Is the nearly four year bear market in gold finally coming to an end? Pierre Lassonde, Chairman of Franco-Nevada Corporation (FNV) and former Chairman of the World Gold Council, tells Financial Sense Newshour that gold is at a tipping point with China a key decider in which direction it goes. Pierre also discusses the Dow-gold ratio (see chart) and how this has helped investors know when to buy and when to sell.
Financial Sense: What is your outlook on the price of gold?
Pierre Lassonde: We've been in a bear market for almost four years—it’ll be four years in October—and, so far, the $1140 low that we've seen has held against many bear raids and it continues to hold and we are what I would call in the dog days of summer for gold because between May and July is the seasonal low point. So, if it's going to crack, it normally does right now and it hasn't—it’s held. When you look at the gold equities, they seem to have been turning a corner lately and normally the gold equities are ahead of the bullion itself. I think it's very constructive and my thinking is if we get to July and the gold price has held $1140, then by August/September you're going to see numbers that we haven't seen in a while and I think that we may be back in a new gold bull market.
FS: Why do you think gold is close to a bottom?
PL: Back in 1999 I put out in our Franco Nevada annual report a chart called the Dow Jones Industrial Average vs. Gold and the way to think about this chart is to compare the financial sector vis-à-vis the hard assets sector … and what's interesting … is when I look where we are today, we are at the tipping point for that ratio to turn back in favor of gold.
FS: What do you think would be the catalyst for that to happen?
PL: The catalyst for gold reaching let's say close to 1 or 2:1 [on the Dow/Gold ratio] I think will be inflation in China … [since] they're finding themselves to be not as competitive as they used to be especially against India, Bangladesh, Indonesia and other countries. And what could cause inflation to really perk up in China is a devaluation of the renminbi. Now if they devalue the renminbi, you're going to have real inflation in China; you're going to have Chinese rushing to the gold exchange market and you could have a real run on gold at that point in time.