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Why gold could soar further – and when it could stop

Neil Gregson, co-manager of the JP Morgan Natural Resources fund, explains why the gold rally could continue but also when it might end. 

Why gold could soar further – and when it could stop

Soaring gold prices likely have further yet to run as investors fret over a host of macroeconomic woes, a senior member of JP Morgan Asset Management’s natural resources team has said.

Neil Gregson, who works with Ian Henderson on his JP Morgan Natural Resources fund, a Citywire Selection pick, made the comments in a video interview shortly before gold hit a fresh record high of $1,578.5 per ounce.

He said the end of instalment in the US Federal Reserve’s latest massive bond-buying programme, seen as a major driver of the yellow metal’s ascent, did not signal any immediate declines in gold prices.

Pointing out that while it was still unclear as to whether the Fed would provide more stimulus, he said recent US data suggested monetary policy would in any event remain ‘very stimulating… that interest rates will stay low, will not be increased – and this is a good environment for gold.’

Gregson added: ‘In the short-term, with all the concerns in the world, we would be positive on the outlook for gold prices.’

Suki Cooper, analyst at Barclays Capital, said the metal’s recent rise followed a downgrade to Ireland’s credit rating by Moody’s and evidence of a split between Fed policymakers as to the ‘factors that would necessitate policy easing or tightening.’

‘Gold prices continue to flourish amid the macro uncertainty as a flight to safety boosts interest,’ she pointed out in a research note.

Nonetheless, Gregson noted that when the US economic recovery is more certain, the dollar stabilises and interest rates go up, ‘that is going to be a significant headwind for gold.’

He also said large miners should increase their dividend payments, amid criticism that despite strong profits due to high commodity prices, the companies have not returned enough cash to shareholders.

‘Divided yields could be higher,’ Gregson said. ‘The companies are raising their dividends, but they’re still fairly low; there are buy-backs from the likes of BHP Biliton and Rio Tinto, but they also… are spending a significant amount on capital expenditure.’

He continued: ‘So, really the question is: is that money being spent wisely?’

UK-listed miners are among the top holdings in JP Morgan Natural Resources, including Rio (RIO.L), BHP (BLT.L), Xstrata (XTA.L), and Anglo American (AAL.L).

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15 comments so far. Why not have your say?

Peter Thoresen

Jul 14, 2011 at 08:08

These commentators amaze me. Gold has been rising for years: it's nothing to do with Ireland's downgrading although that will have made some turn to gold as a safe haven.

Miners are undervalued..... Gregson is right though to say that if they spend their new found profits on going after new but expensive resources their shares will suffer.

As JP Morgan well know, there has been a degree of manipulation in the paper gold and silver markets, but that is coming to an end as the demand for physical metal starts to take precedence.

There's a race to the bottom in currencies: gold is now being recognised as a currency ..... the Austrian School is coming to the fore and the Keynesians have been rumbled once and for all. Unfortunately most of our economists and politicians are behind the curve on this one so the printing presses will just keep rolling as our savings and pensions are stolen from us!

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Peter Thoresen

Jul 14, 2011 at 09:21

Correction to my last comment. I guess that the politicians and bankers do know what they are doing (stealing by printing money and causing inflation)....... it's just that 90% of the population won't understand until it's too late!

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Anthony O' Grady

Jul 14, 2011 at 09:34

Listen to Marc Faber's views on gold. The only tool left for western Govts (whilst ultimately unwise) is to print print print. When the dollar collapses, as it eventually will, watch gold leave the earth's atmosphere.

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Haydn Ellwood - Yellow Capital

Jul 14, 2011 at 09:55

Couln't agree more with Peter - politicians do know what they are doing. - And Gordon Brown could be Keynes re-incarnated.

Austrian economics is the only sensible economic school of thought. Keynesians forgot the principle, that an increase supply (money printing) will cause demand to fall (value) - basic economics lesson 1.

Yellow Capital - bases its proposition on Gold as money and the fundamental base in the pyramid of private client wealth. Gold is money, always has been - 2000yrs+

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Swings and roundabouts

Jul 14, 2011 at 10:39

I reckon the earth would be better off without Gold.

We spend huge amounts of energy and environmental damage to extract the shiny stuff then put it into vaults where it does nothing. It doesn't pay a dividend, doesn't make anything, doesn't come up with ideas, doesn't educate anyone. Did we not drop the gold standard in the 1920's? Have we not made huge progress since?

If there were another planet similar to ours but with no Gold would they have no money? No economy? Gold is speculation and mainly driven by fear and greed, and in my view a bar of gold is worth less than a pint of beer.

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Haydn Ellwood - Yellow Capital

Jul 14, 2011 at 10:57

That's because you probably haven't experience a currency collapse, where inflation jumps to 2, 000, 000 % in a year. When it takes a wheel barrow of money to buy a pint of beer, or where it is cheaper to use paper money as toilet paper because it is worth less than the toilet paper itself.

gold is not an investment, that is why it doesn't pay a dividend or interest. it is a medium of exchange, the common denominator in the exchange equation.

in relation to your comment about not doing anything etc. Gold maintains its value, it remains liquid through market crashes, it doesn't tarnish in acid, it is the only element that will remain in pristine condition after thousands of years, gold does not have any counterparty risk, it has no credit risk, it cannot be manufactured in great quantities.

Do you think we live in a normal planet where someone (government) is allowed to cut down a tree, make paper, print on it, give it legal tender and that represents value? More like a cartel...

if you think the world of IOU's written by bankrupt governments is normal, then perhaps you should stick to investing in pints of beer?

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Hotrod

Jul 14, 2011 at 11:14

Just my Two penny's worth.

Whilst I agree with the gist of the argument for gold. (I have invested in gold mining shares) I do not subscribe to the idea that markets can reverse engineer the policies of Govt. treasuries, and decisions made by central banks. After all the people put in charge of these departments have proven credentials and hold the balance of power.

The idea that we could all go back to a gold standard does not square with the logistical reality that I see. (The ratio between physical gold held by central banks and the intrinsic value of fiat currencies has expanded far to much)

The economy of one Country cannot stand alone. Globalized trade demands the electronic transfer of money on an unprecedented scale. Even if there was enough gold in world to make some sort of system viable; the logistics and security concerns involved would render any such system inefficient.

Governments are watching the gold market very closely. If there are signs that powerful entities are trying to corner the market or too much gold is being hoarded by wealthy individuals I am in no doubt that they will bring in tax legislation to prevent it spreading.

At the end of day: I am like everyone else: At a loss to come up with a solution to the horrendous debts which the western world is now saddled with. Lets face it, they can never paid. My guess is that ways will be found to gradually write them off.

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Swings and roundabouts

Jul 14, 2011 at 12:23

Well gold has been a terrible store of value if you bought in the bubble in 1980 and held on to it, so I disagree with it being a store of value, better to trade it.

But yes when everyone has fear of currency collapses they will head to gold, so you agree it rises when people are fearful.

You sound as if you believe that gold has magical properties, but how can it help our situation if everyone flocks to hoarding Gold? That would be a terrible scenario, and as Hoteod mentions Governments would undoubtedly step in.

Gold was useful long ago before the digital age we live in now, but like Hoteod I see there being far too many impracticalities to going back to a gold standard

Also if a country can adopt the gold standard again then surely it can opt to go off it again? Ie it will not and has not in the past stopped countries defaulting

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Haydn Ellwood - Yellow Capital

Jul 14, 2011 at 12:47

If buy anything at the top of a bubble, you will be punished, that goes for any asset class, even rubber pooh. so your arguement lacks credibility and is not specific to gold.

Why hoard gold, gold is your last line of defence against financial turmoil.

I dont agree with digital age arguement, you can digitalize gold and infact there are many online gold accounts, many companies accept gold as payment and many gold miners pay dividends in gold. I am or never have suggested going back to a 'classic gold standard' where everyone lumps around two kilos of gold to pay for everyday living. but what should occur is a gold exchange standard, where foreign treasuries are forced to redeem there debts in gold or gold backed currencies. refer to Pres Charles de Gaules statements 30yrs ago.

Anyway, look at every that has abondend the gold standard and not how rapidly the currency devalues, and look at how often and shorter the intervals occur between default. as compared to a fiat money backed by gold.

Gold is and has always been the underlying asset to paper money which is a derivative of gold. an IOU, when there are more IOU's issued than physical gold to back it up - someone loses. the fear and greed you refer to is the fear of the IOU's failing to deliver the OU in the IOU promise.

anyway economic history is freely available, you are comparing a short 100yrs of existance to over 2000 years worth of history and reliance on gold as the medium of exchange. it doesn't change over night. unless humans adopt another 'commodity' as the demoninator in the exchange equation gold will remain in its role.

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nicholas gold

Jul 14, 2011 at 15:47

I find it interesting that governments can create this horrendous debt load and then come out in "crisis" mode that as here in the USA all we need to do is raise the debt ceiling and everything will be just fine. I recommend that your readers spend a few evenings of light reading with Gibbons' "Decline and Fall of the Roman Empire". To think that we can spend our way out of this situation is absolutely ridiculous. The physical properties of gold and its history make it money, nothing more or less. These so-called "experts" (Bernanke comes to mind) have created the ultimate Ponzi scheme, and its unwinding will be very unpleasant indeed.

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Myron Martin

Jul 14, 2011 at 20:22

The term "Ponzi scheme" has been tossed about quite loosely of late, however by dictionary definition, our fractional reserve banking system definitely qualifies for the simple reason that only the PRINCIPAL of a loan is created.

The required INTEREST demanded is not created by this pyramid scheme of creating (out of thin air) up to $20 new dollars for every one on deposit counted as reserves, when in fact they are LIABILITIES, the depositor still owns and can withdraw the money from the banking system.

This means interest can only continue to be paid if there is an exponential increase in NEW LOANS (read DEBT) that develops into a DEBT PYRAMID that eventually gets so big it can not be serviced even at near zero interest rates. Eventually there are no more qualified borrowers with viable collateral whether personal, corporate or country and lending slows down or ceases to the point where there is insufficient money in circulation to transact business and also service required debt payments.

If that is to simple and explanation, here is an essay with more detail:

From July 9th Automatic Earth posting.

Elliot Wave: House Prices Will Fall 90-95% / Deflation Not Inflation on The Dollar, First

by MCMSinger - Patrick.net (June 20)

Robert Pretcher said himself in a video that although he may sound like an extremist - he expects home prices to eventually collapse to 90-95% devaluation of it's highest peak. He also expects deflation. Why? Because although the money supply is very high - you have to understand that the debt on that money supply is close to 8-10 times its size.

Where did that debt come from? From easy credit to anyone. I believe a lot of people don't understand that US has already gone through inflation.... When? Through the bubble years when everyone was spending on credit cards, easy mortgage to anyone, excessive student loans, & excessive business expansion.

Banks do not really lend you the money. They only pretend to lend you the money as if they actually have that money in reserve when they actually do not. They are allowed to lend I believe 8 times more than they actually have in reserve. (20?)

***This effectively means that a bank is pretending to lend you money which you believe is actually available in the monetary supply within a economic system - when truthfully that money never existed in the first place - it was electronically credited out of nowhere - basically electronically printed when you were approved for a loan which you applied for (mortgage, college loan or business funding) - and then electronically credited to you. COMMENT: In any other context this would (and should) be considered FRAUD!

You are basically fooled into believing you owe the bank money - when you don't because they didn't actually take that money available in the monetary supply within a economic system - instead they electronically printed about 80% of your "loan" themselves - while they only really actually lent you 10-20% of the "loan".

Let me get to the main point: The bankers have effectively made people chase $14-20 trillion dollars actually available within the economic system to pay off $140-160 trillion... How does that work? It doesn't! COMMENT: The chickens are coming home to roost, the fractional reserve banking system is quite simply a PONZI SCHEME that has pretty well reached the end of its possible mathematically survivable stage, the simple truth is that you can not pay down debt with more debt, it is a tread mill to nowhere.

This formula makes individuals in a economic system chase after money - money becomes scarce - even though the supply of the money is quite high and it is backed by nothing - the debt accumulated is so many times greater than the supply available. ***

This mathematically creates a depression and deflation by manipulating the supply of money within an economic system while at the same time manipulating the debt within an economic system - so the debt is many times more than the supply.

Now that the banks are no longer "lending" (counterfeiting) much.... The defaults just keep piling up - and that's exactly what mathematically has been engineered.

Though the government is in the mortgage and loan business now. I understand that haven't fully closed their own "lending" (counterfeiting) however once Freddie & Fannie along with Sallie is ended - expect the defaults to skyrocket & the contraction of the economy to increase many times - because then you can no longer pay off debt from more debt.

First you will have deflation - then after all the defaults, bankruptcies & foreclosures have been processed through - maybe in 2-10 years depending on how things proceed - you will have MASSIVE inflation due to the supply of the money and the fact that it is backed by nothing. The dollar is definitely not stable however understand other currencies are much worse in how solid they are.

Deflation is what will hurt most Americans not inflation in my humble opinion. Inflation will help americans to easily pay off their mortgages, student loans, & credit cards. This will free them from debt slavery while at the same-time allow them to keep their homes and have businesses create jobs.

Inflation will hurt savers though - but savers are very few in this economy and it is actually very tough for most americans to save money even though a lot of them are trying to cutback on useless luxuries. Most americans are either under debt or live paycheck to paycheck from being homeless.

What I am saying is exactly what happened in 1929-1933. Too much debt with very little money available to pay it off. The federal reserve also contracted the money supply which worsened things even more. The United States of America has been hijacked by wall street & international bankers, I'm sorry but that is just the cold hard truth...

The stimulus & bailouts were just to temporary - once QE2 ends in June 30 (10 days from now) - if nothing else is done to get more money into the system - the whole thing is going to collapse eventually when you go by the math. Math never lies - opinions do.

The bankers did exactly the same-thing in 1929 - put a little bit of money in the stock market to keep things a little bit afloat after a major crash - then in 1933 pull out the money - triggering a much bigger crash... The same game it seems they are playing - just on a much larger scale - which will make the collapse worse.

Stock market is rigged - get out of it. It's not worth it if the bull runs continues - too much risk - if you still make money - good for you but understand that you are taking a lot of risk when you should consider protecting yourself. Also whenever the stock market crashes - New York State real estate collapses but the collapse of that market spreads a bit to other markets.

What do you think about my perspective? With these factors in mind of what the banks have done - I can confidently say that the housing market definitely is in risk of falling 90-95% - even though that may sound extreme - when you look at the math behind it - it is actually very logical. Again - Math doesn't lie, opinions do.

Sure gas prices are rising along with groceries and utilities but that is not a full perspective in my humble opinion of inflation vs. deflation. I do think that eventually they will those prices will fall down. In April 2008 -gas was rising but then it fall. I believe it's simply up temporarily due to artificial prop ups to the economy by the government. Grocery stores by the way are losing money.

I do believe that both inflation and deflation will happen - just at different times. And maybe also even with different necessities possibly. Though generally I believe all asset prices and commodity prices will deflate but then inflate.

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Papershuffler

Jul 15, 2011 at 09:10

Going back to the third comment (Anthony O' Grady) - re: the decline of the USD/ rise of Gold - wont the rise of the Chinese currency have the reverse effect on the Gold price (ie. the chinese currency replaces the vacuum left by the US Dollar) as investors/ speculators who bought Gold sell and invest in China instead?

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David Ruiter

Jul 15, 2011 at 17:19

Re Myron Martin's Post:

As stated, if foreign investment ceases, the Ponzi scheme ends....and gold is a potential "refuge".

"Open Ended Questions" to all:

A) What would likely happen in the first few days following collapse of the world's reserve currency.

B) What signals would indicate that a major melt-down is about to occur?

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Pertan

Jul 16, 2011 at 09:25

You can't live on gold as an alternative to a currency ona daily basis, so all it does is serve as a hedge. You might have done just as well converting sterling, euro or us dollar to the swiss franc or norwegian kroner and avoided the speculative part of gold value. No one can suggest that the current value of gold reflects the equivalent devaluation of currencies, particularly with relatively low inflation.

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nicholas gold

Jul 16, 2011 at 15:06

In the right weights you certainly could, considering its physical properties. As for "relatively low inflation" I am not at all convinced after having gone to the grocery store and filling my gas tank. It's probably comforting in a way to ignore what is happening and believe the "expert" opinions, but when the inevitable happens you will be certain to hear or read the famous phrase, "WE NEVER SAW IT COMING".

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