Interview with Miguel Perez-Santalla: How Far Will Precious Metals Fall?

HardAssetsInvestor.com (Norman): Hello everybody, and welcome to HardAssetsInvestor.com. I’m Mike Norman, your host. Today with me my guest is Miguel Perez-Santalla, vice president of marketing for Heraeus Precious Metals Management. Miguel, you’re coming back again. The last time you were here, last summer, things looked a lot different than they do right now. Metals prices – particularly platinum up around $2,000 – a huge collapse. Give us a little bit of your view now of how things look after this tremendous pullback.

Miguel Perez-Santalla, vice president of marketing, Heraeus Precious Metals Management (Perez-Santalla): Well, platinum's trading around $1,000 … keeps bouncing up trying to go higher. It’s having difficulty mainly because there’s no physical demand; the fundamentals just aren’t there to support it. There’s still platinum being produced, but there’s no consumers. We can see the collapse from the demand especially from the auto sector – which pulled back – and the jewelry sector. Norman: Right; that’s like auto production at a 40-year low. When you were here last time, you were bearish. You said that the prices were unsustainable at the levels that they were. That proved to be a very prescient call, but now you’re still not seeing any signs of a turnaround in that sector? Perez-Santalla: That’s correct. At this moment, we’re seeing no growth at all in demand for physical metals. The only industry that’s buying platinum at all is the medical industry – which uses it for stents and other medical devices – and the percentage of platinum or the quantity is minute. So even though that industry continues to grow, it’s not enough to offset the lack of demand from the auto sector. Norman: Some of the economic indicators now … they are starting to look a little bit more mixed, whereas before they were all aligned very negatively. If you look at the stock market – which is up sharply from its lows from back in March – are you keeping that in the rearview mirror, so to speak, or just keeping one eye on that as maybe some sort of a leading indicator that things might start to perk up in your business? Perez-Santalla: I’m hoping that things do start to perk up in the physical side. The thing is that even if it perked up in the physical side, it’s not really a direct relationship to the price, because the price is actually being held up right now because of the investment side – the fund money that’s in there, and the investment side, the off-take that goes into the ETFs. Norman: But hasn’t that pulled back a lot? Perez-Santalla: It did pull back on the initial collapse, but then there’s been fresh money that’s come into the marketplace. There’s a certain amount of metal still being held off the physical markets, and as long as that money stays there, the prices will be held up, or maybe even go higher on fresh buying from the investment side.

Norman: Was that, in your opinion, that whole investment surge that we saw over the last several years culminating in the big decline; are some people now taking the attitude or the position that hey, we’re just not going to play this game anymore, it was too brutal?

Perez-Santalla: Oh yeah, there’s definitely people that got out of the market, but even more, I think, it was tightening of credit. Once credit got tightened, it pulled money away from, let’s say, the investment funds of other investment companies that were playing in that marketplace. They had to put up margins for the stocks and whatnot; they just didn’t want to stay in the platinum any longer, and that caused that huge collapse below $1,000.

Now we’re back up; that’s because they’re coming back into the marketplace, because there’s nowhere else to go – they’re still not certain to go into, let’s say, stocks or bonds or whatever. But one thing I do see is that once the money starts flowing back into the stocks, you’re going to see that they’re going to leave metals right away because there’s no earnings, there’s no dividends, there’s no interest.

Norman: Right. What happened during the big boom and the run-up in prices; what happened to capacity, industrial capacity? Because a lot of capital flowed into a lot of these commodity markets, there was an expansion in the productive capacity. Is that a longer-term weight or bearish factor as you look forward?

Perez-Santalla: Well, first off, that big run-up hurt a lot of industry.

Norman: It hurt?

Perez-Santalla: Oh yes; it hurt and it hurt big.

Norman: How did it hurt?

Perez-Santalla: Even so, I mean, General Motors, Ford, Chrysler, Toyota, whoever it is – they all had to pay the prices, so they had to buy these metals. One of the precious metals that we rarely mention is rhodium. This is a metal that when I started working for Heraeus Precious Metals five years ago, was trading at around $1,000 and shot up to $10,000 once. So they had to pay for that metal. So someone actually pays in the end. Everyone always thinks about the winner, but how about who pays? In the end, it’s the industry and it’s the public who pays.

Norman: What about the shrinkage now in the automobile industry? We saw Chrysler file for bankruptcy, GM is on the ropes and they’re being forced by the government to become viable, they have to shrink their size. So from a demand standpoint, where you had these huge industrial consumers, they’re getting smaller.

Perez-Santalla: Right. They’ve gotten smaller but still whatever demand exists, it's still going to be buying cars, they’re going to be buying Fords or Toyotas or whatever. So physically the demand for platinum should still remain; the problem really is just spending, public spending. If they’re not buying cars, the demand for that platinum is not going to be big and it’s not going to go up. In the U.S. market specifically, though, it’s palladium that’s mostly affected, and palladium itself is also going to come off if we don’t see more spending in that area.

Norman: platinum, palladium, rhodium you mentioned … those markets crashed, but gold has held up relatively well; we’re still hovering around the $900 level. Is gold a different story here?

Perez-Santalla: Well, gold is a different story because, opposed to the other three metals ... like the other three metals are industrial metals ... gold is a financial asset, and it’s still looked upon as such. But that is still not the major consumer of gold; so right now it’s being held up by investment money. Now I think everyone who was waiting for disaster has already bought gold, so it remains floating around the 900 level. It hasn’t been able to break through to 950, and it’s just very toppish here, but the price can remain here for a while as long as people don’t have confidence in the market. Norman: You’re talking about confidence in the stock market? Perez-Santalla: Right; once confidence returns into the stock markets or the bonds or whatever, or they have better earnings somewhere else, they will abandon gold because gold does not earn interest. The other thing is that the reason the price will come off once they start doing that is also that the biggest consumer of physical gold in the marketplace is the jewelry market, and that market has essentially died. The consumption of gold is minute compared to historical levels. Norman: But if people have confidence returning in the market, isn’t that the same thing as saying they have confidence in the economy, and if so, maybe they’re doing a little bit better; maybe they can afford to go out and buy some more jewelry? Perez-Santalla: Yeah, but there are certain price points on product, on jewelry, that people will buy gold. In other words, people think something’s worth a certain price, so when they go to the jewelry store and they see that price - "I’m not paying that - and they’ll go to another product. That’s what’s happening – the jewelry market has begun making lower-alloyed products that look prettier, they look nice, things that replace platinum, things that look like gold, and people go to those levels and buy those price points. Norman: Very interesting. Now what about … because hand in hand with this confidence theme that you mentioned, for me it’s monetary policy, because a lot of people who bought gold or who are bullish on gold now say because of what the Fed has done – large expansion in its balance sheet, flooding the financial system with liquidity – that we are facing down the road what could be a hyperinflation. However, that the Fed has been very much on the defensive about this and sensitive to these criticisms, to me suggests that at the moment, when they do feel the economy is picking up traction, they’ll reverse monetary policy, they’ll start tightening. What sort of an effect does that have? I think that will have a bearish effect on gold. Perez-Santalla: I totally agree with you. I think it will have a bearish effect on gold, but I think that the dollars that are out there are being consumed and they’re being used. So that’s why we have no sense of inflation, and you see it in the prices of goods and services; they have not really gone up. I don’t see any indication that they will go up. The money is already in the system, so I don't see that happening. So if there’s no real inflation, we’re not going to see gold take off. To top it off, if there is, what earning do you really have? Norman: That’s a great point, and it’s a point I’ve made before. Now look, in the last cycle … which bottomed out in the late ’90s, where gold hit about 250 …n this cycle, if we do come down, where do you see the level that for you would be a very solid bullish level? Perez-Santalla: I started in this business in the early 1980s, so I always refer back to there, because people act the same way; we’re all humans and we all react the same way to certain things. So I think that confidence doesn’t come back as strong as people would want it to, so I think it’s going to go over a time period. So in the short term, I could see gold in December coming down to around $700, and at that level the jewelry market will pick up again, so it will buoy it and hold it up between 700 and 800. In the longer term, it should come off, or if there’s inflation, maybe it will hold up around there. Those are harder things to see of course, so I’m just guessing.

Norman: That’s an interesting price level, because it’s one that you don’t hear too often. As a contrarian myself, I probably agree with that outlook. Most people, I would say, fall into more of a bullish camp and you hear things like the 2000s, the 5000s … at least for now you’re saying that’s not really in the cards?

Perez-Santalla: I don’t believe it. The world would be in a really bad shape if we see that.

Norman: Now let’s get back to some of the industrial metals. What would you need to see in your business? Demand from your customers picking up, like the actual physical demand of your customers saying, hey, let’s get to work?

Perez-Santalla: You know, interestingly enough, I’ll bring up the three industrial precious metals, which are silver, platinum and palladium. Silver consumption has been brisk and remains brisk, and part of that, I believe, is the jewelry sector, which is that people have turned to silver to buy jewelry. So there’s a lot of jewelry sales in silver, so silver remains brisk at these levels … even right now it’s trading above $13. It can remain there for a while, though I think silver will also trade down because it follows gold a lot of times, as there is also a percentage of people that buy for investment purposes.

Platinum and palladium are being held up by investment money at the moment, but their primary demand is industrial. Once people realize they’re not going to get any earnings if the metals stay stagnant in the price level, they will abandon it, and so I think platinum and palladium can still come off a bit.

Norman: Let’s talk a little bit about speculation. I thought that was a very big factor in the price run-up. And since the collapse, we have a new administration. But to me, when I look out there, nothing concrete has been put in place to limit that speculative element when the cycle starts back up again. Do you see that the same way?

Perez-Santalla: I totally do. I’m really surprised we abandoned looking into what happened with the oil crisis when the price went through the roof – which you and I both know, that was highly leveraged money-manipulating. Maybe it wasn’t everyone in it together, but when the mind-set with highly leveraged money starts going, “Oh it’s higher, it’s going higher,” and all the money is chasing the one product, it goes through the roof, because physical commodities are a limited inventory, right? So that was what drove the price up.

Once credit tightened and people had to give the money back to the bank, that’s what caused the collapse of crude, gold, platinum, palladium – the prices just fell apart. I don’t see any of that going on, and I’m surprised our government has not continued to pursue that, but as always happens …

Norman: If we get another price run-up, they might, but as a guy in the trade, in the physical business, you’re probably happier when that speculation … that makes your business probably more sane, rational.

Perez-Santalla: Right; and we’re happier for our consuming customers that the prices remain stable and there’s relative good activity. But when prices remain high, it hurts our customer base.

Norman: All right; so summing it up now, we’re looking at probably $200 downside on gold, and probably flat prices for platinum, palladium, silver and the industrial metals?

Perez-Santalla: Yes, that’s correct.

Norman: All right, there you have it folks: Miguel Perez-Santalla for Heraeus Precious Metals Management. This is Mike Norman. That’s it for this interview, but we have plenty here in the archives and plenty of resources on this site at HardAssetsInvestor.com. OK, I’m signing off now. See you next time; take care. Bye-bye.

Comments

[History Buf...:]

Mr. Perez-Santalla is a person I would classify as one who "knows the price of everything but the value of nothing". He was correct on his calls on the industrial metals but that does not give him a crystal ball looking forward. I would not be so sanguinary about the economic fundamentals as he seems to be, his comment that in order for gold to hit the really bullish levels, "The world would be in a really bad shape if we see that". I submit to you that it IS in really bad shape, and we ARE going to see those kind of prices.

But that's just my opinion. I am long GTU and physical gold and silver.

May 21 11:28 AM

[Market Sniper:]

This "interview" was a joke, right? Please tell me this is a leg pull. LOL

May 21 05:47 PM

[Expat7:]

I watched this interview and can only say that Mr. Perez-Santalla was not being honest in my opinion. He even said towards the end of the interview that lower prices are better for his firm. i would think that the site that hosted this interview would have seen how disingenuous Mr. Perez-Santalla was being and not have even put it up on their site with their name. Personally I lost a lot respect for "Hard Assets" for posting such a poor interview.

May 21 09:34 PM

[Golden Oxen:]

What a joke! You have it correct Market Sniper a Leg Pull

May 21 11:49 PM

[DONE_SONZ:]

Cover your short position "Hard assets investor".

May 22 07:17 AM

[bagman432:]

Whatever gold, silver, platinum, or palladium do over the short to medium term doesn't really matter. The key is what the dollar and other G7 currencies do over the long term. The answer to that is pretty clear. As long as the governments of the G7 (especially the U.S.) maintain foolish monetary policy it's only a matter of time before all precious metals skyrocket. As far as earning interest on my metals, who cares. The main interest is that I protect my family from the inevitable crash & burn that is sure to come.

May 22 01:46 PM

[Mark123:]

A year from now many will look back at this article and laugh... The rest are laughing now...

May 22 02:45 PM

[sd:]

A BS interview.

May 22 09:55 PM