The Chinese and gold; will we ever see gold below $1000 an ounce again?

ALEC HOGG: In this special podcast Jeff Nichols, Managing Director of American Precious Metals Advisors joins us. Jeff, the gold has become a proxy nowadays, not only for a weaker dollar but it seems other major currencies too and if we believe that other currencies like the pound and the yen and the euro are going to continue falling, I suppose that's good for gold.

JEFFREY NICHOLS: I think so - really all the major industrial nation currencies are reflecting problems in the western economies - problems that are being addressed by easy money and low interest rates that ultimately are going to be reflected in higher inflation and depreciating purchasing power for all these currencies. The question really is not which one is stronger or weaker, but how long it is going to take for them all to be reflected in the rising gold prices.

ALEC HOGG: It is interesting this, because what you have said makes perfect sense, yet many people in many parts of the world are not yet focussing their minds on it. Why do you think that is?

JEFFREY NICHOLS: Gold remains an unknown and is held in low esteem by many people - still these days. It is interesting if you look at the press and media reports on gold, there is often a negative bias in the media towards gold as some sort of irrational investment vehicle that only unwise investors or nuts participate in. So I think it has that going against it. It is not accepted by many people as a reasonable vehicle, as a store value, as something that merits their attention.

ALEC HOGG: I suppose the good thing about investing is that you don't really want to be where the crowd is, you want to be where the crowd is going to go so at some point in time - you were talking to our sister publication, Mineweb and suggesting there that it is unlikely that we will see the gold price below $1000 an ounce any time soon.

JEFFREY NICHOLS: In fact I don't think we will ever see gold below $1000 again. I think the things that are happening now in the world of gold are changing the future in ways that we might not have guessed a few years ago. The world of gold is expanding demographically in terms of the number of systems, the types of systems. We have more people with access to gold than ever before, in part thanks to the introduction of new investment vehicles. Exchange-traded funds (ETFs) are one example but if you go from country to country there are vehicles and products that are designed for local markets. In India for example we have little coins that are distributed through the postal service. From one country to the next there are ETFs that are specific to those countries that trade in their local markets. China is very important to note that a few years ago gold investment was illegal in China. Since it's been legalised it is now possible to walk into banks across the country and into gold retail shops across the country and walk out with a bar of gold. This would have been unimaginable three years ago.

ALEC HOGG: Do the Chinese like gold?

JEFFREY NICHOLS: They like it for cultural and historic reasons - much like the Indians do. It is considered propitious to give gold as a gift on the birth of a baby, on marriage it is considered to be good luck - own gold. So the Chinese like gold and the Chinese have a very high savings rate and consider gold a reasonable vehicle for savings. Many Chinese who are buying gold today will never sell that gold again, in a sense it is being removed permanently from the market but I think this is a very bullish development. The world of gold is expanding demographically and in terms of the gold investment infrastructure there are more vehicles and more channels deliverable to investors around the world and this is resulting in an upward shift in the demand curve for gold. That's if the average gold price over the years in the future, say over the next 10 or 15 years, is going to be much higher than it might have been over say the last 10 or 15 years if you were to imagine an average gold price extrapolating away from whatever cyclical influences there might be.

ALEC HOGG: It's a reality that when economies grow that people do get richer. Are we now perhaps entering an era for the gold price, where it will be closely linked to economic growth in China and India perhaps?

JEFFREY NICHOLS: Yes I think so. The countries that will be getting richer and are already getting richer are countries that have a historic propensity and cultural affinity to gold which is not true of the countries that are now entering a difficult period - US, Europe, other investors, Japan for example. The industrial world is entering a difficult period which I think is going to continue for a number of years, a period of what might be called ‘stagflation' like the 1970s - whereas the East Asian countries, like China, India, Singapore, Taiwan, Thailand, South Korea, even Vietnam and some of the countries in that region are experiencing broken wealth. They all have high savings rates and they all have an affinity to gold - so the fact that they are growing is good for gold and even if they don't suffer from high inflation, high inflation is not required for these countries to see more gold investment demand.

ALEC HOGG: That's a good long-term picture, but what about in the short term? Who is buying today and who in fact is doing the selling?

JEFFREY NICHOLS: I think today if you are talking about today specifically, much of the selling is being done by traders and speculators in New York and in London and the western market centres. They are selling gold not because they are necessarily negative on gold in any long-term sense but gold is simply one of the instruments in the constellation of vehicles that they trade along with oil and other things and in the past week or two as gold seemed to run into technical resistance on the upside - some of these traders decided it was time to take profits or take short positions and the trading train moved into reverse and gathered a little momentum. At the same time there seemed to be a little less anxiety about the euro. They seemed to have patched over some of the problems of that sovereign risk with Greece and some of the other weaker European economies with debt problems. The dollar rallied a little bit. So I think between those two factors, gold began to sell off - much of it being technical selling of futures and derivative products, not really physical sales by investors who have a long-term view of gold. So that's the important thing. Also over the last few weeks we saw some pickup in demand from India importantly. In January and February, Indian demand was actually quite strong and as we came into March the Indians took a rest and were waiting for the prices to come back down again before coming back into the market and that may have contributed a little bit too - but the Indians will come back into the market probably in the next few weeks. There's a wedding seasonal period that begins in April and there will probably be some seasonal buying around that. But I expect gold to pick up. I am still very optimistic about gold during the rest of the year, notwithstanding this current weakness and we will probably see periodic sell offs over the next year or two. I think we are going to see a volatile market around an upward trend. That said, by mid-year we will see the historic US dollar high point which was around $1227 and by year end we will be seeing $1500 gold. So you can see I am quite optimistic but with wide swings around that and sell off will lead some to believe that the bull market is over.

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

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