon, too fast - people are worried.  I think that the basic drivers of higher gold prices over the next few years are really still in place and will remain so for some time to come.

ALEC HOGG:  It's been interesting noticing people like Nouriel Roubini entering the debate on gold.  I'm not sure if you've had an opportunity to read his arguments, and if so, if you've got any thoughts.

JEFF NICHOLS:  Well I think he's missing the real point.  The reason that gold is going higher is not only because of macro economic fundamentals, which he may be looking at, but also because of important changes within the gold market itself.  The reversal of central bank attitudes towards gold and the accumulation now of gold by the official sector after decades of being a seller.  That would be one point.  Another is new investment vehicles that are attracting new players - particularly institutional and hedge fund players that previously had legal barriers to investing gold and he's missing also what is going on in China.  China is a fantastic potential market for gold.  Inflation is beginning to rise, there's a growing middle class, and importantly, the government is endorsing private gold investment for the first time in 50 years.  And as a result, gold investment bars are now available at banks and retail shops across the country - and it's just the beginning - the tip of what China will bring to the world of gold.  He's also missing the fact that mine production is diminishing - it has been for many years and it will continue to fall, even with increases in China, Russia and South America over the next few years - total world goldmine output is going to continue declining for at least five years and probably much longer.  And then too, gold is an emotional metal and emotions are increasingly negative.  People are losing faith already in the Obama administration here in the United States.  People are worried about the cost of healthcare, however that evolves.  Foreign central banks and private investors are distrusting the dollar like never before.  These are the points that he's missing...

ALEC HOGG:  Just to dwell on China a little if we can Jeff - you do visit there fairly regularly.  We've had, here in South Africa, quite a lot of propaganda from the platinum guys who say that ‘platinum jewellery sits better on an oriental skin than gold jewellery does - and as a result they were saying that is why there was so much platinum jewellery being sold into China.  Clearly, you're talking about the investment attractions of gold, but on the jewellery side, is that propaganda or is that accurate.

JEFF NICHOLS:  It's half and half - clearly there's rising interest in platinum jewellery and also beginning - palladium jewellery in China - partly because of marketing efforts by the Platinum Guild International Trade Association.  But the country where platinum jewellery is really very popular and where it's preferred because of its appearance against an oriental skin is in Japan.  The Chinese are less interested and have a longer tradition in gold, both as an investment and as jewellery - and jewellery demand in China for gold is also rising rapidly.

ALEC HOGG:  The point that you made earlier that the Chinese government is now encouraging investment by its citizens in gold after not allowing them to do it for many years perhaps that penny hasn't quite dropped yet.

JEFF NICHOLS:  No, we're just scratching the edge of the surface if you will - I was in China a few weeks ago - I had dinner one night with a friend and his girlfriend - the young lady who works in an advertising firm and this young woman had already been investing in gold.  She had recently gone out and bought 100g from a retail shop.  So, it is sort of filtering into the population but we're only just beginning.  I think China alone - if everything else just remained neutral - China alone has the potential in the next decade to drive gold prices much higher.

ALEC HOGG:  Jeff you did mention the central banks of the world buying gold in greater quantities than they have been for decades - that's often though, not a good sign.  You will remember well that the Bank of England sold a big chunk of its gold when the price was pretty much near its bottom.

JEFF NICHOLS:  Well central banks historically have been not good at timing the gold market.  But the central banks that sold a couple of decades ago, over the last 20 years, were central banks like England and some of the other European countries that felt over weighted in gold in terms of the structure of their reserve portfolio and part of the reason why they sold at that time had to do with this idea that they could use financial instruments and gain a return that they couldn't gain holding gold.  Having gone through that experience, the official sector realises that alternatives to gold aren't necessarily rewarding either.  They bought dollars, which have gone down.  Now we're looking at another set of central banks, principally the Asian central banks, which are under weighted in gold and are losing faith in the dollar and they're less concerned about the volatility of the gold price than they are about balancing their portfolios and getting up to par with the rest of the world.

ALEC HOGG:  There was some interesting news coming out of the Middle East today that a number of the countries there are getting together in a block and wanting to produce a central currency.  Is that something that would be - clearly it wouldn't be that good for the us dollar if it were to eventuate - but how would the influence be on the gold market?

JEFF NICHOLS:  Certainly in the near term rather minimal - the ability to launch a currency in and out of that sort and have it gain worldwide stature is something that would take time, measured over years not months, and we've seen this sort of talk before.  I think there's a political game going on if you will, when countries like the Middle East and Emirates or China knock the dollar - in a sense they're vying for more political power on the world stage and it doesn't necessarily mean that they're going to dump their dollars - after all, there's very few places they can put them...

ALEC HOGG:  Indeed.  Another issue that was a bull factor for the gold market up to now, has been a de-hedging by gold producers.  That seems to be coming to an end.  Barrick has virtually finished its de-hedging now, AngloGold Ashanti still has some to go, but with that out of the picture, doesn't that take a floor away...

JEFF NICHOLS:  That is a negative, certainly for the months ahead and one of the reasons why gold seems as strong as it did in the past year, particularly when sell offs occurred and they stopped short after falling only $5, $10, $15 is, I think, that Barrick and some of the other de-hedgers were coming into the market at opportunities of price weakness to buy and de-hedge.  That's now gone, but in its place we're going to see rising central bank buying on dips of that sort and also at the moment, we have some end of year bookkeeping going on with institutional investors, particularly hedge funds and others wanting to book profits that they've scored in 2009 before year end, and some of these will look for opportunities in January on price weakness, to re-establish those positions.

ALEC HOGG:  So to summarise then, is it accurate to think that it is a healthy thing for the gold price to have come back from the peak - it might have risen too far, too fast but that the long-term trend is still intact?

JEFF NICHOLS:  I think so and it's possible, as I said at the outset that we could see further weakness, but I would view any declines, simply as greater opportunities to accumulate.

ALEC HOGG:  Jeffrey Nichols is the managing director of American Precious Metals Advisors.

The SAfm Market Update with Moneyweb is broadcast on SAfm 104-107fm, weekdays at 18:00 to 18:30.

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