Kitco’s director of Global Trading explains why the bull market in gold and silver will continue after the Fed’s QE3 decision last week.

Peter Hug is Kitco’s director of global trading. He has been involved in precious metals since 1974. Hug developed the first precious metals certificate program and the first margin trading accounts for metals on the cash market. Hug will be speaking at the 5^th Annual Inside Commodities conference Oct. 10 in Chicago, and is one of a handful of experts who have succeeded through multiple bull and bear cycles on the strength and skills honed during the dramatic fluctuations of the 1980s. HAI’s Sumit Roy recently caught up with Hug to discuss the outlook for gold and silver after the Fed’s big announcement.

HAI: The immediate reaction to the Federal Reserve’s long-awaited third round of quantitative easing has been positive for gold, as one might expect. But is QE3 already priced in after the big rally from close to $1500 to nearly $1800?

Hug: I don’t think so, though the market may be a little tired at these levels. Back in early August, when gold was trading under $1600, we were looking for gold to rise to $1720 and for silver to rise to $33 or $34 after Labor Day.

There are many factors supporting gold and silver. First, the announcement by the European Central Bank that it would start its bond-buying program last week, the ratification by the German courts that the bond buying is constitutional for Germany, and finally, the latest Fed action.

It’s not so much QE3; the Fed didn’t add a specific amount of money. What they said that was more substantive than in past conversations is that they will continue to create liquidity for this market and continue to buy mortgage-backed securities even after the economy shows signs of recovery. Additionally, they extended their zero-interest-rate policy an additional year, to mid-2015.

The Fed has given the market a green light. You’re going to get free money. If you’re a little worried about the risks in the stock market after these runs and you’re getting zero on your bond returns, you might look at the commodity sector to buy. Thus, gold and silver reacted accordingly.

HAI: Now that the Fed has played its cards, what do you see as the next major catalyst for gold?

Hug: The Fed hasn’t played its cards. It will continue to play its cards. I think that was the subtle, but major, difference in what Bernanke said. That said, you have issues in the European Union that have not yet been resolved. This is a very-headline-driven market. Europe is an issue that will continue until there’s some clear evidence that the sovereign-debt crisis has been solved. I don’t think we’ll see that evidence until at least sometime probably spring or summer of next year.

Furthermore, the U.S. election is coming up, and you have the fiscal cliff coming at the end of the year. Any of these uncertainties is going to create floors for precious metals. I’m not discounting the fact that gold may drop $80 from here or that silver may give back a dollar or two. But I think these markets need to be purchased on pullbacks.

HAI: Speaking of that fiscal cliff you just touched on, how do you see that playing out for gold? That’s a positive, I assume.

Hug: It depends. It could be a positive, depending on how politicians address the fiscal cliff coming up. Congress is probably going to extend the tax credits or the tax breaks for six months to a year ahead of the election, which will give the incoming president the ability to deal with it.

The worrisome part about the fiscal cliff is that [ratings agency] Standard & Poor’s has warned that if there isn’t some concrete action taken, it may lower the U.S. credit rating. The last time that happened, the U.S. stock market took a major hit, which should be beneficial for the metals. But what happens when you have that type of a hit to the stock market is that everybody starts looking for liquidity. Metals tend to be very liquid. So you’ll also get some selling pressure on the metals when that happens.

HAI: You said that the European Central Bank’s bond-buying program set off this latest gold rally. How is that program different than the Fed’s quantitative easing?

Hug: The aims of the programs are different. They both expand the balance sheets of the central banks by printing money. In that sense, they are similar. But the Fed is not buying these mortgage-backed securities because they’re worried about U.S. yields. In Europe, the ECB is worried about yields —such as the Spanish yields, which were over 7 percent at one point—where it’s almost impossible for the governments to borrow money and then be able to pay it back at those rates.

The ECB is not buying bonds to bump up employment. They’re doing it to create liquidity for the banking system. The Fed and the ECB are injecting cash into the economies, liquidity into the economies, with different aims and motives.

The net result, however, is that both balance sheets of the ECB and the Fed are expanding, which means money is being printed. And there is then a perception that somewhere down the road there is going to be an inflationary price to pay for this. And that’s why the metals are taking their cue from this expansion of the balance sheets right now.

HAI: We’ve seen a big reaction in platinum to the mine strikes in South Africa. Is there going to be any impact on gold production out of that country?

Hug: Only a minor impact, because gold production is fairly widespread globally. South Africa accounts for 70 percent of the world’s platinum production and just slightly under that for palladium. A severe strike in South Africa—specifically on the mines that are now on strike—has significant supply ramifications for platinum, palladium and rhodium. Whereas for gold, it’ll have only a minor impact. Gold production globally can certainly meet demand without South Africa participating.

HAI: Let’s move on to silver. The metal has had a great run-up to nearly $50 last year. But since then, it’s fallen significantly, though it’s rebounded with gold recently. Are you bullish on silver? And will it ever reach the $50 level again?

Hug: “Ever” is a small word, but it has a large connotation. If we do it on a parameter of last year, gold hit a high of $1925 and silver hit a high of $50. If gold hit $1925 within a week—just to give you a time frame—silver probably would make it up to the $38-40 range. Should gold continue through $1925, silver seeing $50 is certainly within the realm of possibilities.

One factor against silver is its big industrial demand component. If the global economies are slowing down, that may weigh on demand for the metal. There is an argument for silver not running as quickly through these levels as gold. Silver has made a phenomenal move from the $26 range in percentage terms, relative to gold. Still, if gold gets up to $2000/oz., $50 silver is certainly realistic.

HAI: Speaking of those numbers, what are your price targets for gold and silver?

Hug: If the Fed continues to be accommodative to the economy, and interest rates stay at zero through 2015, there is a realistic chance of seeing gold in the $2,200 to $2,400 range. If gold got to those levels, I can see silver in the $53 to $55 range.

On the down side, if the stock market collapsed and the Dow fell 2,000 points or 3,000 points over a period of two or three weeks, it’s conceivable we’ll see gold back down under $1600 and silver down between $29 and $31. However, I think we’ve seen the low for silver at $26 and we’ve seen the low for gold at $1,530.

Again, I’m a buyer on any sustained weakness in the metals because the Federal Reserve is going to keep printing money as long as necessary, which is very price positive for the metals.

HAI: Looking longer term, what is going to be the biggest driver of these metals? Is it the sovereign-debt fears? Monetary policy? Or is it currency movements?

Hug: Monetary policy, though if it’s not combined monetary policy between the Europeans and the Fed, there’ll be currency implications as well. We’ve seen that with the U.S. dollar, which has dropped about 8 percent in the past four weeks. It was trading at 1.20 to the euro and now it’s approaching 1.30 to the euro. As the Fed keeps interest rates at zero, stimulates the economy and puts more liquidity into the market, it makes dollars more abundant and creates less demand for dollars. That’s why the dollar has sold off.

The dollar sell-off off has been price supportive for the metals. But going forward, monetary policy is going to be the primary driver for precious metals, with the caveat being that geopolitical risks are also going to come into the picture, especially in 2013. I think the Iran-Israeli situation is going to come to a head in 2013. And some of the problems that we’re now seeing in the Middle East are only going to get worse, they’re not going to get better.

So with those types of events, what I call flash-point events—where if something happened and oil shot up to $140—you could easily see the metals move up 5 to 20 percent on a fairly quick move. But on a sustained basis, monetary policy will drive the metals.

HAI: What do you see as causing the end of the bull market in gold and silver?

Hug: The end will not come until the Federal Reserve starts to raise interest rates, which they say they won’t consider until 2015.

As they raise interest rates, gold will have a competing asset in government debt—something that’s safe and generates a return. But until interest rates get up to a 5 or 7 percent level—which is probably a minimum of three years away—I don’t see risk to precious metals on the monetary policy side.

Disclaimer: This commentary is provided by Kitco Metals Inc (“Kitco”) for informational purposes only and is not intended as any form of advice, whether legal, accounting, investment, financial or tax advice. Therefore, it cannot be relied upon as such. Should you require such advice, contact a licensed professional. The information provided herein is provided on an “as is” basis without any warranty of any kind, whether express or implied, and your use of the information provided in this commentary is entirely at your own risk. In no event will Kitco be held liable for any indirect, special, incidental or consequential damages arising out of the use of information contained in this commentary.

17 reasons to own gold and silver now
by Mark Leibovit:

1. The gold market has entered a once-in-a-lifetime period of opportunity. Gold, which surged over $800 in 1980 and then tanked to the depths of $280 in 1999, is now embarking on what may be a 20-year advance which will likely carry it to as-yet-unforeseen levels – possibly as high as $11,000 an ounce and silver to $700 an ounce.
2. Proportionally, the silver market price can be dramatically influenced. Any look into the history of silver prices shows that the metal can escalate quickly, often 10-20 percent in a period of just a few weeks. Since mid-August, silver prices are already up 32 percent.
3. Since October 2001, silver has increased in price from approximately $4 to a recent high of $49 which is an approximate 1125 percent gain. Once we clear $49, the sky is the limit! It’s the poor man’s gold! Mark Leibovit predicts Americans will be standing on street corners to buy silver (and gold) before the ultimate top comes!/li>
4. Silver has both intrinsic and industrial value. From film emulsions, to antibacterial products to circuitry, silver has literally thousands of industrial applications that help to limit the amount of physical silver in circulation. We are already holders of silver in our TV, computer and electronic equipment, batteries and car bearings. Silver is utilized in medical technology, solar energy and water purification. As technology advances, so do applications for silver.
5. Gold demand has continued its rapid acceleration. According to the World Gold Council, demand in 2010-11 reached a 10-year high of 3,810 metric tons, a 10 percent increase over the previous year. The U.S. Geological Survey reports that total global gold production has been falling steadily over the past decade to just 2,350 metric tons in 2011. We question whether sovereign nations have been accurately reporting.
6. Gold is still underpriced relative to inflation. Inflation-adjusted prices for gold range from $2,382 to $10,226, so at $1,922 an ounce (the Sept. 6, 2011 high), gold is not even close to reaching prior price levels.
7. Gold bears have been consistently wrong. Mainstream financial media predictions of a gold bubble have not come to pass. One influential analyst at Kitco predicted gold would end 2011 at $800 an ounce … yet it ended the year at $1,405 despite an anticipated correction.
8. We are drowning in debt. Government debt is skyrocketing. The national debt is now $16 trillion, more than $50,000 for every American man, woman and child. Bernanke, Obama and Draghi (European Central Bank president) are promoting dangerous policies that create only an illusion that the economy is stable. Any hope that the runaway spending of the Obama administration and other governments was a temporary “emergency,” a reaction to the 2008 credit wipeout, has been derailed. The federal budget deficit went from $160 billion in 2007, before Obama’s election, to $1.4 trillion in 2009, $1.56 trillion in 2010, and was projected to hit $1.65 trillion in 2011. The 2011 budget has the biggest one-year debt jump in history, or nearly $2 trillion, reaching $15.476 trillion – the first time since World War II that U.S. deficits hit over 100 percent of GDP.
9. Do you think that is scary? That is nothing. According to data presented at the U.S. Debt Clock, U.S total debt is $55 trillion and total U.S. unfunded liabilities are $116 trillion.
10. The federal government is in a mayhem printing spree, with the M2 money supply increasing 21.1 percent from June to September 2011. As the dollar devalues, investors are scrambling to buy hard assets. It took a lawsuit by Bloomberg to uncover the Fed’s “Secret Liquidity.” The Federal Reserve mounted an unprecedented campaign, secretly providing as much as $1.2 trillion to banks and private companies without any congressional or public approval.
11. Large-scale gold buying is just beginning to make its way into mainstream “retail” financial institutions and pension programs. Five years ago, only gold “fanatics” and other “extremists” were buying gold. Today, central banks are buying again. Famed hedge-fund managers George Soros, John Paulson, Paul Tudor Jones and David Einhorn have piled into gold, gold exchange-traded funds and mining stocks.
12. Gold is in the process of reemerging as an international reserve currency. As central banks around the world have engaged in massive money creation, smart money will allocate a greater percentage to gold as a “store of value.”
13. Gold bullion holdings amongst the world’s central banks have risen to a 6-year high, according to data compiled by the International Monetary Fund. Emerging and developing nations have swollen their gold reserves 25 percent by weight since 2008. The debt-heavy West is a net seller.
14. Investment overtook jewelry as the largest source of demand for the first time in three decades in 2009, according to GFMS Ltd., a London-based research company. Investor demand will climb 9.9 percent to 1,597 tons this year and another 11 percent in 2012, Morgan Stanley estimates.
15. The U.S. Mint sold 85,000 ounces of American Eagle coins since May 1 as the Standard & Poor’s GSCI Index of 24 raw materials fell 9.9 percent. The last time sales reached that level, bullion rose 21 percent in the next year. Gold will keep gaining in 2012, a Bloomberg survey of 31 analysts, traders and investors reports.
16. Supplies of physical precious metals (especially silver) are diminishing. The time is not far off when obtaining physical delivery of the metal will be very difficult if not impossible.
17. We are nowhere near a market peak. The signs you see on street corners offering to buy gold represent smart commercial buyers – not a sign of a market peak. When you later see long lines of retail buyers (some waiting overnight), then a top may be near.

Mark Leibovit’s Gold Letter, # 1 Gold Timer for 10 year period & #2 Gold Timer for 2011

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