➤ Disappointed precious metals investors are putting pressure on gold prices.
➤ Rolling over of the August COMEX futures contract weighed on gold, as it has in recent years.
➤ Potential for economic instability in coming years may support the price of gold.
The price of gold has dropped in recent months after hitting record highs in 2020. CPM Group Managing Partner Jeffrey Christian, a gold market expert, recently spoke with S&P Global Market Intelligence about the outlook on precious metals and the potential for further price declines. What follows is an edited and condensed version of the interview.
CPM Group Managing Partner Jeffrey Christian.
S&P Global Market Intelligence: Gold has declined in recent months from over $1,900 per ounce to about $1,700/oz in early August, after which it bounced back to the mid-$1,700/oz range. What drove the climb up and subsequent pull back from gold's record highs over $2,000/oz in 2020?
Jeffrey Christian: There are several things going on. You saw investment demand rise sharply last year for physical gold and silver. Physical gold and silver investments were extremely low in 2018-2019. Then in 2020, with the economic lockdown, the recession and the pandemic, you saw investors buying more than twice as much physical gold and probably twice as much silver too. So you had investors coming in.
In 2020, and continuing into earlier this year, you saw a lot of investors who were new to gold and silver flocking to the market. And they were driven by economic concerns. There were a lot of economic fears that caused investors to come into the gold market and the silver market. That drove gold prices to a record high last year.
Then, part of gold's increase in July of 2019, and in July of 2020, had to do with [the] rolling of the August COMEX Gold futures contract into December. Once that was done in those two years, in the first week of August the prices of gold and silver fell back. And in both years, the prices basically stayed weak for the rest of the year, [with] seasonal weakness in fabrication and investment demand that kicks in as everybody goes on vacation.
We've also seen disenchanted investors. They haven't seen hyperinflation. The global financial structure hasn't crumbled. The dollar hasn't collapsed. The stock market hasn't collapsed. Gold didn't go to $10,000/oz. Silver didn't go to $100/oz. And so you've got a lot of disenchanted investors who bought gold as the price rose.
Are inflation concerns playing into precious metal prices in a significant way?
It has a little bit. There have been people who've bought into hyperinflation concerns. But what we've been saying for years is that gold investment demand has been going up for 40 years or so, while inflation has not been a problem. And we still don't think it's going to be a problem. Everything that we see looks transitory. Beyond that, you've got a lot of economic, financial and political issues that are causing investors to buy gold. Some are looking at inflation, but most of them are looking elsewhere.
In 2015, gold dropped close to $1,000/oz. Is there a reason to think that gold could do it again?
The future for gold and silver prices over the next five years is inextricably bound up in what happens economically in financial markets. And politically, we see an economic, financial and political environment that will be hostile to broader human activities over the next five years. We think that you could have another recession relatively soon and that there are enough financial imbalances [that] you could have another global financial crisis. We see gold and silver prices probably reaching record levels on the high side.
What do you expect in terms of gold mine supply over the coming decade?
We're looking for something of a decline over the next 10 years. And the decline reflects lack of mine investment and the rise of resource nationalism. At the same time, equity markets have moved away from being the place where corporations source capital, with the vast majority of investment in equities, not just in mining, going into derivatives like index funds. That capital doesn't accrue to individual companies.