The CPM consultancy's outlook for Gold Prices in 2010

WHAT'S THE OUTLOOK for Gold Prices going into 2010...?

Here Carlos Sanchez, associate director of research at New York's CPM Group speaks to Hard Assets Investor...

HAI: You guys are very much involved in metals – gold, precious metals – and gold has been on a tear. We had one of your colleagues here several months ago, Jeff Christian, at the time when gold was probably more or less around $900 an ounce. He was not that bullish at the time, looking at fundamentals such as actual physical demand, mine output, etc. Yet we have broken through; we've seen gold vault up above the $1100 figure. How high do you think it could go?

Sanchez: Well back then, we didn't expect prices to perhaps rally as high as it did so quickly. We had expected prices to move higher, but over the course of later this year and into the first quarter of next year.

Gold Investment demand has been the main driver behind prices over the past couple of years, and more so over the past several months. I think investors continue to be concerned over financial markets, economic conditions and political conditions as well. So I think with weak economic growth, with high unemployment, with what's going on in Afghanistan, Iran, etc., you have increased concern. And investors continue to rush to safe-haven assets such as gold.

HAI: Are investors coming up with new bullish-for-gold arguments, and bearish on the general economy, even though we're starting to see things improve?

Sanchez: Even despite the recent stabilization and the pickup in stock markets over the past several months, I think there's concern that stock markets remain vulnerable, not only in the US, but around the world. You also have increased concern over the economic conditions. There have been signs of stabilization, but they still remain vulnerable. Economic growth has not been as it was over the past several years

HAI: What about some of these extreme forecasts? I've heard people say, "We're going to $5,000. We're going to $10,000...$20,000..." Are those realistic?

Sanchez: I don't think they're realistic now. I think we'll have to wait to see what happens over the next several months. But I think $1,400, $1,500 is definitely a possibility, perhaps early next year. As far as $2,200, I think economic conditions will probably have to deteriorate from here going forward for us to see that price level.

HAI: Now if they don't deteriorate, if we continue to see the stock market improve and maybe even start to see some job creation at some point...don't forget, back in 2003, I remember very well the so-called jobless recovery turned into a recovery that actually created jobs. Can we have a scenario where gold continues to appreciate even though real economic conditions improve?

Sanchez: You know, if economic conditions do improve and you see a steady decline in unemployment, a stabilization in economic conditions and financial markets, you may see Gold Price gains capped. But at the same time, they will be supported. Because it will take several years for unemployment to move back to levels where it was prior to this recent financial calamity.

HAI: So from your perspective, there's no element of excess speculation or sort of a bubble environment right now when we talk about gold?

Sanchez: I think investors have helped push prices higher. They've been chasing prices higher, and that's helped sort of continue that cycle of rising prices. Perhaps once investors see that their price targets have been hit, there will be a pullback in prices. But at the same time, that pullback may not be as sharp as some expect. I think the pullback, as we've seen over the past several months, has been $30 to $40. But at the same time, the investors have been willing to Buy Gold at increasingly higher levels.

HAI: All right. So just quickly, would you say the new floor, what price level is that? $700, $800?

Sanchez: On a short-term basis, I think that price level is $1,100. If prices do fall below that, I think you could see increased buying. There's potential for prices to fall perhaps $40 to $50 lower. But that would, I think, pick up investor attitudes, and there could be some increased buying there. But next year the floor may be $1,000 if not $900.

HAI: What about silver? Silver looks like it's kind of lagging, both in terms of its nominal prices and inflation-adjusted price, way below the level it was in 1980...

Sanchez: I think silver prices have always really been much more volatile than, perhaps, Gold Prices. Some expect silver prices to head much higher just because it's much lower than its record high it hit in 1980, which was around $50.

HAI: The silver/gold ratio right now is probably a little bit more than 50 to 1?

Sanchez: Right...

HAI: Historically, what has been the range?

Sanchez: Well, the range has been from 40 to 70. But at the same time, that's dependent...you know, many investors look at the ratio, but you have to look at the underlying fundamentals behind the silver market as well. So I wouldn't really focus too much on that ratio.

HAI: Silver then is more driven or governed by economic factors. It's much more, you would say, an industrial metal. Many people say gold is money.

Sanchez: Right...

HAI: So it's a sort of a currency in some people's minds. I don't know if I would buy into that. But for many people, that's how they look at it, whereas silver, what you're saying I think, is that there's more of an economic fundamental driver behind that.

Sanchez: Silver's seen as a hybrid sort of commodity. It has its financial roles similar to what gold is, but also an industrial metal. And what's been driving prices higher has been strong investor interest. But at the same time, what's been capping prices is weak industrial demand, weak fabrication demand for silver.

HAI: All right, what about some of the other precious metals? Let's talk about platinum, let's talk about palladium. How do those look? Still sort of a bullish outlook for those metals?

Sanchez: We're pretty bullish on all of those metals. For silver, we're expecting prices to, perhaps, top $20 later this year; platinum's already topped $1,400, and perhaps will test $1,500. And palladium, possibly $400.

HAI: Now some of those metals – platinum of course, palladium – are very tied into the automobile industry. It's used in the manufacture of certain components in vehicles. Automobile output has been weak because of general economic conditions. If we start to see that come back, that would be a supportive factor then I would guess.

Sanchez: Yes, that would definitely be supportive. And auto production and sales are expected to come back. They are strong in developing economies. In developed economies, they've come off from prior years. But once the economy does begin to pick up, you should see demand increase as well.

HAI: Let's get back to gold for a second, because there have been some interesting new developments in the fact that we are starting to see some major central banks purchasing gold. Now historically, traditionally, central banks have been sellers of gold. Now they're buying it. You have India; people say China could be next. You know, it was sort of a contrarian indicator when they were all selling heavily down when it was about $250 an ounce. You don't take it as any kind of a contrarian indicator when they're buying it at $1,100, $1,200?

Sanchez: Well, you know, central banks aren't really in the market to hedge or to speculate or to profit. They work more on a mechanical basis. So when they feel that they need to increase or decrease their amount of gold that they hold, according to, perhaps, the amount of foreign exchange holdings that they have, they'll do that. They won't look at the price, because that's not what they do.

HAI: But it has been a bullish story in the sense that investors, when they see that, they sort of extrapolate, and say, "Well, you get one central bank doing it, you're going to get all of them or many of them, anyway, coming in." And their ability to purchase in vast quantity, that's a real ability.

Sanchez: Right. I think it definitely solidifies the view that there is strong demand for gold, that, "Hey, look, if central banks want more gold, so should we." But I think it definitely does support prices.

HAI: What would happen if the Fed starts raising interest rates?

Sanchez: At some point, central banks are going to have to increase interest rates. But that may be farther off than some expect. In the US, the Federal Reserve is expected to increase rates later in 2010. But at the same time, it's going to be a slow process. And that liquidity is going to be drained from the market very slowly to ensure that economic growth continues. So it may help cap Gold Prices, but at the same time, you're still going to have these underlying financial/economic concerns that will support them as well.

HAI: For an investor now who's thinking about getting into this, what's the best way to do it? Should you go via the Gold ETF route? Should you buy mining stocks? Should you buy physical gold bars, gold coins? What would you say to somebody?

Sanchez: I think it depends on the investor, but I would definitely get some exposure to rising Gold Prices. Now depending on what your preference or what your ease of use is, as long as you have some exposure to the rising Gold Prices, that would be good.

HAI: All right, there you have it: You've got to get some exposure to rising Gold Prices. That's it for now, folks. Thank you for joining me. Thanks to Carlos for coming by here.

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Ben Bernanke's all washed up in Japan...

BEGINNING a new tradition, we give an award to the person who has done the dumbest thing in the financial world during the preceding 12 months, writes Bill Bonner in his Daily Reckoning.

We call it the "Christopher Columbus Prize", named after the mariner who didn't know where he was going, didn't know where he was when he got there, and as Winston Churchill pointed out, did it all at government expense.

Anyone can make a mistake. But to make a truly colossal blunder you need the support of the taxpayer. That's why Time magazine named Ben Bernanke its "Man of the Year".

You guessed it, Bernanke is our man too.

A decent economist is rarely offered the job of Fed chairman. The public wants miracles. A real economist knows he can't deliver them, so he takes himself out of the running before embarrassing anyone. A scoundrel like Alan Greenspan, on the other hand, squeezes his role like a ham actor, even though he knows the juice is bogus.

But in order to understand the grandeur of Bernanke's error in 2009 we have to go back to the Greenspan era...and his illusions of 2004. He had no idea of where he was then, as evidenced by a famous speech made to the Eastern Economics Association, entitled "the Great Moderation". The Fed's future chairman described recent history, in which nothing much went wrong. He attributed this remarkable stretch of growth and stability to "improved policymaking," noting that the stability should continue indefinitely, "assuming of course that policymakers do not forget the lessons of history."

But the professor from Princeton never learned the lessons of history in the first place – not even the recent history of Japan. The real cause of the "moderation" was a huge flood of credit in the '90s and '00s. No one disputes it. That's why everybody looked so smart. Even a captain who wanted to run his bark aground would have had a hard time finding rocks; they were submerged under EZ money – much of it from the Fed. Investors thought they were geniuses because their assets rose in price. Businessmen were heroes because sales increased. And the Fed chairman took excess credit for what excess credit itself had wrought. But that was just like Ben Bernanke, he mistook a dangerous nuisance for a great success.

Then, in 2009, having misunderstood where he came from and how he got there, it was not surprising that he had no idea where he was. As Bernanke saw it, credit was what made the world spin. Now, with gears stiffening, it needed more grease. But where would the money come from? The US government already had a net worth of minus $68 trillion; it could only spend by borrowing more. Any moron could see the problem right there. In order to put a dollar in the economy, the feds first had to take it out, which further damaged the credit of the world's biggest debtor.

Team Bernanke was counting on "the multiplier effect", in which spending by the government is supposedly magnified by the private economy. But if he had learned anything from history, it should have been that the magnifier doesn't work when an economy is de-leveraging. David Ricardo explained why more than 100 years ago: as the government borrows more and more, people begin to suspect a crisis is coming. Rather than spend or invest, they hunker down and wait. Instead of multiplying the government's inputs, the private sector gives them a haircut.

The amounts are staggering. In 2010, the US federal government will have to roll over 2.5 trillion in debt and finance an additional deficit that will probably reach up to another trillion. Where will it get that kind of money?

Don't look at us, said Bank of China honcho Zhu Min last week: "The United States cannot force foreign governments to increase their holdings of Treasuries...The world does not have so much money to buy more US Treasuries."

Where he was maladroit with fiscal policy, he stumbled badly on monetary policy too. Intending to re-liquefy the economy, Ben Bernanke turned on a fire-hose. But the banks hunkered down, just like consumers. Measures of the real money supply turned negative. The Fed stopped reporting M3 – the traditional money supply measure – in March 2006. But it has been contracting month after month since July. We don't have December numbers yet, but it appears likely to drop below the zero line...meaning not just a decline in the rate of an increase, but an actual decrease in the available money supply. As the supply of money falls, the value of each dollar goes up. People owe more...and spend less. That is what a depression is all about.

Economist Richard Koo:

"Now the same Mr. Bernanke is finding himself, in the United States, that even with all the actions of the Federal Reserve, nothing is happening. So he is in the same position the Bank of Japan was in 15 years ago."

Now we see where the mariner has washed up – just where he didn't want to go. In Japan.

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