Kitco's Peter Hug: Gold Bottom Already In

April 22, 2013

 

Hug (cont’d.): Vice versa, when you get a drop like this, you need to calibrate your portfolio. And just because you may think everything is great, you don’t cancel your life insurance policy or your health policy because one day you feel particularly healthy. It’s an insurance policy.

So when the market drops to $1,300, you recalibrate your portfolio. And if you wanted 10 percent of your assets in metals, and now that ratio is at 6 percent because the metals have dropped, you need to buy 4 percent more.

That will allow you to add positions in corrective markets, in weak markets and sell into strengthening markets, at the same time maintaining your core holding.

IU.com: And that’s the long-term view, right?

Hug: It’s a view that could be long or short. You may in three years from now—for whatever reason … now again it will depend on age or risk profile what you need. You may look at this and say, “When I look at the world today it just feels better; it looks better. Everything I’m seeing is better. So what I want to do now is maybe drop my allocation from 10 to 5 percent.” But in that scenario, in that environment, your other 90 percent should have done extremely well. So you recalibrate your insurance position.

But I don’t see anything fundamentally that has changed in this market that would make you change your percentage allocation at this point. If you were comfortable at 10 percent three months ago, there is no fundamental reason not to be less comfortable at 10 percent today—again, with a recalibration. Because when you look at the globe, nothing has changed. In fact, everything is getting worse, in my opinion, not better. And now you’ve got Bank of Japan that’s got a stimulus program that on a GDP basis is twice, if not 2 1/2 times the size of the U.S. spending program. Nothing is getting better out there.

When you look at the weak sisters of the EU—the Spanish, the Greeks, the Portuguese—they have youth unemployment, some of them approaching 60 percent. These kids are going to hit the streets in the spring and summer, and they’re going to be protesting. I think you would not be wise, to not have a precious metals component in your portfolio.

IU.com: What’s puzzling to me is that given this fundamental picture, why has so much confidence been lost in gold? You think it’s mostly a tactical event?

Hug: I don’t think it’s an issue of confidence on the investor’s part that’s buying this from an insurance position. I think what this is, is just the big players out there—everything happens now on a push of a button, and it just gets overdone. Whether it’s on the upside or on the downside, it gets overdone. The valuation here of gold at $1,300 is low. The mining industry has finally been taken to task, and after telling investors for a long time that they have a $300 production cost on gold—which is absolutely garbage—they are now admitting the production costs are probably closer to $900, $1,000 an ounce.

 

 

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