HardAssetsInvestor

Mike Norman, Hard Assets Investor (Norman): Hello everybody, and welcome to HardAssetsInvestor.com. I’m Mike Norman, your host. Today my guest is Rohit Savant. He is a senior commodity analyst at CPM Group, specializing in precious metals. Rohit, thanks very much for coming on the program. Appreciate it.

Rohit Savant, senior commodity analyst, CPM Group (Savant): Thanks for having me here.

Norman: So, precious metals — you’re the specialist. Give me your outlook. Let’s start with gold right now. Gold ran up recently to over $1900 an ounce. We’ve seen a pullback. Is this the end of the run? Is there more to go?

Savant: I think in the short term, we still have more to go.

Norman: How much more?

Savant: We think gold prices can go up to about $2000 or $2100 over the next three to four months. We should expect continued volatility in prices for an extended period of time. With the election year coming up in 2012, we do think that’s also supportive of prices.

Norman: The election year?

Savant: Yes.

Norman: Why?

Savant: I think a lot of the support for gold is coming from investment demand. And if investors continue to remain skeptical and concerned about whether policymakers are actually going to be able to do something right, that’s probably why the election year would play an important role.

Norman: So educate me on this a little bit. I mean the policy that we see, for example, in Europe — and what we’re about to see in the United States — it’s deflationary. You’re talking about austerity. We see the contraction in GDP everywhere. All this is deflationary.

Is that a good environment for gold? Aren’t people investing in gold because they’re afraid of inflation, or hyperinflation? Aren’t we seeing the opposite? And at the same time, I’ll just throw this in: You’re also seeing an historic rally in U.S. Treasurys, in public sector debt instruments.

Savant: Right.

Norman: How do you square the two?

Savant: I think it’s a little bit of a concern, in terms of the longer-term view that people have on the U.S. dollar. And I think that is one of the reasons why you’re seeing this move into gold. And even though things are deflationary, and at the moment you’re seeing this sharp increase in demand for Treasurys, there is that underlying concern about the U.S. dollar going forward, and major currencies pretty much across the world, and what the outlook for those would be.

And I think that’s one of the things that is helping to support investment demand for, say, …

Norman: OK, so, on the demand side, the main driver, now, looks to be investment demand. Let’s talk about the supply side. How does it look? How does total mine output look? The global supply of gold? Is that on the increase? Is it flat? How does that look?

Savant: Mine supply is actually on the increase. We expect mine supply — both for gold as well as silver — to increase in coming years, largely because of the sharp run-up in prices and the relatively low cash cost for producing these metals. That definitely provides an incentive to miners to go ahead and bring this out of the ground.

So in terms of mine supply, we do expect the source of supply to increase at least over the next three or four years.

Norman: Now that level, is that at a historically high level? Or is it still below a peak that we saw previously?

Savant: Eventually we do think it gets back at least to the peaks that we saw in the early 1990s. So in the case of gold, we do expect that to happen.

Norman: So we haven’t hit that point yet?

Savant: Not just yet. But we should be hitting that point very soon, in the next year or two.

Norman: And what’s happening, also, the main component of demand historically has been the jewelry industry, right?

Savant: Yes.

Norman: Demand there is what, flat to down?

Savant: It’s flat. It’s down mostly in the developed markets, because jewelry wouldn’t be your priority for spending when you’re going through a tough economic environment.

Norman: Right.

Savant: But you are seeing fairly healthy levels of demand for gold, especially in developing markets, where a lot of investors there, especially the lower-income-group investors in countries such as India and China, where they basically use gold as a form of savings. So they would basically change that into some form of jewelry or ...