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How low could gold prices go? $1,000/oz?

According to Edward Karr, CEO of RAMPartners, the band is tuning up and the guests are just starting to arrive. Instead of selling before the party really gets going, he advises keeping a “decent percentage” of cash to take advantage of opportunities to buy both physical Gold and junior mining stocks. His real bottom-line advice in this exclusive interview? Tap into what makes you happy in life.

Companies Mentioned: Continental Resources Group Inc. – Sagebrush Gold Ltd. – Yukon-Nevada Gold Corp.

The Gold Report: RAMPartners is based in Geneva, Switzerland, a country that made economic news a month ago when the Swiss National Bank capped the Swiss franc at 1.20 francs per euro, slashed interest rates and flooded the market with Swiss francs. Did you agree with those moves and what impact do you think they had on the gold price?

Edward Karr: I emphatically disagree with the move by the Swiss National Bank. To me it makes no sense to peg the Swiss franc at 1.20 to the euro. Switzerland is, in effect, backstopping Greece and all of the other indebted countries in Europe. This is lunacy. Greece or anyone can just hit the Swiss National Bank’s bid at 1.20 and convert into Swiss francs, which it would probably rather have than its euro position.

Since this policy, we’ve seen a psychological shift in markets. People have been rethinking the Swiss franc as a safe-haven currency. The Norwegian kroner looks more like a safe-haven currency now than the Swiss franc. I’m just happy Switzerland is not part of the European Union and not part of the euro. I hope it will understand the foolishness of the 1.20 peg and get rid of it soon.

As to the current effect on the gold price, right around when this happened gold topped and started to sell off. I don’t think they are directly related, but I think it is psychological. If the Swiss franc holds at 1.20 to the euro, if a hedge fund or a corporation hits the Swiss National Bank with a billion euros, it is no big deal. But what about 10 billion, 100 billion, even a trillion? Then it starts becoming a big deal.

At some point does Switzerland have to start selling its gold reserves to continue this lunacy? Switzerland now has 1,146 tons of gold. Maybe people are worried that if that gold starts to come out it could put downward pressure on the bullion price; hence, we have seen a little sell off in the overall market.

TGR: Just a few years ago, the Swiss Central Bank had more than 2,000 tons of gold in its reserves. What is your view on the sale of so much of its reserves?

EK: I think it was extremely shortsighted. Switzerland has a long history of fiscal stability and gold has been a very important part of that stability.

Right now, Switzerland has the world’s eighth largest gold reserve, which is quite impressive for such a small country. But, the 1,146 tons of gold it has at current market values is really only about $60 billion. That might seem like a big number, but it is minuscule in comparison to the trillions that global governments are going to have to print to combat this increasing financial crisis.

TRG: Gold has fallen steadily since reaching about $1,900/ounce (oz.) in August. It now sits at about $1,670/oz. Why has it fallen recently?

EK: I think the logical explanation for falling prices is that gold is a relatively liquid asset. Governments, hedge fund managers, bankers and individuals are all facing a severe cash crisis. In that environment you have forced liquidations. Governments are doing all they can to put a positive spin on a terrible environment. But, if you’re a global macro hedge fund manager who has heavy redemptions, you have to sell your liquid assets to raise cash.

Man Investments is one of the biggest hedge fund groups. Last month it announced record redemptions of $7 billion. The firm has to raise cash, so what is it going to do? There are no bids out there for Greek debt, no bids for mortgage-backed securities, no bids for countless other OTC financial derivatives. Gold is liquid; it is easily tradable and has been part of the massive global scramble to cash that we’ve seen in the last two to three months.

TRG: How low could gold go?

EK: That’s a great question. The only credible answer is that gold can go a lot lower than anyone expects. A lot of Johnny-come-latelies have bought into gold in the last few years. A big downdraft will shake out a lot of loose hands.

Europe is on the edge of a cliff. Dexia Bank might fall any day. UniCredit in Italy is right behind. I think we will see a severe domino effect that will make 2008 seem like a walk in the park. If Dexia or UniCredit or the European Central Bank itself had a big major gold position and it had forced liquidation, it will have to sell and the price could go down pretty dramatically.

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Posted by on October 16, 2011. Filed under Precious metals. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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