Ed D'Agostino: Gold And Silver To Double Long Term Amid Undeclared Currency War

by: Hard Assets Investor

By Sumit Roy

Ed D’Agostino is the publisher of Mauldin Economics and the general manager of Hard Assets Alliance (HAA). HAA provides self-directed investors with online precious metals trading and storage. HAI’s Managing Editor Sumit Roy recently caught up with D’Agostino for his take on the latest developments in the gold and silver markets.

HardAssetsInvestor: After falling sharply in 2013, gold has surprised many by steadily rallying this year. What sparked the turnaround in prices?

Ed D'Agostino: There have been several catalysts to the price increases we’ve seen in 2014. The big ones for me have been: 1) continued demand for physical gold, particularly from the East; 2) prices in 2013 reached levels that made gold mining unprofitable for many operators, which affects the supply chain; and 3) nothing has changed. U.S. and EU banks are still overleveraged and too big to fail, governments continue to devalue their currencies, global growth remains low and debt levels remain dangerously high.

That’s an environment in which you want to own gold, particularly at the prices we saw in 2013. Funds that took profits came back in, and individuals (again, mainly in the East) continued to load up.

HAI: Last year we saw a huge surge in physical buying around this time of the year due to the drop in prices. Is physical buying holding up this year?

D'Agostino: Physical buying remains steady this year, but without the big spikes we saw in 2013. Buyers continue to accumulate, but they are taking advantage of dips in price. And who can blame them?

We’ll all look back at these prices in a few years and wish we bought more. Remember, the cost of extracting metal from the Earth has gone up significantly. I don’t think we will see prices below $1,000 again—it just can’t be done with today’s cost structure.

HAI: There’s a lot of news out there right now. The conflict between Ukraine and Russia; Fed tapering and interest rate concerns; the first-ever bond default in China—these are all stories that have been in the headlines. In your view, what are the most important themes or stories that gold investors should look out for going forward?

D'Agostino: Chinese demand will continue to influence the price of gold. The recent devaluation of the renminbi combined with increasing debt pressure is going to push Chinese demand for gold even higher.

Investors should be watching currencies, as we are essentially in an undeclared currency war. Japan will continue to destabilize Asia. They’ve backed themselves into a corner and have no choice but to continue printing yen in an effort to make their exports more price-attractive. That impacts South Korea, China, and on and on. Sooner or later, other nations are forced to take steps to protect their exports.

Unfortunately, the situation we are watching unfold in the Ukraine could be just the beginning of geopolitical instability as countries become more desperate to protect their economies.

Closer to home, I’m watching two stories. First, food prices are going to go up—a lot. California and the Midwest have been experiencing drought conditions for years. We’ll see higher prices for everything from protein to grains to produce. And that’s what you call inflation.

Second, the stock market is due for a correction. Overdue, in fact. There are dangerous signs coming from the market. Individual investors are coming back into the market after getting crushed in 2008. Their timing is usually not the best. And there is a high degree of leverage in the market, which will magnify the impact of even a minor correction.

Margin leverage is at an all-time high. The last time we saw margin borrowing even close to today’s level was in mid-2007. Before that, you have to go back to early 2000. Those two peaks in margin debt were followed by major crashes in the market.

HAI: Do you have a view on prices either for the short term or long term?

D'Agostino: I don’t worry about the short term, as I believe day-to-day prices are largely irrelevant to the long-term investor in precious metals. You typically don’t day-trade insurance policies, and that’s what gold is to me—insurance.

Looking at the longer term, I just don’t see the U.S. debt being dealt with in a meaningful way until politicians are forced to deal with it. And we all know that by then it might be too late.

So, long term, I look for gold and silver to double or more from current levels. It will be a rocky ride, but the macro trends continue to point to higher prices for precious metals.

Ed D’Agostino is the general manager of Hard Assets Alliance, a leading online precious metals vendor where investors may purchase physical precious metals and store them at nonbank vaults in the U.S., Europe, Australia and Singapore. The alliance offers conventional accounts as well as Precious Metal IRAs.