The Gold Price and Happiness

The Gold Report

Reasons why the party may just be getting started (though the Gold Price could also fall more than many expect)...

DON'T SELL before the party really gets going, advises Edward Karr, CEO of Geneva-based investment group RAMPartners.

In this interview with The Gold Report, Edward Karr explains why he believes investors should maintain a "decent percentage" of cash to take advantage of opportunities to buy both physical gold and junior mining stocks, as well as his approach to staying happy as a gold investor.

The Gold Report: RAMPartners is based in Geneva, Switzerland, a country that made economic news recently when the Swiss National Bank capped the Swiss Franc at 1.20 Francs per Euro, slashed interest rates and flooded the market with Swiss Francs. Did you agree with those moves and what impact do you think they had on the Gold Price?

Edward Karr: I emphatically disagree with the move by the Swiss National Bank. To me it makes no sense to peg the Swiss Franc at 1.20 to the Euro. Switzerland is, in effect, backstopping Greece and all of the other indebted countries in Europe. This is lunacy. Greece or anyone can just hit the Swiss National Bank's bid at 1.20 and convert into Swiss Francs, which it would probably rather have than its Euro position.

Since this policy, we've seen a psychological shift in markets. People have been rethinking the Swiss Franc as a safe-haven currency. The Norwegian Krone looks more like a safe-haven currency now than the Swiss Franc. I'm just happy Switzerland is not part of the European Union and not part of the Euro. I hope it will understand the foolishness of the 1.20 peg and get rid of it soon.

As to the current effect on the Gold Price, right around when this happened gold topped and started to sell off. I don't think they are directly related, but I think it is psychological. If the Swiss Franc holds at 1.20 to the Euro, if a hedge fund or a corporation hits the Swiss National Bank with a billion Euros, it is no big deal. But what about 10 billion, 100 billion, even a trillion?

Then it starts becoming a big deal. At some point does Switzerland have to start selling its gold reserves to continue this lunacy? Switzerland now has 1,146 tons of gold. Maybe people are worried that if that gold starts to come out it could put downward pressure on the bullion price; hence, we have seen a little sell off in the overall market.

TGR: Just a few years ago, the Swiss Central Bank had more than 2,000 tons of gold in its reserves. What is your view on the sale of so much of its reserves?

Edward Karr: I think it was extremely shortsighted. Switzerland has a long history of fiscal stability and gold has been a very important part of that stability.

Right now, Switzerland has the world's eighth largest gold reserve, which is quite impressive for such a small country. But, the 1,146 tons of gold it has at current market values is really only about $60 billion. That might seem like a big number, but it is minuscule in comparison to the trillions that global governments are going to have to print to combat this increasing financial crisis.

TRG: Gold has fallen steadily since reaching about $1,900/ounce (oz.) in August. It now sits at about $1,670/oz. Why has it fallen recently?

Edward Karr: I think the logical explanation for falling prices is that gold is a relatively liquid asset. Governments, hedge fund managers, bankers and individuals are all facing a severe cash crisis. In that environment you have forced liquidations. Governments are doing all they can to put a positive spin on a terrible environment. But, if you're a global macro hedge fund manager who has heavy redemptions, you have to sell your liquid assets to raise cash.

Man Investments is one of the biggest hedge fund groups. Last month it announced record redemptions of $7 billion. The firm has to raise cash, so what is it going to do? There are no bids out there for Greek debt, no bids for mortgage-backed securities, no bids for countless other OTC financial derivatives. Gold is liquid; it is easily tradable and has been part of the massive global scramble to cash that we've seen in the last two to three months.

TRG: How low could gold go?

Edward Karr: That's a great question. The only credible answer is that gold can go a lot lower than anyone expects. A lot of Johnny-come-latelies have bought into gold in the last few years. A big downdraft will shake out a lot of loose hands.

Europe is on the edge of a cliff. Dexia Bank might fall any day. UniCredit in Italy is right behind. I think we will see a severe domino effect that will make 2008 seem like a walk in the park. If Dexia or UniCredit or the European Central Bank itself had a big major gold position and it had forced liquidation, it will have to sell and the price could go down pretty dramatically.

TRG: Are you willing to be more specific on the price?

Edward Karr: It would not surprise me at all if I came in tomorrow and gold was at $1,000/oz., a 60% decline from the current levels. If gold were to fall that dramatically, to $900/oz. or $1,000/oz., it would represent an incredible buying opportunity.

When you Buy Gold, you want to buy it and take physical possession. Owning gold isn't about the price paid. You shouldn't look at the price every single day. By the time this crisis is over, it's going to be about how many ounces you actually have in your possession—under your mattress, in your safe, not in your bank, I hope.

TRG: Your fund holds bullion and junior precious metal equities. How have you changed the way you manage the fund in the midst of this volatility?

Edward Karr: We have adjusted our portfolios and we are managing money a little differently. Volatility has certainly increased. In the last month, junior mining stocks are down 40%, 50%. When you get into these high volatility ranges, liquidity drives up as well, delivering a one-two punch. Selling 10,000 or 20,000 shares on a junior mining stock can take it down 25%.

You have to be nimble and you have to be able to stay the course. You don't want to over-leverage. You want to keep a decent percentage of cash and have some dry gunpowder to take advantage of big sell-off opportunities.

TRG: When I look at my investment portfolio, which consists largely of junior gold explorers, I see nothing but red. I want to sell everything and wait for opportunities. Do you believe that is prudent or do you have better advice?

Edward Karr: The investment game is 99% psychological, and it is you against yourself. In my experience, when you feel it is the right time to sell it is exactly the wrong time to sell. I sincerely believe that investors who sell out now are going to miss out on one of the greatest rides of their lives.

Central banks around the world are going to have to put together trillions of Dollars. Quantitative Easing (QE) 3 is going to make QE1 and QE2 seem like a little prelude. The Fed is going to have to team up with the European Central Bank and print an incredible amount of money to recapitalize the whole financial system. When they do that, it will set up a moon shot for precious metals and junior mining companies.

This party is just getting started. You can see the house, you can hear the music and see people, but you have not even walked in the front door. Wait for the party; don't leave before it even begins!

TRG: What are some rules of thumb for investing in junior resource companies during uncertain times?

Edward Karr: I like to own good companies with solid management teams and great assets. And then, it all comes down to the timing. The current markets are fantastic for finding attractive entry points. As a general rule, when it feels the worst is usually the best time to buy.

When people get scared, markets and stock prices get way out of line. That is when you need to have the courage to really step in and accumulate. Worst case, if the banks collapse and the ATMs actually do stop working, those who own physical gold will be better off than 99% of the other people out there. But it is more likely that the markets will rebound quickly as QE3 comes in and the ECB and the Fed turbo charge the printing presses. Then, the junior mining stocks and bullion will be off to the races.

TGR: You talked about having some powder dry for when you're ready to strike. What striking opportunities do you see in the market at this point?

Edward Karr: I like Nevada, as I mentioned. Another location that I really like is Colombia, which I think is setting itself up to be one of the hottest mining destinations of the future. Colombia is doing all of the right things from a political and economic standpoint. It has incredible undiscovered resources.

TGR: Edward, can you leave our readers with some sage Karr wisdom that they can lean on in these unprecedented economic times?

Edward Karr: I truly believe that we are heading into a very, very challenging time for humanity in general. The ultimate goal in the financial markets is like the ultimate goal in life—to survive. But you also want to be happy and to prosper. You need to keep it all in perspective.

Your readers are in the top 1% of the global population. And if they own physical gold, they may be in the top one-tenth of the top 1%. A lot of people in the world live hand-to-mouth every day and they remain relatively happy.

I think it is really important to tap into that happiness. Take some time out to be grateful for all you have in life. Enjoy time with your friends and with your family. Spend time on what is important to you. Help people who are less fortunate than you are.

At the end of the day, we're here for a good time, not for a long time. It is important to enjoy the journey each and every day. Don't get so worried about the downdraft of your gold position or your junior mining stock. Keep it all in perspective.

TGR: Very wise words. Thank you for talking with us today, Edward.