The likelihood of QE and a long-cycle correction for gold – Murenbeeld

Gold is roughly in the middle of a 20 to 25 year cycle and should break through its all time highs within the next few years but, it won't be smooth sailing

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GEOFF CANDY: Hello and welcome to this mineweb.com newsmaker podcast. Joining me live in Geneva at the Precious Metals Summit is Martin Murenbeeld - he's the chief economist for Dundee Wealth Economics. Martin you had a fascinating presentation yesterday about the implications of a euro crisis for gold and clearly there's been a lot of focus on what's been happening in the US and whether or not Ben Bernanke is going to be setting up another round of quantitative easing. And for some time now, people have perhaps not been focusing on Europe as much as possibly they should be. It seems to be coming back into the spotlight again and clearly there are a lot of implications for a euro crisis - if you could just sketch the scenarios that you sketched last night...

MARTIN MURENBEELD: The first thing I would say is the crisis that is unfolding in Europe is, net-net, quite positive for the price of gold. I did point out that there were some negatives inherent in the crisis but the negative factors are essentially unlikely to come about. To put it differently, the probability of the negative factors being the dominant ones is quite low. Some of the positive factors centre on the need for more liquidity in the eurozone and, no matter how we cut the cake, regardless of whether or not the eurozone remains intact, the high probability case is that the ECB and/or the national banks are going to have to put a tremendous amount of liquidity into the system. One of the organisations, the Centre for European Policy Studies for example, estimated very recently that, were Spain and Italy to be bailed out in the way that Greece and Portugal are being supported, it would require upwards of €1.8tr - and that money will have to come from somewhere. Ditto if the IMF were to be involved, it will have to come up with money and that money will have to come from somewhere. So I showed in some of the charts just how liquidity is generated. Governments borrow it in the market, but if that raises interest rates then typically the central bank will step in and help buy some of those bonds. So to come up with liquidity governments borrow or central banks print and to the degree that the world economy is somewhat weak, we expect that the central banks will be very sensitive about any rising interest rates on the back of demand for more liquidity and so that they will go into the market and buy. Now that's one of the key characteristics - one of the key factors we see out of this European crisis.

GEOFF CANDY: Moving to the US, firstly do you see a third round of quantitative easing happening, and secondly, you mentioned that you're less worried about what's going on in the US for some reasons, primarily because there are potential ways for the US to solve some of their problems.

MARTIN MURENBEELD: Okay, with respect to quantitative easing, I think that there is a 50% probability that there will be another round of quantitative easing. To me, probably the key reason that the Federal Reserve would ease, having nothing to do with the United States economy per se, is if the situation in Europe became unstuck and so that Europe were to face, if you will, a Lehman moment. And there's great potential which I talked about in the speech last night for a Lehman moment in Europe because the banks in Europe are heavily exposed to sovereign debt, and you know, if one or more countries defaults, Greece defaulted, but it borrowed money so that it could put it back into the Greek banks, or at least it got money from the system so that it could be put back into the Greek banks - so that's not an issue. But if for example Italy were to move towards a default, or Spain were to move towards a default, the banks would be seriously hurt and this will have ramifications for North American banks. So that would be my number one reason for quantitative easing in the United States. The second reason, the obvious one, is that the US economy falters in the second half of this year. And we think that there's a likelihood that this will happen. We're not that gung-ho on growth in the US economy, so it certainly to me looks like there is an excellent chance that there will be some kind of QE, both either from the European side or from a weakness in the US side. And that's not saying anything about 2013 which is likely to be a weak year if all the fiscal measures that are supposed to be taken at the end of this year, and at the beginning of next year are actually taken. And we'll get huge fiscal drag in the US economy and that will have the US economy fairly weak in 2013 as well.

GEOFF CANDY: What does that mean for gold, especially if you look at the long cycle view for gold, where are we and what does the current situation imply?

MARTIN MURENBEELD: Well to the degree that more liquidity is put in the system, either in Europe or in the US or in the UK or in Japan or elsewhere, more liquidity is, all else constant, a very good development for gold. So when we do our measures for world liquidity and they rise on the back of growing balance sheets amongst the central banks, we see the gold prices will go up. With respect to the long cycle, I think gold is in at least a 20, maybe 25-year long cycle of which we've completed 11 years and there are reasons that I think the long cycle will carry on for that many years. The key one being that about three billion people - mostly in South East Asia but also in Latin America and possibly in Africa, and in Russia - are now fully entering the world economy and they need things and they will be buying things, they're becoming richer, they'll be producing things and some of their wealth will be allocated towards gold. In fact, as the listener knows, India and China have a huge affinity to gold and as these countries become richer, the price of gold is likely to be pushed up on the basis of demand from these countries. Now, having said that, I am concerned that somewhere within the next two, three, four years, there will be a significant correction - a year-over-year price correction in the gold price. And we always see these things happening in the long cycle. It hasn't happened yet for gold. It has happened for copper. It's happened for some of the other commodities that we look at on a long-cycle basis, but it hasn't happened for gold. The factors that might create such a correction could be a significant recession, combined say in India and China, and if that were to come together with the US being in a position, let's say two, three or four years from now, being able to raise interest rates, I would fully anticipate that the gold price would come down possibly for a year or so and I rather suspect that most people will think that the long cycle will have finished, but it won't have.

GEOFF CANDY: Just quickly to close off with, given the scenarios you sketched for Europe last night, and also how you see the world playing out in the US and also indeed in India and China, what would be the most likely outcome, two or three years from now, what will the world look like?

MARTIN MURENBEELD: Well, I think what the world would like in terms of gold is we would have over a period of three years, assuming that we're not three years out in one of those mid-cycle corrections, I would expect gold to be certainly taking out its all-time high in inflation adjusted dollars. That high happened to be in 1980 and that will translate into about $2400 currently, so I wouldn't be surprised to see gold three years out or four years out, up around $2500. With respect to the global economy, I think growth in the developed world, specifically in Europe and North America, will continue to be somewhat weak and that's assuming that the US hasn't really got its act together with respect to changing certain tax and spend policies and having been unable to devalue the dollar so that the US economy can grow a little bit faster. So I would expect somewhat slower growth in Europe and North America, much like what we're seeing now in North America. Europe will presumably come a little bit out of its recession, but it will be difficult three or four years from now to talk about Europe per se because I fully expect that there will be at least three or four new currencies going by old names - the drachma being one.