By Sumit Roy
Marcus Grubb is managing director of investment for the World Gold Council, where he leads investment research and product innovation as well as marketing efforts surrounding gold's role as an asset class. Grubb has more than 20 years' experience in global banking, including expertise in stocks, swaps and derivatives. After the release of WGC's quarterly Gold Demand Trends survey, HardAssetsInvestor's Managing Editor Sumit Roy spoke with Grubb to get more details on the particulars of some of the report's more surprising conclusions.
HardAssetsInvestor: The big story of the year was the massive outflows we saw from gold exchange-traded funds. Will we see the selling of gold ETF funds slow in 2014?
Marcus Grubb: Looking at what's happened so far in January and February is quite encouraging, because we're starting to see new funds flowing into the ETFs. We're on track to have the first four-week period where we've had net new creations in these products internationally after 13 months of selling. There is clear evidence that sentiment on gold is improving and that you're seeing some investors return to the ETFs.
Another point I want to make is that we think the Fed tapering is already factored into the gold price. It's really now about interest rates, and clearly, monetary policy is looking like it will stay very accommodative in the United States and elsewhere.
HAI: How do you see things evolving on the physical side of the market? Last year was a record year for physical demand, but can a country like China see another record jump in its gold demand in 2014?
Grubb: Consumer demand will stay strong. There are a lot of binary events out there that could hit that one way or the other. For example, if Indian import controls are released, it would be good, or if China had an economic crisis, it might be bad in the short run.
Notwithstanding big events like that, we still think you'll see strong consumer demand this year that's similar to last year, simply because you've still got continued growth and prosperity in the two largest markets, India and China. And you'll definitely see evidence of a pickup in coin demand and jewelry demand in Western countries in Europe and the U.S. as well.
Going back to China, we're in the camp that says this is a secular uptrend in Chinese gold demand; it isn't a cycle. Ten years after deregulating, per capita gold holdings are less than half of Indian holdings.
Having said that, what is the likelihood China will exceed or equal the record 2013 figure? That's going to be tough, because we had a third growth in the market - over 30 percent demand growth. And, of course, part of that was related to the price drop in gold last year.
Grubb (cont'd.): Although we do expect a good year for China, it's very unlikely it will equal 2013. It's early in the year right now, so it's hard to predict for the full year. We don't have a target yet for China, but I would say we would expect the Chinese market could come in close to where it was last year.
Remember, this is a market that five years ago didn't have any net imports. So basically demand was about 400 tons because it was equal to domestic mine production. It's quite remarkable we're now talking about a market five to six years later that's well north of a 1,000 tons a year.
HAI: We saw somewhat of a currency crisis earlier this year, with big declines in the currencies of Argentina, Turkey and other emerging markets. Are the people in those countries turning to gold for protection?
Grubb: Yes, there is anecdotal evidence emerging in some of those countries. In Turkey for example, you're seeing anecdotal evidence of increased demand for gold from retail investors.
HAI: How does the gold futures market look right now?
Grubb: We're back up to about a 9 million to 10 million ounce net long now on Comex, having been as low as less than 2 million net long last year when gold was down to $1,180. That's still on the low end; the average is probably more between 15 million to 20 million ounces.
So while it's considerably better than it was, it's still not back to the longer-term average of the long position that we saw since the gold run started in the early 2000s.
HAI: According to the WGC's latest figures, central banks continued to buy gold last year, even as the prices fell. But what struck me were the top three buyers - Russia, Azerbaijan and Korea. Why are those countries in the top three?
Grubb: It's interesting. We saw a lot of buying by Russia and also from some of the central Asian Republics and Korea.
Korea has been in the figures before. Russia has a clearly stated policy of raising gold in their portfolio. Gold is a natural hedge against the U.S. dollar, which they're very long on, on account of the Russian economy's dependence on energy exports. Holding gold makes sense from a diversification perspective, in the case of Russia.
As for the smaller buyers in central Asia, again, they're quite resource-dominated economies, in some cases. Secondly, they're simply adding gold to their portfolio as a hedge asset. We think that will continue. We do talk directly to the central banks on a regular basis. They were concerned about the price drop last year, but with stability coming back into the market, you could see more purchases by central banks.
HAI: Overall supply fell by almost 2 percent in 2013. But we saw that 5 percent increase in mine production. When are we going to see that decline in mine production that a lot of people have been expecting?
Grubb: Talking to the supply-side analysts, you'll more than likely see mine production flatten out or decline in the second half of this year going into 2015. And in the meantime, you might still see a small increase in mine production in the first part of this year.
HAI: Is there anything else we should look out for in 2014?
Grubb: Keep an eye on the ETFs and keep an eye on India, because there's a chance of an upside surprise there if import controls get abolished later in the year. If that happens, it'll have a big impact on the gold market; there's no doubt about that.
Finally, the other thing is the action in other asset classes. Large investors came into the year expecting the assets that performed well last year to deliver similar returns this year, but so far that hasn't been working very well. It will be interesting to see whether more investors start putting gold back into their portfolios as a hedge against these risks.
We don't give a price forecast, but I do think that unless there's some big binary events that we can't see, that you should have a positive year for gold this year in terms of returns. It may be a small rise, but we would expect it to be an up year simply because we think tapering is now discounted, and the physical market is getting back into balance, and could soon be in a deficit.
Last year, 800 tons came out of ETFs. Frankly, I just can't see where anything close to 800 tons is going to come from in 2014. That means you could have a lot more competition over that physical gold this year than we did last year.
That 800 tons is a lot of gold. Barrick Gold (NYSE:ABX) is the largest producer, and mines about (200 metric tons) a year. So you're talking four or so Barricks of additional supply last year. Well, that's absolutely not going to happen in 2014. I don't want to sound too optimistic, but it does suggest to me the risk now is on the upside for gold, not on the downside.