Kitco's Peter Hug: Gold Bottom Already In

April 22, 2013


Hug (cont’d.): And now the SEC and some of the fund managers are making these mining companies own up to the fact that their production costs are not $300. And gold production is declining while the cost of gold production is rising. We’re almost at a point where eventually mines will just stop producing; it won’t be profitable for them.

The fundamental long-term picture for the metals is extremely positive. If you add in some of the other arguments that aren’t yet prevalent, but I believe will become prevalent, such as the fact that you can’t just keep printing $85 billion a month, nor can the Japanese be doing $160 billion a month and debasing their currencies without the inevitable result being an inflationary surge—whether it comes next year, or two, three years from now, it’s in the system—that’s going to be price-positive for hard assets. Be it oil, be it real estate, it’s going to be price positive. And the last leg of a metals cycle is usually the inflationary cycle. And that hasn’t happened yet.

So, as a trader, would I buy at $1,392? Yes, I would, but I’d have a tight stop in there, hoping that it will get through $1,400 and scare the shorts out. As long-term investors, at any of these levels here, I’d recalibrate my portfolio. Do you have any sort of price range for gold, say, for the remainder of the year? I recently interviewed a trader who was telling me we would not see $1,600 gold any more.

Hug: I hate long ranges. But I think we may have seen the low in gold. I don’t know if there’s much more below $1,300; maybe $1,250. But we may have already seen the low. This may have been the opportunity to get in before the next leg up. The only context in which that $1,600 ceiling would be correct, in my opinion, would be is everything is rosy, and there is no need for a safe-haven asset. Does it make a difference what the dollar does going forward? All the monetary easing has not weakened the dollar, and a strong dollar is detrimental to gold prices, right?

Hug: It is. But it’s important to point out that many say a $1.32 euro indicates a strong dollar, and it does when you compare it to a $1.50 euro, but it doesn’t indicate a strong dollar when you equate it to the euro being at 90 cents way back a year or two years after it came out. So the dollar is right in the middle of its range; in fact, it’s closer to the bottom end of its range against the euro than the top end of its range.

An increasingly stronger dollar generally will be negative for the metals, but it depends what creates the strength in the dollar. If the European banking system—for the sake of a worst-case scenario—collapses and people move their assets out of the euro into the dollar, it will strengthen the dollar. But I can guarantee you that if that were the scenario that strengthened the dollar, gold would go up as well.



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