Jeffrey Christian on bitcoin and ‘runaway’ gold price

Jeffrey Christian is the managing partner of CPM Group, a commodities research and management, consulting and financial advisory firm in New York. He founded the company in 1986, spinning off the Commodities Research Group from Goldman Sachs & Co., and its commodities trading arm, J. Aron & Company. Christian is an expert on precious metal markets and took time to speak with The Northern Miner about his outlook for gold, silver and platinum group metals in 2018.

The Northern Miner: Some people see the rise of bitcoin as a distraction from holding gold or investing in gold stocks. What is your view?

Jeffrey Christian: I don’t think most physical gold investors and gold stock investors see bitcoin as an alternative to gold and gold shares. I know our clients, who tend to be more intellectually oriented and perhaps more longer-term oriented, see bitcoin as something they would day trade, but they wouldn’t take a position overnight because they see it as the ultimate fiat currency backed by nothing and no one, and the antithesis of gold.

But I’d make a bigger point, too: I don’t think bitcoin is distracting many people from gold. What’s distracting people from gold is the stock market. If you look at the cryptocurrency market — bitcoin and the others — it’s less than US$200 billion in open interest, value outstanding and it’s fewer than a million investors.

No one really knows for sure how many are out there but people who manage cryptocurrencies estimate that at the most there are about 1 million investors participating.

The gold market has about US$2 trillion of investor gold holdings. So the open interest is US$2 trillion, or 10 times what bitcoin is. And you have billions of people who hold gold, and they hold it because it’s not a fiat currency, it’s an alternative to currency. It’s a tangible asset, the value of which is determined by the market. It’s tangible as opposed to a digit on a computer that can disappear tomorrow.

You have about US$300 trillion in stocks and bonds, both of which have hundreds of millions participating in those markets, and that’s where the money is being distracted away from gold.

With stocks and bonds it is not just the $300 trillion in stocks and bonds. You have to add in all the index funds and the ETFs based on them. Then it’s quadrillions of dollars.

So when people say they think bitcoin is distracting investors from gold, yes, maybe a few of them, but the real distraction, if that’s what you want to call it, are stocks and bonds, which have been rising and rising for seven years now, and are at record levels.

Cryptocurrencies are a sideshow to gold and gold is a sideshow to the stock market.

TNM: We seem to be at an inflection point with worries about geopolitics — the volatility of U.S. President Donald Trump, and deteriorating relations with North Korea. What sort of an impact is all of this uncertainty going to have on precious metals?

JC: The economy and financial market conditions have more influence on all of these metals than political factors. There’s a lot of optimism about the U.S. and the global economy right now. Unemployment has been falling on a cyclical basis. But we think that optimism will start to wane over the course of 2018. We wouldn’t be surprised to see lower growth in 2018, or even a small, short, shallow recession sometime from 2018 to 2019. That’s probably more likely in 2019 than 2018, but we see the economic expansion that began in 2009 is maturing, so there could be some slowing in the global economy, the U.S. economy and the Chinese economy next year, relative to what we see right now.

In that environment the stock market looks more vulnerable to some sort of correction, and investors might be more interested in gold and silver as a consequence of that. As for PGMs, any weakness in the auto sector would be reflected in platinum and palladium prices.

TNM: What is your price forecast for gold next year and beyond?

JC: We’re expecting the gold price to rise modestly between now and the end of 2018, and on a longer-term basis it could take off.

The average annual gold price this year through the end of October was $1,257 per oz., and our estimate is that it’s probably going to be US$1,263 per oz. by the end of 2017, which is a 1% increase from 2016. Next year we see it rising by 4.6% to around US$1,322 per ounce. We think prices will run away to the upside but not until after 2018.

The gold price could average US$2,200 per oz. sometime during 2022 to 2024. So we expect to see a record gold price, but it’s maybe four to six years away.

TNM: What about gold investment?

JC: You’re seeing investment demand in 2017 at about the same level as it was last year. But there’s been a big shift away from people buying gold out of fear of an imminent collapse of the system, towards people buying gold out of greed. There are fewer people buying gold coins and more people buying gold ETFs, futures and options. You’re also seeing more gold being bought in China based on expectations of higher prices and less gold being bought in India based on concerns about the state of the world.

TNM: What’s your outlook for silver?

JC: Silver has been flat this year and will end 2017 at around US$17.25 per ounce.

Next year we see a 6.6% increase to around US$18.40 per ounce.

It’s a very similar expectation to that of gold in that it’s investor driven.

There is some industrial demand there, too.

There’s going to be modest price increase in 2018 and beyond. There will come a time when investors look at the stock and bond markets, and politics, and say they think they should own more gold and silver.

So silver could rise in the same time frame as gold (2022 to 2024).

I’ve got US$38 per oz. silver as the annual average real price for the peak (2023), which is roughly the same real price at the last peak, in which nominal silver prices averaged US$35.29 per ounce.

TNM: What’s your read on platinum group metals?

JC: The palladium price has been pushed up this year by a combination of developments all at once. People have been moving into palladium based on the idea the auto market is shifting from diesel to gasoline initially, and maybe later electric vehicles. That’s all true, but the surge in investment demand appears to have been overdone and overly optimistic in terms of how fast the changes will occur.

This investment surge combined with congestion in the New York palladium futures contracts this year.

Our view is that this congestion in NYMEX is probably alleviating somewhat, and you may not see palladium prices rise going forward as much as they have been.

You could see the price come off beyond December, and you could see the market move back to a positive forward carry — a contango — rather than a backwardation.

Palladium prices on an annual average basis in 2017 are up by about 39.8% — that’s our projection for 2017.

For 2018, we forecast that the average annual price will be up by 4.7%. Over the first half of 2018 we don’t see the price rising — it’s going to be flat or move lower. We may see daily prices come off by 5–10% from where they are today. But the annual average price will be higher because it’s starting from a higher base.

If you look at where the price was earlier this year, it was down about US$700 per ounce.

We don’t see the price falling back to that. We see it falling back to US$890 per oz., or something like that.

The intraday price [on Nov. 30] is about US$1,009 per oz. — that’s the price on NYMEX.

Over the course of 2018, the palladium price could get down to maybe US$890 per oz., or US$900 per oz., for about a 10% decline from the intraday high, but on an average annual basis, the price would still be up from the average annual price of 2017.

TNM: And platinum?

JC: In contrast to the other precious metals, the platinum price has actually been down this year. On an average annual basis it is probably off 3.7% at US$954 per oz. in 2017.

We’re looking at it to be basically flat next year — or a 1% increase in 2018 to US$963 per oz., so not a lot of movement.