Double dip recession, hedging and the gold price- Julian Phillips

The structural shift in gold means that in recession or recovery, the price of the yellow metal will continue to rise, albeit with a number of dips along the way, says Julian Phillips of Gold Forecaster

GEOFF CANDY:  Hello and welcome to this week's edition of Mineweb.com gold's weekly podcast.  Joining me on the line is the founder of the Gold Forecaster, Julian Phillips.  Julian, gold has been moving in a pretty tight range over the last week or so and is down to around $1,177 level an ounce as we speak.  Is this current movement just a case of summer doldrums or should we be reading more into it?

JULIAN PHILLIPS:  I think we can read more into it because what has happened in the last week, the euro appears to have gained strength.  I personally believe it just stopped falling quite as fast as the dollar because the attention is now turning to the United States and the possibility of the double dip recession which immediately prompts traders, closing positions, going short, trading stocks and people generally de- leveraging ahead of potential falls.  So I think we can read a little bit more into this.

GEOFF CANDY:  If we believe perhaps that we are likely to go into a double dip recession and I do want to get your views on that, what would such a scenario mean for gold? 

JULIAN PHILLIPS:  Initially it would mean a little bit of tumble, as people sell assets to cover critical debt but thereafter I think the emphasis must be put on uncertainty and instability in the monetary system.  After all should we enter another recession, it would be a second blow to an already bruised global economy, or should we say developed world economy, and in particular the United States.  So initially I think we have to see gold ease, which is what it is doing right now but I qualify that by saying the major trauma was suffered in 2007.  So this is really happening on the back of what has already happened when most de-leveraging has taken place ahead of that, therefore it should be quicker and it should be shallower.

GEOFF CANDY: So if one looks at this and looks at the state of the world economy, a large reason why we managed to come out as little scathed as we have been was the strength in China and the question now being "can China withstand a second dip into recession by the global economy?"

JULIAN PHILLIPS:  I am always awed by China.  The government there has such a firm grip on every facet of their economy and their iron grip tolerates no opposition, therefore one may ask for the housing market to be cooled.  It has cooled so rapidly.  We have seen 60% drop in house sales in the last few months whereas if we look across to the West who are so fragmented because the democratic shapes to our economy, we can't move so fast, so when China says its going to slow down it is really the central government saying "we are not going to grow quite so fast because it is producing bubbles, but we'll trim it back" and we were hoping that it would drop back to that 8% or 9% but it appears to be still in double figures, albeit it close to 10, and I do believe that it's not a case of froth being wiped off the already rich, but we'll see a broadening, deepening of the middle class.  So a slow down in China really adds health to that development, which will continue. I think they are strong and therefore we have to look at the numbers of new middle class and new wealth and their attitude to gold, and I think that's far bigger than simply cooling the already rich. 

GEOFF CANDY:  Julian that leads into another question and that is if we do see an inevitable drop in the gold price, if you will, surely it cannot continue forever, if the investment demand that has been driving the price for the last couple of years now, if that wanes somewhat, can gold jewellery demand pick up or is this the wrong way of looking at the gold market these days?

JULIAN PHILLIPS:  There are so many jewellery markets.  If you look at the developed world they tend to have 9ct and 1'8ct gold which in Asian  terms is not real gold.  And that reflects the consumer spending power, more than anything else, if the rest does go back into growth, fundamentally investment demand drops off, then, clearly that side of the market will improve but not to the extent that investment demand would cool.  However, Asian jewellery demand is 24ct and it is difficult to differentiate between the investment demand there and jewellery demand because the motives behind the buying of both seem to be the same.  However, my own view on investment demand, because it is being led by China, by Saudi Arabia and Russia, has moved not so much into a bull market but into re-rating of it's role in the monetary system and I think that has far broader implications than a simple bull market would, so is investment demand really going to decline?  Not for some while.  If I look at the last BIS transaction; that spoke volumes about the role of gold which extends far more than its inherent worth or market worth.

GEOFF CANDY:  Let's just explore that a little bit.  How has that structural shift occurred and what does it actually mean?

JULIAN PHILLIPS: My belief is that when, whichever motion it was pledged that huge amount of gold in terms of the reserves through commercial banks, it was done basically to keep them anonymous, that prompted by a broader set of support such as the EU government and the ECB saying "yes, we'll give you the support but we want the crown jewels on the table as well as your commitment to austerity measures" and I suspect but have no proof that the role of gold in that regard was enhanced tremendously.  Imagine for a second, that whoever swapped that gold couldn't return the same currencies for which they swapped it and lost that gold.  At some point they'd have to announce it and I think that would have a far more devastating impact on confidence in that particular nation than simply the loss of that small amount of money. 

GEOFF CANDY:  Is that likely to happen though do you think?

JULIAN PHILLIPS:  I don't think it is because I think the pressure on the parties involved is so great that we will make sure it doesn't happen even if somebody else has to step into the breach to return the foreign currencies.  However the use of gold in the transaction was critical and it reminded me of what Monsieur Noyer of the French Central Bank.  When first asked about selling half of France's gold, he said "that would be like selling the family jewels" which indicates the importance that even central bankers place upon their gold.  It goes far beyond its market worth.

GEOFF CANDY:  Julian, in terms of the investment demand in those burgeoning economies like Russia and Saudi Arabia for example, is that also then a much longer term investment in the gold market rather than the speculative flows that we are used to here in the western world.

JULIAN PHILLIPS:  Very much so.  I think that is structural and what fascinates me is that Saudi Arabia should be doing this because they've got so much oil and oil to all intents and purposes is a tremendous reserve asset in itself.  So why are they buying gold?  There are so many implications if you follow that road and follow the road of China and Russia.  I would add to that that the encouragement of the local citizens to buy gold is also rather a long term strategy.  Imagine the day for instance when they really did require gold to be swapped between different nations and if you'd see the move in the balance of power.  I don't think gold will be swapped I think it will be used to add confidence to the particular currencies involved. 

GEOFF CANDY:  Coming back to the scenario of the double dip, or not the double dip in perhaps one case, as we see the global economy recovering eventually as it must, regardless or not whether there is a second dip into recession, what would such a recovery mean for gold?

JULIAN PHILLIPS:  I think that gold, as I mentioned, is going through a structural change in terms of its role in the monetary system and I personally don't see gold responding per se to a recession or even to growth or to inflation per se.  It is going to respond to the levels of instability, the levels of uncertainty, the fear people have for the future and I think that transcends any particular economic state.  The economic state such as a double dip recession, tells us that the FED and the monetary authorities in the United States actually couldn't get a grip of the situation which implies an inadequate control and when that happens and you had money based on their promises and their prospects, you have to have people acting in a prudent manner, moving to something that isn't affected by that, such as gold and I think if you follow that particular line of thinking you will see why gold will continue to move forward.  The dip that we are about to see now, or are seeing, I do believe is short lived and I do see it followed by a tremendous rise just as we saw post 2007 August.  It dipped quite strongly and then it recovered back to its peak.  I see that and more in the future.

GEOFF CANDY:  Then you would not necessarily be following the same sort of line as Goldman Sachs for example who were saying last week, gold is doing quite well in the short term, or is likely to do relatively well in the short term, but perhaps it might be a good idea to start hedging some production as a producer. 

JULIAN PHILLIPS:  I was horrified to see that story.  When you just look back at what happened to the various miners who did do that.  Yes, it was great while the gold price was falling and the contango added to their profits, it was wonderful but when it turned, they were bitten so hard, that it damaged some very prominent careers and hurt many share prices.  So for them to say that, I think they must have said it tongue in cheek or profit lines in view and not with the interests of the potential hedgers.  I certainly would never advocate hedging in this sort of market. 

GEOFF CANDY:  Julian Phillips who is the founder of the Gold Forecaster.

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