HardAssetsInvestor

Written by Cinthia Murphy  |

July 16, 2012

Christian Magoon: When Flight To Dollar Safety Fades, Gold Price Will Take Off

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Gold has a shining future, but the Treasurys rally could put investors in a world of pain, Magoon Capital’s CEO says.

[This interview originally appeared on IndexUniverse.com and is republished here with permission.]

Christian Magoon is perhaps best known for heading Claymore Securities, now Guggenheim Investments, where he led the charge marketing a number of successful niche funds—as well as a few flops, as he is quick to point out. But these days, he leads Magoon Capital, a consulting firm that helps asset managers develop, launch and market ETFs. He is also behind two ETF-focused websites Gold ETFs and India ETFs.

When he visited recently with IndexUniverse Correspondent Cinthia Murphy, he wore a long-term bullishness about gold on his sleeve. He also was quick to warn that the herdlike flight to safety into bond funds recently looks like an accident waiting to happen for wary investors in search of a safe haven.

Murphy: You launched many ETFs in your days at Claymore and now you not only offer advice to asset managers, but you’re on the blogging circuit as well. You write a lot about gold. What do you make of the recent gold slump? After an 11-year rally, has the gold market reached the end of its run?

Magoon: The main issue with gold is demand. Supply is very limited and costly to obtain, so the question about gold’s future centers on demand. The two largest consumers of gold in the world today are China and India, and both economies are in a slowdown. China has been proactive with interest rate cuts and other measures to address its lagging growth, but it is still slowing. India has seen its currency lose 20 percent of value in a short time and GDP growth drop materially. All that curbs demand for gold.

Last year, the No. 1 category of consumption of gold was jewelry. Investment came second and usage in electronics was third. Jewelry is a discretionary purchase and jewelry consumption happens in good economic times, not bad.

Finally, you have the flight-to-safety phenomenon. The U.S. dollar and Treasurys have benefited the most from that flight to safety during the most recent crisis, not gold. And because gold is denominated in U.S. dollars, the strengthening of the dollar has hurt gold prices too.

In the short term, a big question is whether China and India can rebound. I think they can.

Murphy: Taking China and India out of the equation, then, what do you see happening with this mad race into bonds? Where do you stand in this debate about a possible bond bubble?

Magoon: I think the flight to safety in U.S. debt will ultimately prove to be a short-term trend. In the longer term, the U.S. financial picture doesn’t look very good unless tough decisions are made to correct the U.S. debt profile.

Just because the U.S. is the “best of the bad” in the debt-ridden developed world, doesn’t mean that investors will stick with U.S. debt as a safe haven forever. When the attractiveness of U.S. debt unwinds, safe havens like precious metals will benefit, and gold is at the top of that list. But for now, I expect gold prices to be range-bound until a significant development in the EU or in global liquidity occurs.