Kitco's Peter Hug: Gold Bottom Already In

April 22, 2013

Nothing fundamental has really changed in gold markets, so don't expect selling to continue, Kitco's Hug says.


Peter Hug, director of Kitco's Precious Metals division, isn’t buying that the 12-year-old gold rally is over. In fact, he told Correspondent Cinthia Murphy that with all the currency debasing going on around the world, gold looks poised to go even higher.

So what has happened in the past several weeks? It began with the Cyprus spook in March, and with the help of computer trading and the growing presence of highly liquid gold ETFs, emotions have been pulled out of the market. I wanted to get your perspective on what’s been going on with gold. Why do you think gold fell so quickly recently?

Hug: Quite frankly, as a trader, I’ve been very cautious about gold for a while now. In fact, I’ve been relatively bearish on this market since about the $1,680 level, and suggested for a few months that gold looked like it was setting itself up for a test of the 2012 low around $1,527. I think what you have happening here is a perception issue because I don’t think, fundamentally, anything has changed in the market that would have caused gold to rally from, say, the $900-level in 2008 up to the high of $1,925 we saw recently. In retrospect, I think the market was just way ahead of itself.

But what happened when it broke through $1,527 was sort of the perfect storm. Some speculation first emerged that Cyprus would have to sell its gold reserves to meet its financial obligations to the EU, and everybody reacted to that. But it wasn’t a Cyprus story necessarily, because Cyprus has only 10 metric tons of gold and that’s nothing—10 metric tons of gold trade roughly every 20 minutes on the New York Futures Exchange. What it was, was the psychology of why they were selling the gold—there was a suggestion that the EU was putting pressure on Cyprus to sell its gold reserves to meet its financial commitments.

Now, under the EU charter, they have no legal authority to force the central bank to sell its gold reserves, but the fact that Draghi was suggesting that fueled the idea that this might be a prudent thing for Cyprus to consider. Psychologically, from a trader’s perspective, if they’re going to force Cyprus to do this, why wouldn’t they also force countries like Portugal, Spain, Italy, Greece to do the same? And these countries combined have massive gold reserves. So it was a change in the market’s sentiment more than a technical move?

Hug: Well, the psychology was that it was looking like central banks may be pulling back on their buying and may be forced to sell, but once gold prices broke through that triple bottom from 2012, after that it was all just computer selling. When I traded this market in the ’70s and ’80s, everything was a phone call. And there was a lot of emotion in the market, so people weren’t able to do what they’re able to do today. Today there’s no emotion—they just put their numbers into the computer. If it breaks $1,527, it’s “get me out,” and the computer just executes it. It was just a cascading effect all the way down.



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