Long Term Factors Still Favouring Gold - Lundin

Author: Brian Sylvester

Austerity programmes across Europe, continued debt problems in the US and further political uncertainty all point to a continued uptrend in gold prices, says Brien Lundin. A Gold Report Interview.

Downgrades for U.S. debt, austerity programs across Europe and political uncertainty all point to a continued uptrend in gold prices according to Brien Lundin, publisher and editor of Gold Newsletter. For long-term investors, Brien Lundin says in this exclusive interview with The Gold Report, small-cap, precious metals equities are one place to take advantage of the coming upward gold price trend.

The Gold Report: Brien, cited the escalating European and U.S. debt crises as triggers for the August 22 spike in gold prices, when it briefly eclipsed the $1,900/ounce (oz.) mark. Since then, the French bank Société Générale has been downgraded and austerity measures are forcing the Greek economy further into recession. Despite these significant catalysts, the gold price remains range-bound between $1,750 and $1,850/oz. Why isn't gold reacting?

Brien Lundin: If the European debt crisis and the S&P downgrade of U.S. sovereign debt had happened separately, say a couple of months apart, I think gold would have risen just as far, but the rise wouldn't have been as steep and the market wouldn't have overheated. But they happened to occur right on top of each other, so the market got ahead of itself and went nearly parabolic. Speculators who were merely trend-following traders came into gold, but the end of the rally sent them all packing at once. That dealt a sharp psychological and emotional blow to the market that we are still recovering from. Since then, we have seen a lot of very fluid, hot money coming in and out of the market.

More recent news from Europe hasn't had quite the same effect. We have seen some itchier trigger fingers, people playing the news of the day and getting right back out. We have also seen physical gold buyers from Asia come in on the price dips.

The result has been rallies tempered on the upside by the speculators abandoning trades more quickly. We have also seen drops tempered by bargain-hunting, physical gold buyers coming in on the downside. In short, gold is in a consolidation phase, awaiting the next trend, which I think will continue to be headed upward.

TGR: You mentioned Asian physical buying. Recent rumors suggested China could be buying Italian debt to help Italy out of its problems. Is that bolstering the euro and keeping investors out of gold?

BL: I think that China helping out Italy hurts the gold price in an indirect way. It's a sign of China knowing which side its bread is buttered on and knowing that it needs a stable Europe to support its economy.

We saw that need for stability when the European Central Bank and other central banks announced a coordinated U.S. dollar liquidity program and Germany and France said that Greece would definitely stay in the euro. All of this is part and parcel of trying to calm the markets down in the interim and to show that the gold price is essentially capped or that the rise is being dampened by official intervention.

TGR: Are you implying that the euro is doomed?

BL: I believe the euro is doomed as it currently exists. I think there is very little chance Greece will remain in the European Monetary Union. The rest of the PIIGS (Portugal, Ireland, Italy, Spain) remain to be seen. After all, what's the use of a club if you can't kick anyone out?

Obviously, the risks here are the implications of such an event, the dominos that would fall in the European banking system. The fact that Germany and France are so reluctant to kick Greece out of the euro zone shows that the problems could be very deep and widespread. I think they are just prolonging the situation. Ultimately, the euro of the future will not be the euro we see today.

TGR: What effect has the news out of Europe had on the gold price?

BL: There may have been some official manipulation in the gold price recently to bolster the idea that things are calming down. When the Swiss announced its cap on the franc, the news was incredibly bullish for gold; gold in effect became the last safe-haven investment standing. But shortly after that news broke, the metal sold off about $50/oz. overseas in just a few seconds. Investors wondered who could have known that news was coming, who could have reacted that quickly and sold so dramatically. The evidence points toward official management of the gold price.

TGR: In the September issue of Gold Newsletter you wrote that "long-term factors still favor a continued uptrend" in the gold price. Can you give us more detail?

BL: When we look at the S&P downgrade of U.S. sovereign debt, the problems in Greece and the potentially cascading effects across the banking system in Europe, what we see is the result of far too much debt being created on both the governmental and private level. Too much money has already been created and will have to be created in the future to inflate away all that debt. It is mathematically and politically impossible for austerity programs to be severe enough to overcome these debt loads. There is no way, especially under the weight of those austerity programs, that growth can be robust enough to overcome these debt burdens. At some point and to some degree, inflation will have to depreciate those debts away. That is the very reason why investors with a long-term view are buying gold. They aren't concerned about gold having come so far over the past 10 years. They are looking down the road and seeing the amount of currency that will have to be created to get out of our tremendous fiscal problems.

TGR: With the aid of Ron Greiss, at thechartstore.com, you note that gold prices should continue to move higher at least until the 2012 election in the United States. Why?

BL: I don't see any chance of fundamental fiscal reform in the U.S. to address the debt problems before the 2012 elections. No one is going to move off center and no one is going to take the political heat to make the dramatic reforms necessary to get the U.S. back on its feet.

We have about 14 more months, at least, in this bull market. If you look at the long-term trading channel for gold going back to the beginning of this bull market in 2000, you see that that channel, while fairly broad, has not really been violated, except by the 2008 credit crisis. If you extend that trading channel, it brings gold up to a price range of around $2,100 to $2,500/oz. by the 2012 elections. That would be a very nice gain from current levels.

After 2012, gold's future depends on the results of those elections. If it is status quo politically, I think all bets are off on the gold price. I wouldn't even hazard to guess what the ultimate upside could be.

TGR: And who knows where the euro will be by then.

BL: Right. We are on the brink of a massive inflationary reaction to the debt loads around the world. A number of people are afraid of a deflationary collapse, but I learned long ago that central bankers will never let that happen. Their primal instinct is to inflate in a situation like that and that's exactly what they'll do. They will take the lesser of two evils.

TGR: What is the advice you would give to a novice investor right now, to invest long term?

BL: Yes. You have to think down the road a bit, especially with strategic investments in plays like the Yukon, where news shuts down in the winter and you can pick up bargains at that time. It typically takes at least two exploration seasons for companies in the Yukon to get indicative results. A number of the companies that were hotly recommended last year aren't going to make any real news until next fall. You can pick up bargains now; you just need the patience to wait 12-24 months rather than expecting drill results within a few weeks.

TGR: Brien, as always, thank you for your time and insights.

With a career spanning three decades in the investment markets, Brien Lundin serves as president and CEO of Jefferson Financial, a highly regarded publisher of market analyses and producer of investment-oriented events. Under the Jefferson Financial umbrella, Brien publishes and edits Gold Newsletter, a cornerstone of precious metals advisories since 1971