During the first week of 2011, International Business Times had the chance to interview Scott Carter from Goldline International Inc, who just took over as the CEO this month, after several years in the company. Goldline is one of the top providers of precious metals products in the U.S. and in business for over 60 years. We used this opportunity to compare the ongoing gold rally with the last major rally in the 1970s. Other topics include Carter highlighting the global dynamic of today's interest in gold, and talking about the possibility of seeing QE3 in 2011.
IBTimes: Thank you for being here, and congratulations on your new role! The year 2010 ended with a stellar performance for precious metals, with silver gaining 83% and gold rising 30% in U.S. dollars, the strongest performance since 2001. Let's start by looking back at this full decade of rising gold prices, and maybe even put the ongoing rally into perspective with the last major rally during the 1970s.
Scott Carter: When you look at a longer timeframe and not only at the last year, when gold achieved another 30 percent year over year price appreciation, you see that the precious metal has been performing well over the last decade and is up over 300 percent in that period. And you have to ask yourself, what is driving Gold all those years so constantly? Even in the years 2001 to 2007 gold was performing very well, even before it became en vogue due to the financial crisis.
So how can you explain the continuous appreciation of gold and also silver long before the financial meltdown, with the collapse of Lehman Brothers, the popping of the real estate bubble etc. What was driving it prior to these most recent events? And I think you need to come back to currency issues: The debasement of the U.S. dollar, the devaluation of currencies, and the overexpansion of debt had an effect on the nominal price of all commodities, but most pronounced on gold and silver. I think between 2001 and today, we witnessed a serious decline in the value of fiat currencies. The large monetary expansion is visible in the significant increase of sovereign debt, and also individual and corporate debt during that time. Right now, the cause of the day is the challenge facing nearly every developed country in the world: A debt crisis which is hard to solve. The current debt crisis has been generated from years and years of promises of future benefits. And now the bill has come due, but no money has been set aside to pay for it. As a consequence, more and more of today's dollars need to be used to pay for today's liabilities of governments. The U.S. government, and also the ECB for that matter, knows that the only way to maintain this is to issue more debt to pay current debt. It's a crazy scheme that we're in but that's what seems to be happening, and the beneficiary of this are hard assets, most of all gold and silver.
IBTimes: The debasement of the U.S. dollar was also the cause of the deep crisis of the 1970s, with U.S. President Richard Nixon breaking away the last remnant of the Gold Standard in order to print more money and thus enabling the gold rally from the decade-long fixed price of $35 per ounce to a top of $850 in 1980. Could you comment on this period, which most people, including me, didn't experience or don't remember?
Scott Carter: There are some similarities, yet there are also differences compared to today. If you look at the time horizon in the late 1970s, gold and silver spiked in just one year. There wasn't a decade of what I would call a broader and deeper bull market. There was much more of a fear-factor associated with the purchase of gold and silver than today where it is more of a reallocation or balancing of portfolios where gold as a component of the asset-allocation had a renaissance. In the 1970s and early 1980s it was pure fear. We had incredible high and very visible inflation, which we don't yet have today, and we had a serious debasement of currencies. That caused a spike in the price of gold and silver within an 18 to 24 month period, after which it came back down as the run-away inflation was brought under control. But today's challenges haven't gone away, and cannot be easily solved either. We hadn't really have inflation yet anywhere near to where it was in 1980. We have currency debasement, but to pay current liabilities and bills which are much higher than 30 years ago. And I think that's why you see a broader depth of interest in commodities, precious metals primarily, around the world as part of asset allocation.
IBTimes: I think that's a crucial point and one of the most important long-term trends driving gold which you point out here: Today, although it's still there, we have a smaller contribution of fear driven demand from Western countries, but a completely new and fast growing demand component from new middle-class consumers in the emerging market countries, especially China, and also from the central banks of those nations. And on the other hand, the problems will be very hard to tame this time around. The gold rally cannot be stopped by suddenly hiking the interest rates to 15% this time, as that would immediately collapse the hundreds of trillions of dollars of debt we now have.
Scott Carter: You hit the nail; I think there is not one central banker in the U.S. or Europe who would even consider raising the rates that much. I think we trick ourselves, we measure inflation differently, for example we don't include food and energy. We have truly convinced ourselves that we are not in an inflationary environment - so we could give them that point as a success.
We are indeed not seeing price inflation as it was in the 1970s. But the steps we are taking, especially in the U.S. to fend of unemployment and deflation, have been proven to lead to significant inflation down the road in the past. And I think the markets are already pricing that in, and they price it in gold like they would any other time when that happens.
IBTimes: What are your projections for the gold price in 2011, and following years?
Scott Carter: I like to evaluate what many experts are saying about where the price of gold is going to be at, and I am going to give this statement ahead: If you look at the percentage of portfolios that have gold as a component, right now around the world it's estimated to be one percent. If you look at this traditional asset class, when nothing dramatic changes and we have a continuation of the devaluation of currencies by manufacturing low interest rates, making money easy in order to incite growth, then you will see gold rise as a percentage in portfolios, and therefore also rise in price.
And I like to look at major banks to see where they put their targets and how they adjust their forecasts. For example, UBS has a target for the price of gold at $1,550 per ounce in 2011, that's revised upwards from $1,400. Goldman Sachs has a price target at $1,575, a massive correction from the previous $1,325 target. BNP Paribas has a target of $1,600 for 2012 and $1,500 in 2011. If we look at our own estimates and compare it to these bank forecasts, we concur that you are going to see another appreciation of gold prices during the next 12 months to between $1,500 and $1,650 an ounce. 2012 looks a bit blurrier because there are so many other factors, but those estimates of major banks as well as what we are seeing in the major trend line and the political desire to continue an easy money policy all adds up to more of an appetite for gold. Also, a major factor of why gold was somewhat out over the time is that it doesn't pay a dividend or interest. But in this low interest rate environment, this argument is off the table.
IBTimes: Let's discuss the macro-economic trends which are relevant for gold in 2011, particularly interest rates. Central banks in several countries like China, Russia or Australia started increasing rates recently. More significantly, the interest rates of U.S. bonds rose strongly after Ben Bernanke announced QE2. How do you see the significance for gold, and the trend of interest rates?
Scott Carter: Well if you look at the world, we have two different kinds of economies. You have the emerging markets like China and India where they are battling the inflation problems that come with 8% or even higher GDP growth. Such a scenario is, without raising interest rates significantly, historically bullish for gold [and demand is already strong and fast growing]. Higher interest rates just compensate the potentially inflationary environment in such high growth economies.
On the other hand you have countries with slow growth, or what I would call mature legacy markets like the EU and the US, which are struggling mightily to even generate 2.5% to 3% GDP growth. So they are actually going the other way and keeping interest rates very low and doing that by printing currency. The US has QE2 [the second round of so called quantitative easing, which is the Federal Reserve's label for buying up debt assets to keep rates down and the market liquid], while the EU is bailing out Greece, Ireland and potentially other countries, with the European Central Bank also buying bonds of those nations. Generally speaking, they are kicking the can down the road by enable them to finance their countries at a low interest rate.
And both of these scenarios set a very bullish environment for commodities, for gold and silver. You are either battling high inflation, which is a positive environment for gold as long as it is not tamed, or on the other side you have a situation where world currencies like the dollar and the euro are devalued. With gold priced in these currencies and their value going down, the precious metal is doing well. And most economists or analysts agree that the dollar will be weaker than it is today in 18 or 24 months. That's one of the underpinnings of why so many say that the gold bull market has still a way to run. Gold is the real standard against which all other currencies are measured - and fall.
Nothing goes up forever though, there are seasons for everything. Will gold rise for another decade? We have to monitor if the conditions change to get the eventual answer. But for now we don't see that (a discontinuation of the macro-economic trends driving the gold bull market).
IBTimes: Do you think the Federal Reserve will dare to proceed with QE3 in a few months, when the current round of debt monetization runs out?
Scott Carter: At the end of this year I would say absolutely, QE3 or something similar will be in place, as the Fed's primary objective is to generate employment, which is just not happening in the U.S. for now. To the extent that unemployment remains high, I think that we can expect continued monetary expansion, be it through QE3 or some other stimulus packages passed by congress to keep the economy crawling along. Whether it's called QE3 or not, that component is necessary for the Federal Reserve to achieve its key objective of reducing unemployment.
Also, if you have an annual budget deficit of over one trillion dollars, which is now even higher than total tax revenues, there is really only one option left, and that is to issue more debt.
IBTimes: As it is still a great opportunity for people to diversify into Gold, do you have any advice about a good portfolio share, and in which ways investors can gain exposure to precious metals?
Scott Carter: You can certainly buy gold mining stocks, where you don't by gold itself but a share of a company, which comes with all the strengths and weaknesses of business. You could also buy an ETF fund, which is probably the easiest and lowest cost way, but again you only buy a piece of paper which gives you exposure to the precious metals market. And many people do that, with GLD being the most popular of these funds. And then you can buy the physical metal, which is where Goldline specializes. In all of those cases though, diversification is the right strategy. We recommend to hold 5% of an portfolio in precious metals, up to 15% to 20% as an absolute maximum if you are really, really bullish. And it shouldn't be just a short-term bet, but be a long-term investment held for at least 3 years and for example 10 years. If you are looking to speculate in this market, physical gold is not the right thing to buy.
You can also diversify between metals, like buying silver. You can even get physical palladium and platinum delivered from Goldline. These are industrial metals which are closely tied to the economy and had a very good performance, with palladium doubling in 2010.
IBTimes: About one year ago, as the Greek debt crisis emerged in the news, panic buying of bullion by German investors resulted in longer delivery times and higher premiums due to a strained supply. Could you at Goldline International Inc. also notice sudden spikes in demand, and more importantly, could you foresee a similar situation occurring in the U.S. and would you then still be able to process and deliver all orders?
Scott Carter: Well, nothing is impossible, and certainly a sudden demand-pressure by many more individuals interested in gold can happen. Goldline has not experienced any limitations in supply yet, even with the events over the past 3 years. We have inventory turn every 2.5 days, and until now hadn't had difficulties to source enough precious metals products to meet the demand of our clients.
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