Jim Rogers Correctly Predicted Gold Would Fall To $1200, And Now He Thinks It Could Go As Low As $900
JUL. 6, 2013
The price of gold peaked at just over $1,900 per ounce in the fall of 2011.
And it was right around that time that commodities guru Jim Rogers began warning investors that the yellow metal could hit a low of $1,200 before the sell-off was over.
He was right.
Gold prices entered a bear market (down 20% from its high) in April. And on June 27, they touched $1,200.
In a phone interview this week, Rogers explained to us how he arrived at the $1,200 figure.
He also offers his outlook for gold as it continues its complicated bottoming process.
Business Insider: Two years ago, you told us you could see gold going to $1,200. How did you arrive at that level?
Jim Rogers: I'm sure it was all based on intuition from Business Insider, but gold had been up at that point 11 - 12 years in a row which is an anomaly.
I don't know any asset that's gone up 12 years without a down year, and gold needed and deserved a correction. And, if it's going to happen where would it go? $1,200 was between 35% - 40% and 35% - 40% reactions are commonplace, so that was the first number. I wish I could tell you I had a formula.
I'm not sure we've found the final bottom yet, it would make a lot of sense for gold having had 12 years up, to have at least a longer consolidation, a longer correction, maybe a few days, a few weeks, or a year or two. Why not 2014, 2015? My view is that gold is in the process of making a complicated bottom which could take a while. So I'm not buying gold. I haven't sold any gold or silver, but I'm not buying any. I'm watching and expecting a new low, which might be lower.
BI: Were there other things you were watching that made you think gold prices would fall? Emerging market demand or perhaps the Fed?
JR: There were lots and lots of mystics who were convinced that gold was holy. That gold could not go down, that gold had to go up. And that's the reason I think gold hasn't made it's final bottom yet. It's because there are still lots and lots of mystics, people who tell me gold cannot go to $1,200. I say open your computer you'll see it is $1,200. Don't tell me it can't happen.
Many people think this can't be happening or it's being manipulated and there's all sorts of excuses for what's going on. You know when you have people that are faithful, or true believers, you usually don't hit a true bottom until most of those people get washed out. I suspect that is still to come. I don't think many of the true believers have sold their gold yet.
BI: Do you have any guesses for how long it would take to make a bottom?
JR: I wish I was that smart. I don't really know it could happen before 2014 or 2015. But the bull market's not over. Gold is going to eventually make new highs. It seems that there may be another. It's because it had these 12 years without going down, I don't know anything in investment history that has gone up 12 years without a declining year. There may be something I just don't know of it.
BI: What drove gold prices higher for 12 years?
JR: That's a very good question. Another question could be what's caused it to go down finally? What caused it to go up 12 years in a row was a 20 year bear market.
Gold had collapsed starting in 1980 and it went down for over 20 years. It went down substantially. So, when you have a very long extended bear market like that, everybody sells out, mines close, mines open and you lay the foundation for a nice, long bull market. And that's what happened to gold after 20 year period of real despair in gold, then you can have a nice long bull market. And yes 12 years is a long time, but it's nowhere near 20 years. The foundation was built for a long-term bull market.
Then it was driven by the fact that we had a lot of money printing in the world, we had a lot of debt, a lot of crises around the world. So there were all sorts of psychological reasons, all around the world, not just in America, for people to buy gold.
Now what caused it to finally go down, and as much as I love India and Indians, they are the largest buyers of gold in the world. And India has a huge balance of trade deficit. The largest drivers are oil and gold. You can't do anything about oil so the Indian politicians are blaming their problems on gold. And they've taken many measures, and more measures are coming to diminish or even eliminate the import of gold. I'm not the only person who saw that. They've been pretty loud about it. That was the main catalyst or the straw which broke the camel's back which made gold start going down finally, after 12 years of going up. And the foundation had been built for over 20 years and many, many fundamental things came together. But then after 12 years of a bull market more mines started opening, more gold mines were formed and then the Indians said, among others, but mainly the Indians said we're going to stop all this.
And by the way the French have also recently come out with measures that you cannot buy more than, anything, in cash for more than €1000, to limit the purchase of gold. The Germans are also taking measures to make it more difficult to buy and sell gold. So you have a lot of governments coming together with measures against gold and silver, but especially the Indians. And the Indians are the largest buyers.
All these things came together after 12 glorious years because the correction is worse than it would have been otherwise because of the 12 years. So it all fits together what did happen, what is happening, what will happen in gold. I'm not selling my gold. But even though it may be a couple of years more complicated base building, I fully expect the bull market to end in a bubble some day, and some day is not here yet.
BI: Is there anything else our readers should know that I haven't asked you about?
JR: I'm not selling my gold. I'm skeptical, even though I expect gold may go down even more to $1,000 to $900. A 50% correction would be $960 or whatever it is. Now 50% corrections are quite normal in markets. What's not normal is for something to go up 12 years in a row.
So, it would be normal if gold did correct 50%. That might go some way towards shaking some of the faithful, some of the mystics. We got to shake out more people. I don't see any signs that the faithful, they've been worried about what's going on, but I don't see any signs yet that the faithful are giving up and selling their gold. Not just verbal despair, not just people talking about despair, but people acting. Then gold prices will make a nice, firm bottom.
As gold prices plunged, gold mining stocks have taken a beating too.
We saw a brutal sell-off on Friday, and the Market Vectors Gold Miners ETF has been down 49.5% year-to-date.
In the second of our two-part interview with Jim Rogers, the commodities guru told us about the biggest headwinds for gold miners.
Also, he's not convinced that the commodities supercycle has ended just yet.
Business Insider: What's next for gold miners and mining stocks?
Jim Rogers: I don't own gold mining stocks. There's so many other easy ways for people to buy gold now that the miners have stiff competition. And there's lots and lots of competitive situations in mining.
30 years ago if you wanted to buy gold, you were almost restricted to gold mining shares. That's not true anymore. You can buy all sorts of coins. In those days only Krugerrands were available, 30 years ago. Nobody even made gold coins except Krugerrands. Now many countries have them. All sorts of ETFs, ETNs, futures, now there's many ways to buy gold. So the miners have a serious competitive situation and of course there's hundreds of them.
Mark Twain said the definition of a gold mine is 'a hole in the ground with a liar standing at the top of the hole' because there's just so many of them. Somebody once did a study and I think he determined that more money has been lost in gold mining shares than any other industry in America including airlines and railroads at one time. So miners are going to have a very difficult time ahead of them.
If I'm right about the price of gold, that's one huge headwind and the other is there's too many of them. If you can find a gold mine that can make money, that has good management and that has good reserves, sure. But even that's going to be difficult because gold is going to take a while to make a bottom.
BI: The price of gold is now below the cost of production for many mines. Do you think that could cause tightness in supply and push prices higher?
JR: Of course that would happen eventually. I've been in the investment world a long time and I know that things can stay below the cost of production for years. It takes a long time for people to believe they have to close their mines. It costs money to close a mine, it costs money to re-open a mine so people are reluctant to close mines. So you can see any commodity staying below the cost of production for a while, especially if it's something like a mine which is expensive to close and expensive to open.
Some people are not going to be able to open mines because of what's happened. But then you're going to eventually have people close mines, and eventually, like I said it's going to work its way out in 2014, 2015, gold will make a nice bottom and off we'll go again with the assumption of a bull market.
BI: The word on Wall Street is that the commodities super cycle is now over. Do you subscribe to that view?
JR: Well I'm very keen to hear that, especially since none of these people saw the bull market coming. All those people who didn't see it coming and weren't convinced it was happening, are now saying it's all over. I'm sure you know that bull markets climb a wall of worry and we're certainly having a wall of worry and skepticism which is good.
In 1987 stocks around the globe fell 40% and many people said the bull market was over. Then in 1989, 1990, 1994, 1997, 1998 there were many times when stocks collapsed and everybody was convinced the bull market was over. The bull market wasn't over. It eventually ended in a bubble. In my view that's happening with commodities. I don't see major sources of new supply coming in on stream. Most commodities don't have massive new supply yet. For instance, agriculture has produced record levels for the past few years and yet inventories are the lowest in 40 years because consumption keeps going higher and higher, faster than production does. We have serious fundamental problems developing in agriculture. I don't see enough new supply to cause the bull market to end other than a temporary consolidation, especially since so many people are convinced and quick to rush out and write that the bull market is over. But we'll see.
Most bull markets have lasted for a couple of decades, or nearly a couple of decades. And in my view supply is not there yet. By the way if economies slow down, it would affect demand for all commodities but then Mr. Bernanke and his friends are going to print a lot more money. It's the wrong thing to do but unfortunately that's all they know to do, and they'll do more.
Publish date: 06/07/13