Still room to run on gold: Goodman

It’s hard to find a fan of inflation, the great eroder of wealth, unless you talk to those investing in commodities. And there are few commodities that benefit from inflation more than gold.

Inflation is not a necessary condition for gold to rise, according to Martin Murenbeeld, chief economist, DundeeWealth Economics, DundeeWealth Inc., but it can help.

Murenbeeld was speaking to a lunchtime audience at a recent Toronto CFA Society event where he, along with Ned Goodman, chairman and CEO, Ned Goodman Investment Counsel Ltd, provided their insights into precious metals investing.

“Gold reacts to a thousand things, and you can’t possibly keep track of all of that,” said Murenbeeld.

He said liquidity is one of the drivers and that liquidity is related to inflation. “At some point if you get a lot of liquidity you get inflation; that’s what the market is seeing at the moment.”

Liquidity, like inflation, has many ways to manifest itself, such as driving bond yields lower. “Liquidity doesn’t have to manifest itself in commodity prices alone, it doesn’t have to manifest itself in consumer prices or in wage rates,” said Murenbeeld. “The way it has been manifest is in what I believe to be too-low bond yields.”

Money is pumped into the economy through the government bonds issuance, he explained. Once the money is in the system, gold begins to rise.

Goodman cited the noted strategist Dylan Grice who famously said: “Confidence in central banker’s ability to learn from past inflation is as likely to be misplaced as it was in the ability to learn from past credit booms.”

Gold remains the cleanest insurance against such poor confidence, he added. Goodman, who predicted $700 gold at a time when it was selling for $250, now says it would hit $7,500 an ounce, if it reclaimed its place as the world’s reserve currency.

“I don’t think it’s going to have a reserve currency [status], but that’s the target that it could get to when we see the mother of all bubbles,” said Goodman, assuring “we’re not in a bubble now.”

Gold is the oldest and simplest defence for those who operate on the basis of hoping for the best but preparing for the worst, he said.

Goodman combines his geological background with business acumen when he assesses the future growth potential of gold. There have been 15 bull markets since 1932, which on average lasted for 3.8 years, he said.

“The current bull market ended on March 6, 2011, it ended two years on March 6 2011, so there’s 1.8 years to go.”

But statistics could be misleading, he said. “You can’t look back on statistics; 80% of the 15 [bull markets] never reached the third year,” said Goodman. “They got to two years, never reached the third year.”

He said this forms the basis for the probability that “we are looking at some difficult times ahead.”

The Middle East and oil prices, the Euro and European sovereign debt have been playing spoilsport, he said adding that “there are many events where timing, magnitude, or intended and unintended consequences are absolutely impossible to predict.”

The United States is in deep trouble and “a depreciating dollar has a lot to do with appreciating hard assets.”

“The currency value of gold is better than an IOU, which is what dollars are,” said Goodman.

He sees good signs for gold all around. “The new euro currency and banking system now looks positive for gold,” he said.” Recent press releases from the European Central Bank reference gold forming part of the reserve system [and] clearly indicates that gold is here to stay and not for sale.”

He further says there is a real quest for hard assets. “We invest in commodities, gold, and real estate, and anything else that may have hard assets behind it.”

“The reason for that,” said Goodman, “is that it’s my belief that we’re going into an inflationary time on a worldwide basis, where there is a beggar-thy-neighbour system going forward in the currency markets, and paper money is totally useless. And something’s got to replace it.”

And that replacement could come in the form of gold. “You can’t walk around with a building in your pocket, but you can walk around with gold in your pocket.”

Investors collectively want to take a position in gold, not because it would be the best asset to hold, but it is a very good hedge against some of the worst worries of the world, he said.