After rising above $1,300/ounce on a shaky outlook for the global economy, gold has dropped in the last few weeks. BusinessLine spoke to Bob Alderman of Gold Bullion International, for his outlook for the metal. Excerpts from the chat:

How strong are the fundamentals for gold now? How do you see demand and supply in the medium term?

Medium to long term, we like the fundamentals for gold.  On the supply side, although mine production was up for the sixth consecutive year due to mines that were developed over the last decade, we do not believe there is a large enough pipeline of new projects to satisfy future demand.  This is due to a cost structure that is approaching (or even exceeding) the current spot price.  On the demand side, we see continued strength in Asia and throughout the emerging markets, central banks and the investment sector as price goes up — hence a real “push/pull” phenomenon in the years ahead.

Where do you see gold prices going from here?

I don’t have a crystal ball, but what I can say is that the supply-demand relative to mining costs is going to be in favour of a higher gold price. Gold tends to do well when there is geopolitical uncertainty.

What people sometimes don’t appreciate or don’t understand is that the currency troubles going on around the world have made gold a terrific investment relative to their own home currencies. Many countries are moving in the direction of quantitative easing if they haven’t already gotten there.

That said, people assume that when interest rates go up, it is bad for gold. Gold does better in a zero rate environment than it does in any other environment, but I think historically at least gold returns do not get dramatically impacted in a moderate real rate environment.

So assume that we are in the 3-4 per cent real rate environment, volatility is going to be lower and correlation to many other asset classes will go down as well. So yes, performance and price will go down, but since we will see only a moderate real interest rate, we don’t believe gold prices are going to crash.

Do you feel the gold market responds to the underlying commodity’s fundamentals? Or is dollar the key factor?

There is no question of whether dollar has an impact on gold (it has). But it is not all that unusual for the dollar to rise in tandem with gold.

For the last 12 months, we have seen gold doing reasonably okay though dollar has risen.

Gold and dollar both have finished higher for the year, five times since the turn of the century — 2001 2005, 2008, 2010 and 2011.

So I think the lesson learnt here is that gold is really a currency and all currency trades are based on relative value.

How do you see the gold-oil correlation with oil prices down so sharply?

The gold-oil relationship is more a function of the dollar. We have been looking at the ratio of oil-to-gold, that is, how many barrels of oil can buy one ounce of gold, and historically, when that number is greater than 20, we have seen financial crisis in many instances which, in turn, has triggered a rally in gold prices.

We saw it in April of 1972, in 1986, and in the 1990s, 1998, 2008. These were all years when the ratio was over 20 and was followed by some kind of a financial crisis.

I am not here to suggest that there is going to be a crisis in the global equities market. But I think it is worth noting that, as of now, the ratio is 23.

It was 28 to 29 a couple of weeks ago and gold was actually increasing in price to some degree. I am not suggesting that there is going to be a major financial crisis but history suggests that if it happens it is a very good thing for gold.  

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