By Sumit Roy
Jeff Clark, senior precious metals analyst at Casey Research, is hardly new to the world of gold. As the son of an award-winning gold panner, Clark also works his family's placer claims in California, Nevada and Arizona. When not looking for the yellow metal, he can be found researching mining companies, analyzing big trends in metals and looking for safe and profitable ways to capitalize on the gold and silver market for subscribers to Casey Research's investment newsletter. HAI Managing Editor Sumit Roy recently caught up with Clark to discuss the latest developments in the gold market.
HardAssetsInvestor: What's your view on the recent stock market pullback and how does it relate to gold?
Jeff Clark: Generally speaking, gold has an inverse relationship to the stock market, meaning when one goes up the other tends to fall. One of the strongest inverse relationships gold has is with the dollar - gold has about an 80 percent inverse relationship to the direction of the U.S. dollar.
And for the stock market, it's about 60 to 70 percent, depending on what time frame you're looking at. So if the stock market is trending down, gold has about a 60 percent to 70 percent chance of trending up.
And that makes sense when you think about it: A lower stock market usually means trouble in some part of the economy or the world, which is supportive for the gold price. The relationship doesn't work every time, but it does tell us that gold investors don't necessarily need to fear a decline in the stock market.
The exception to that would be if the broader stock market experienced a big crash. If we were to see another 2008 or another 1929, gold is going to get hit. Gold stocks will take it on the chin as well. The way to look at it is this: The sharper or more sudden the sell-off in the stock market, the more likely gold will fall as well.
At this point, most news going forward will probably be negative for the stock market, which would be good for the gold price. But if the market surprises and goes higher, that means the economy is actually getting better - and that would lead to higher inflation, sooner or later. That, of course, would be good for gold as well.
In the big picture, though, investors shouldn't base their decisions on whether or not to buy or sell gold on what they think the stock market might do. Gold is an alternate currency - it's hard money, a hedge against the massive currency abuse that's still ongoing after six years. That makes gold a must-own asset right now, regardless of your outlook for the stock market.
HAI: The situation between Russia and Ukraine is still tense. Is that a factor investors in precious metals should pay attention to?
Clark: If you're a buyer of bullion and you're holding gold for all the fundamental reasons that one should be holding it for, then no. This is probably a short-term phenomenon, and if the situation resolves, we could even see a pullback in the gold price.
Obviously, if the situation worsens - if someone fires a shot or a bomb is dropped, that would be a major escalation and would definitely push gold higher.
But again, that's not why we buy it. We buy gold for personal crisis protection. We buy it because inflation may hit, or deflation, or the dollar loses its reserve currency status, or because all that printed money comes home to roost, or because our staggering debt levels finally break the system.
All these things could impact our personal standard of living, and that's why we buy gold, not because of how the conflict between Russia and Ukraine may or may not resolve.
HAI: I know you have a lot to say about inflation, but according to the official government statistics, inflation isn't something we've had to worry about over the last couple of years. Do you see that changing this year or any time in the near future?
Clark: Yes. First of all, inflation is higher than what the consumer price index (CPI) reports. Most people know that the calculation for the CPI has been changed dozens of times since 1980, and if you used that 1980 formula to calculate inflation today, it would be much higher than the current rate. That said, I do think the CPI, as it's currently configured, will measure higher inflation rates some time in the near future.
I wish I knew the timing, but when it happens, the fallout could be ugly. It could be potentially catastrophic for people who aren't prepared for it. The losers in that environment will be bondholders, and the winners will be gold holders.
Many people have been lulled into a sense that money printing doesn't lead to inflation. But I don't believe in free lunches, and so I think there will be consequences to the government's interventions. And when those consequences pick up steam, I want to be holding gold.
HAI: Do you see any parallels between what's going in gold today and what happened in the '70s and '80s?
Clark: There are some similarities and there are some differences, but the price comparison is very interesting. Gold bottomed in 1976 after selling off for about two years. Today we declined for a little over two years - not quite as much percentage-wise, but the time span has been longer.
From its 1976 low to its 1980 high, silver gained almost 1,200 percent, and gold gained over 720 percent in the same time frame. If you were to apply the same percentage gains and the same time frames to the 2013 lows, silver would hit $240 by the summer of 2017, and gold would hit over $9,700 in November 2016.
Now I'm not saying we'll see those exact prices in those exact time frames. My point is that is the kind of reaction gold and silver had after a big bear market and in a similar environment to today where there's concern about currencies and inflation. If inflation does hit, it would catch a lot of people off guard, and I would thus not be surprised to see that kind of movement in the gold price.
HAI: That's a good point. Just because gold has moved down over the last two years doesn't mean the bull market is over.
Clark: You can measure bull markets and bear markets however you want. Some say we're in a bear market and that's fine, though I would call it more of a down cycle. And the reason I say that is because the fundamental reasons to own gold simply haven't gone away. They've actually gotten stronger.
Regardless of the terminology, the fact remains that all the catalysts and reasons to hold gold are still there. And in fact, they're greater today than when gold hit $1,921 an ounce in 2011.
HAI: You recently wrote a very interesting piece about seasonality in the gold market and when it might be the best time to buy. Can you tell us a little bit about that?
Clark: We found some interesting things about seasonality. We looked at all the monthly data on the gold price going back to 1975 - when it was made legal again in the U.S. - and there was one month where gold was historically, on average, down every time regardless of the environment - bull market, bear market, flat market or even a mania. And that month was March. In every environment, March was the only month the gold price fell consistently.
The other months that gold typically falls - and I say "typically" meaning roughly two-thirds of the time - are June and October. The best month historically has been September. And the best seasonal time of the year has been September to February.
So we've been advising our readers to gain full exposure by this August. But regardless of seasonality, I think by this time next year, prices will be sustainably higher. So whether seasonality applies this year or not, now is the time to buy while prices are low. This applies to silver as well.
HAI: Speaking of that, what is your price outlook for gold and silver for this year or into next year?
Clark: We don't make short- or even long-term price predictions. As an organization, we really like to play the fundamental factors we see working in our favor. But let's look at it this way… if you glanced at annual charts of the gold price since 1975, what becomes clear is that 2013 was an anomaly.
The only other time we saw that kind of dramatic sell-off was in the 1975-1976 period. We didn't even do that in 1980, when gold sold off dramatically after the mania, as the price ended the year higher than where it started.
So to me, 2013 was an anomaly in terms of what happened to the price from the beginning of the year to the end. On one hand, that means the odds are very low that we'd see a second-consecutive anomaly this year. On the other hand, given the size of that decline, it will take some time to recover.
So I see 2014 as the year of recovery, meaning I don't expect big gains this year. But neither do I expect another crash, as it's my opinion the bottom is in.
By 2015, I think we'll clearly see the formation of a new bull market, one that will draw the attention of the mainstream again. And by 2016, you could see some dramatic gains, and maybe even a mania by 2017. So my outlook is not to buy gold because it's going higher in 10 years. My view is to buy gold because it's going much higher in the two- to four-year timeframe.