While Randall Abramson, CEO and portfolio manager with Toronto-based Trapeze Asset Management, freely admits that we are living through the summer of discontent in “Commodityland,” he says investors should step back and look at commodities, especially gold, from a macroeconomic and historical perspective. In this interview with The Gold Report, Abramson discusses the magnet he expects to pull gold to around $1,400/oz inside 12 months, and he also offers some of his favorite names in the gold space.
The Gold Report: July 13–20 was an unusual week in the gold market. In a May newsletter to Trapeze Asset Management clients, you argued that the glass is “half full” for investors given current macroeconomic signals. Much water has traveled under the bridge since. Has your view changed?
Randall Abramson: Our view has not really changed. We rely on certain macroeconomic tools to show us red flags. One is our economic composite that looks at both the U.S. economy and economies around the world. Our economic composite tool currently forecasts smooth sailing with no red flags.
From a stock market perspective, our relative indicator momentum, which is our other macro tool, only shows Brazil and Russia on sell. The only other market on our watch list recently was the Chinese market. It came down to the bottom of its TRIM line but didn't break through. In fact, it did a perfect bounce off of the bottom. I'm hoping that indicates that what we've seen recently in commodity prices is overdone.
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That said, we do not like recent action in the Australian and Canadian dollars. Both currencies can portend further economic weakness because both countries are essentially hewers of wood and drawers of water–economies based on the extraction of natural resources—and we are cognizant that the commodity-hungry Chinese economy is clearly slowing, though it is still performing at a significantly higher rate than those in the rest of the world. Perhaps that's causing some of the weakness in “Commodityland.” But according to the signals, the glass still seems half full.
TGR: How do you explain the recent 4% drop and five-year low of the gold price to Trapeze clients?
RA: That drop happened in a flash—a veritable flash crash, almost 6%—then gold rebounded to be down only half that amount on July 20. The timing and size of the multibillion-dollar order responsible for that drop made it look as if it was designed to spook the market. I'm not sure whether it was forced or orchestrated selling.
TGR: What's your best guess?
RA: It looks orchestrated given the timing, but I'm more focused on the second part of your question—the five-year low. What happens on a day-to-day basis is difficult to put into perspective. It's easier to put into perspective where we've come from and where we are today. We came from a place where a number of commodities were overbought in 2011 because they had bounced significantly from their respective lows in 2009. Gold and silver, in 2011, were selling above their marginal cost of production and way above the average cost of production—gold normally sells for its marginal cost of production, which is usually about a 30–40% premium to the average all-in production costs.
Today, the gold price has fallen back to the average cost of production. That's unusual. That means that on average there is essentially no free cash flow being generated by producing gold. We've overshot to the downside. Could we have a further overshoot? It's possible. If gold broke much below where we are today, it could go to $900 per ounce ($900/oz) or slightly below. I don't believe that's going to happen because it would be virtually unprecedented, especially when we're not living through a major dislocation like a global recession, for example.
TGR: Do you expect further weakness in the Chinese economy to bring further weakness to Commodityland?
RA: If there is significant further weakness, the answer is yes. There is still significant physical gold demand in China, both from the central banks and the public. If there was further economic weakness there, perhaps gold demand would further increase.
