Gold edges towards $1000; rand breaks R7.70/$: Paul Walker – CEO, GFMS

If it’s not the Chinese, what’s driving the price of gold?

Interviewer: Alec Hogg
Posted: Monday , 07 Sep 2009

ALEC HOGG: Well, that gold price is now trading at $990/oz. It has suddenly come to life. Paul Walker is the chief executive of GFMS, and he joins us from Paris. Paul, on Mineweb, Moneyweb's international website today, Lawrie Williams wrote a story about China pushing the idea of buying gold to its 1.3bn population. There was a programme on Central China Television explaining to the public how easy it is to buy gold, and this is being interpreted - in some quarters, anyway - as part of the reason why the gold price seems to be sprinting towards $1000. Is that wishful thinking?

PAUL WALKER: Well, I don't think as much as wishful thinking - it's actually been a story that's been around for some time. If you have a look at GFMS data on China, it's been the one outstanding growth market throughout this bull rally. It's outperformed every other gold market both in value and, most important, quantity terms from the perspective of supply and demand balances in this market. So it's already to an extent in the price and there's no doubt that growth in China, ongoing growth in broader-based Chinese consumption from investors, through jewellery, through potentially the People's Bank or save, that's going to be a positive for gold. So it's been around for some time, in the price to some extent. Would expectations of a surge in Chinese private buying push the price a bit higher? I guess there's some truth to it. I don't think that's what's driving the price at the moment.

ALEC HOGG: What is driving it?

PAUL WALKER: Well, I think our view is really that probably a few fairly significant lumpy transactions have gone through the market at a time we think there's been a degree of illiquidity, and that kind of spiked the price up a little bit, brought in some short covering. And on the back of the usual trends that take place when the market starts to move, some buyers came on the back of that and took it up to the recent highs. I don't think there's too much more to be read into this at the moment. At the house we've been bullish on gold for quite some time. I think gold's still got some upside potential. I wouldn't see this as the rally that sustains gold above $1000 for any period of time, assuming that it gets there. I think we will actually see a little more downside risk in the short term.

ALEC HOGG: Those "lumpy purchases" - any of them from central banks, because that is a key to the long-term future of gold?

PAUL WALKER: Well, I do wonder. I think it's one of the keys to the long-term future of gold. Our long-term views on gold that our clients have seen - we have premised this very much on a view that net central bank selling is going to decline over the next 10 to 15 years, and there's no doubt that that's going to be supportive of the price. I think really where the flows and the important triggers, if you like, for significantly higher or lower gold prices are going to come from private investment. And our view would be that a significant amount of what we've seen over the last week or two is privately based. And the future of the gold price, certainly on a short-term basis, is going to be dictated by what the private sector does as much as what the official sector sides do.

ALEC HOGG: Paul, one of the gurus around the world of investments is John Paulson, who recently has been saying quite a lot about his belief in gold. He took a big stake in AngloGold Ashanti, apart from buying quite a lot of bullion as well...

PAUL WALKER: Indeed.

ALEC HOGG: Would this be something that others would look at - a John Paulson in the same way that some investors look at Warren Buffett and say, well, if it's good enough for him, then I should be following him?

PAUL WALKER: I think there's no doubt that the gurus in the market will definitely bring people along with them. And, as you say, John Paulson's made a lot of his, what, 12.5%, 12.8% stake in Anglos, very large positions in ETFs. And I think a lot of people will be looking at somebody who's got one of the largest hedge funds in the world, saying maybe this guy knows something that we don't know and, given that he's made tremendously good calls in the recent past, maybe we should just in a sense trend-follow him and get on the back of this. Of course, he's been on the record as saying that his view is the long-term threat of inflation. Wealth preservation is underpinning that kind of strategy, and that remains to be seen. But there's no doubt that the inflationary argument has been gathering pace in the market. More importantly, the expectations of inflation are a factor behind some of the sort of trend higher in gold prices and will continue to dictate the short-term dynamic of the gold price. I happen to be a little sceptical about the inflation argument, but if you do believe that inflation's around the corner, well, some are seeing gold as a natural hedge against that. Having said all of that, I am still a little ... 1980s inflation was running high, gold prices went down. And conversely, if you have a look at the very low rate of inflation we've had in the last seven or eight years, that's when we've had the bull rally. Without getting into too many technicalities, I think that's because we have some rather curious ways of measuring inflation rather than the actual fundamental issue underlying price trends, and housing would be just one example of that.

ALEC HOGG: Paul Walker is the chief executive of GFMS, talking to us from Paris.

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