"Interest is the difference in the valuation of present goods and future goods; it is the discount in the valuation of future goods as against that of present goods."
Ludwig von Mises
“Planning for Freedom”
We’ve all been watching the selloff in the global gold market. Armies of chicken littles are in a frenzy due to suggestions that the Fed may be ending its quantitative easing, so I thought this is a good time to check in with my friend Henry Smyth of Granville Cooper Asset Management Ltd. (GCAM). Henry is a former Coutts & Co. banker and a very astute observer of the global financial markets. We spoke last week in New York. -- Chris
RCW: Henry, the gold market has been taking a beating in the past few months. What do you see as the drivers of the gold market today?
HS: Since $1525 support broke gold has been in the throes of stop loss selling. Gold is now over 2% below its 200 day moving average. Physical supply is extremely tight. The precious metals analysts where I trade in Zurich have very good contacts among the refiners. They tell me the order backlog is over four weeks now versus four days in a normal market. Same for Shanghai and Mumbai where you see sharply increasing demand as US Dollar gold prices fall and gold premiums rise. Here in the United States the US Mint cannot keep up with demand for gold and silver eagles.
RCW: So is this correction a normal reaction to the Fed? Or has the fact of QE magnified the volatility of gold (and everything else)?
HS: The shorts in the market are running out of short fuel. The decline in gold has been going on since late 2011 and is very long in the tooth. Sentiment against gold is virtually 100% right now among Western gold analysts. This is a Rothschild moment.
RCW: This is a reference to the famous dictum by Baron Rothschild: “Buy when there's blood on the street?”
HS: It is. There seems to be an expectation that the end of QE will be bullish for the Dollar and therefore bearish for gold. My view is the end of QE will be bearish for all those asset classes which require QE for life support and/or do not do well in a rising interest rate environment. That would include the bulk of US equity and fixed income markets.
RCW: So then I take it you currently are a buyer of gold?
HS: Gold is in a primary uptrend and has been since 2001. The long gold strategy of the Granville Cooper Gold Fund II Ltd. began in 2003. We went through a correction in 2004-5 and another in 2008-09. The current correction is longer in duration but similar in percentage change to the previous corrections. Our investment mandate is long term outperformance against the US Dollar gold price. We use corrections to build positions for the resumption of the primary trend. We have buy stops out there now.
RCW: So given the degree of government manipulation of the financial markets, how do you get a clear view of the gold market?
HS: Gold began its uptrend prior to the onset of the first QE. Fed policy can accelerate or retard, but not alter, the primary uptrend in gold. Gold is a global asset class but is viewed in a very provincial way in the United States. We are seeing a tectonic shift in global asset allocation as gold moves from West to East. This is far more significant than the West appreciates. In my view, this shift is it is akin to the movement of gold from Europe to the US following the 1933 devaluation of the dollar via gold by the Roosevelt administration and the promulgation of the Nuremburg Laws in Germany in 1935.
RCW: That is a pretty bold statement. The real driver of wealth migration from Europe to the US was two world wars. How do you see China leveraging their accumulation of gold to build long-term advantage for the Chinese economy?
HS: It appears that China has since the turn of the century had a state policy of encouraging gold ownership by its citizens. Given this policy and the evolution of their bilateral trading and clearing agreements and systems, it is reasonable to assume the Chinese have global ambitions for their currency, and that their gold holdings will be a significant support to the international acceptance of that currency. A reserve currency is the ultimate projection of state power. I think the Chinese get that.
RCW: Thanks Henry. Hopefully somebody in Washington will take heed of your analysis.