Commentary: Dundee’s Murenbeeld on gold’s decline – and coming climb

VANCOUVER — Gold’s fall last year and its outlook in 2014 are both complicated and straightforward, according to Martin Murenbeeld, the chief economist with Dundee Capital Markets, and his weighing of all the factors results in a gently optimistic outlook for the price going forward.

Murenbeeld addressed a packed lunch crowd as the first keynote speaker at the Roundup Mineral Exploration 2014 conference in Vancouver late last month.

His main message: a massive sell-off of gold by exchange-traded funds (ETFs) drove gold below its fair value last year. This year bearish factors undoubtedly remain in play, but Murenbeeld expects the yellow metal to see some recovery.

“There are a lot of things going on in the gold market that people are writing about that I find a bit extreme, because I think the reasons gold went down last year were really quite simple: over 860 tonnes of gold were sold out of the ETF gold market when big hedge funds decided to play in other markets,” he said.

That sell-off represented almost half of the gold held by ETFs. The ETF gold market is still young — it was only established in 2004, but it grew quickly because it exposed investors to the rising gold price. When gold finally corrected last year, many investors left in search of better returns elsewhere.

“Investors like equities,” he said. “I spoke with a number of hedge-fund [managers] last year and they said to me, ‘Our view of gold hasn’t changed — we’re still bullish. It just isn’t working at the moment, that trade, so we got the heck out because our clients ask us to make money, and the S&P is on a run.’ So that’s kind of what happened.”

That means a continuing equities market rally this year would keep exerting downward pressure on gold. Murenbeeld also argued that 2013 was a gold-price correction, not a bubble bursting.

“Compared to real bubbles, the price of gold has really been fairly pedestrian,” he said. “A multiple of six over the course of ten years — real bubbles get into fourteen-times or sixteen-times multiples.”

Looking ahead, Murenbeeld sees a slew of bearish and bullish factors jostling gold. On the bearish side, interest rates are rising and European central banks are not buying gold, both of which should push the price down. More generally, the world is still struggling with a sluggish economy.

“Gold tends to decline somewhat around times of recessions,” Murenbeeld said. “There’s nothing magic about that — all kinds of things go down, including our incomes, and so the allocation to gold goes down.”

And while he is not predicting a recession, Murenbeeld does not think the global economy with grow enough in the next two years to support commodity price growth.

“When world growth is less than 4%, real commodity prices tend to go negative year over year,” he said. “That’s important because even though the [International Monetary Fund] has upgraded its forecasts, they still stand at 3.7% for 2014 and 3.9% for 2015. That isn’t hard and fast, but my basic point stands: when you don’t have a booming global economy you do have some overhead resistance to your commodity prices.”

On the bullish side, Murenbeeld started with the elephant in the room: the global debt crisis. In his view, the drag on national economies is entitlements, meaning social support payments that governments make to their people. In a chart that some in the room found surprising, Murenbeeld pointed out that entitlements make up more than 60% of the U.S. federal budget.

That kind of expense is usually unsustainable, but most of the potential solutions — reneging on services, raising taxes or accepting a depression — are political suicide. That’s why governments are forced to print money, which is why debt crises are good for gold.

Also good for gold: central banks continue to buy. Murenbeeld said that central banks around the world hold a collective $9 trillion in foreign exchange reserves, and many of those central banks want to diversify these reserves into other things, including gold.

Murenbeeld also drew attention to timelines. A chart of the copper price from 1850 to the present shows that copper’s shortest peak-to-trough half-cycle was 16 years.

“When copper prices go up, they go up for many years, and when copper prices go down, they go down for many years,” he said. “If copper prices have peaked this would be the shortest copper cycle in the history of copper. And you have the same kind of argument for gold.”

Rounding out the bullish factors, Murenbeeld noted that gold supply is flat or declining, the U.S. dollar is overvalued, and geopolitical crises that are positive for gold are always on the horizon.

So what does that all mean for the gold price? Inputting only the bearish factors, Murenbeeld comes up with average prices of US$1,075 per oz. for 2014 and US$970 per oz. for 2015. Incorporating only the bullish factors led him to a 2014 average of US$1,465 and a 2015 price of US$1,780.

But bullish and bearish factors are in play. As such Murenbeeld is left with a prediction that gold will end 2014 at US$1,300 per oz., after averaging US$1,245 per oz. during the year, and will climb gently the next year to average US$1,335 per oz. in 2015.