Hellmeyer Interview Part 1: $2,500 is a very conservative forecast for gold

by Lars Schall

Folker Hellmeyer, chief analyst at Bremer Landesbank, gave an exclusive interview to chaostheorien.de, with his take on the so called “Currency Wars” and China’s role as a stabilizing factor in the world economy. Moreover, he talked about the problem of high frequency trading, the development of oil prices, and the on-going rally in the precious metals markets: “Gold is not in a bubble, silver is not in a bubble, precious metals are in general terms not in a bubble.” Below is the first part of that interview concentrating on the currency wars and precious metals.

Folker Hellmeyer, born 1961 in Hamburg, is a banking professional who started his career as foreign exchange trader with Deutsche Bank in Hamburg (1984 – 1987) and London (1988 – 1989). From 1990 to 1995, he worked as an OTC broker in the interbank foreign exchange market at Bierbaum & Co. GmbH & Co. OHG. In 1995, he went to Landesbank Hessen-Thüringen GZ (Helaba) in Frankfurt as a senior analyst. Since April 2002, he has been the chief analyst at Bremer Landesbank, where he is responsible for the Foreign Exchange and Money Market Sales department.

In his book “Endlich Klartext” ("At last, clear text"), published in 2008 by the Finanzbuch Verlag in Munich, Hellmeyer takes a look behind the scenes of our financial system. His critical analysis provides the reader with entertaining and informative insight into the U.S. financial system and its political background. The functions of the free market, the policy of the central and commercial banks and the role of rating agencies are critically examined and reviewed.

To what extent can one still believe economic data from the United States? How can one look beyond the veil of political correctness? What is the aim of the Plunge Protection Team? These are some of his questions. Hellmeyer is one of a very few senior bankers in Germany who doesn’t grow tired of reminding the public: “First the free market dies, then democracy dies."

A comprehensive interview in German, that Folker Hellmeyer gave chaostheorien.de in August 2009, can be found under the headline „Das Plunge Protection Team in Aktion“ (“The Plunge Protection Team in Action“):

Mr. Hellmeyer, for quite some time, there has been a “Currency War“ going on – and by now it is reaching the mainstream press. Can you explain this development to us and how gold fits into the picture?

Yes, of course. First of all, we have to say that this "Currency War" phrase has been chosen by the Western press and it comes out of the Western financial hemisphere. In that respect, we have to ascertain whether the currency war is in fact the same "Currency War" presented in the media. From my point of view, the currency war is not led by China or other emerging market countries and I want to point this out in a very outspoken manner.

China started revaluing the Renminbi in 2005. The revaluation of the Renminbi currently stands at 20 percent. During the crisis, revaluation was halted for very good reasons because the insecurity about further developments was very high. But from June 2010 onwards we’ve seen an appreciation of the Renminbi by 3.3 percent so far. If you extrapolate the latest pace since June 2010 on a yearly basis, we get somewhere close to 6 percent per year. This is a substantial result in the first place.

Secondly, we have to bear in mind that China took over responsibility for stabilizing the global economy and the world financial system on a global scale. In relation to the GDP, China took on the biggest burden for reviving its economy and thus supporting the global economy. Then they assisted Russia, Eastern Europe and the euro-zone in the beginning of 2009 after the financial centers in London and New York attacked Eastern Europe and particularly Russia. They were sending up-front payments of roughly 100 billion dollars to Russia for future energy contracts.

Thirdly, in 2010, the Chinese were again assisting the euro zone by supporting it during the budget deficit crisis. China was lending support to Greece and China was buying the euro down in the 1.20’s. Again, they were supportive regarding the functioning of the global financial system. So arguing that China is not taking responsibility for world recovery is simply nonsense.

If we look at Japan, we clearly have to state that the value of the JPY does not comply with the status of its economy. So the interventions we are seeing from Japan are very much in line with fundamentals. Here again I don’t see a currency war.

If we talk about a currency war, the initiator stands on the other side: the United States is starting QE2, which means flooding the market with dollar liquidity. And this dollar liquidity indeed leads to revaluations of foreign currencies, in particular in the emerging markets, where you have comparatively small markets unable to neutralize this extra liquidity without consequences, pushing up the value of their currencies to levels that don’t comply with their real economies. In that respect, if there is any currency war going on, then it is a liquidity currency war led by the United States, endangering the recovery of the global economy, because it is able to blow bubbles on one hand and destabilize emerging market countries on the other. If we talk about currency wars, as I said, the United States is at the center of this currency war rather than anyone else.

And what is the relation to gold? Gold, with the increased liquidity, is gaining more friends of course, simply because the world financial system – or the center of this system – is demolished by the policies of the United States. The United States, as a country maintaining the world’s leading currency, is not living up to the needs of its role in a serious manner at the moment. The United States is following very selfish policies in order to gain the day and to lose the future – and I really want to point that out: America is engaging in cosmetic reforms only and intends no structural reforms to revamp their business model. Cosmetics will not deliver the intended results, causing the problems to resolve on a longer time frame. They simply increase problems over time.

Nevertheless, some people are arguing that gold is in a bubble – like, for example, James Altucher in a piece for “Business Insider" recently. Is gold in a bubble, yes or no? And what do you think about Mr. Altucher’s “11 reasons“ that it is?

First of all, gold is not in a bubble, silver is not in a bubble, precious metals are in general terms not in a bubble. That’s the first statement. If there is a bubble, it’s in Triple A rated Treasury paper, whether from Germany or the United States. Precious metals are in demand for very simple reasons: We have an inflexible supply due to a lack of exploration and we have an increasing demand due to various factors.

One factor is definitely the debasement of the U.S. dollar. The second aspect is that global wealth is increasing quickly, in particular in the emerging market countries. 5 billion of the world population are having higher living standards and thus are consuming more precious metals. Thirdly, and this is very important – smart central banks are starting to accumulate gold rather than accumulating printed paper from the United States. That means we have strong demand growth with an inflexible supply. Those are the drivers of the gold price.

Mr. Altucher is giving 11 arguments why gold might be in a bubble and this might sound reasonable at first glance. But upon further reflection, it’s simply nonsense. It is the same nonsense we’ve seen in the past nine years from gold-antagonists being negative on a "professional" basis. Very often throughout the rally in gold we have heard these arguments and they have proved wrong. The same will apply here.

Would you say that Mr. Altucher and his ilk should give it more thought to the concept that gold and silver are the preferred currencies of the so-called elite – and what this might mean for their prices?

Indeed. The elite today are human beings that care about the state of our financial system. The elite are also central banks that know the game that is being played, and we’re talking here about emerging market central banks like the Russian one, the People’s Bank of China, the Brazilian central bank and the Indian central bank. All of these players in this market have a very clear and outspoken view on investments in precious metals, and they figured out that the quality of this asset class is basically based on the fact that the volume cannot be increased by political will but rather only by lots of work, and that is why precious metals are precious.

Louise Yamada, probably the best technical analyst in the world (http://www.lyadvisors.com/), says that gold will not be in a bubble before it goes to $5,200 per ounce. If one added inflation, we get a price of roughly $7,700 per ounce. Do you assess this as realistic?

Well, that depends where the dollar is against the Euro or the Swiss franc when we hit 5,200 U.S. dollars per ounce of gold. Frankly speaking, I do not like these specific price targets for gold and silver. What I’m saying is: for another 5 to 7 years we will see a further rally in precious metals due to the fact that there has been a lack of exploration. This lack of exploration means that we see an inflexible supply picture. At the same time there is a rising demand picture, and that is what drives prices higher.

My minimum call for gold is that we will again see 1980 prices on an inflation-adjusted basis, and that means something like 2500 dollars – but that is a very, very conservative call because in 1980 the world financial system was in much better shape than it is today. And the situation, for example, the development of population, has shifted dramatically. In that respect, there is room for much higher prices than the 2,500. The 2,500 U.S. dollar forecast is a very conservative approach.

If Ms. Yamada is right, what will those people cry then, when they are already now crying “Wolf!“ (a.k.a. “Bubble!“)?

Well, "Crying Wolf" is a funny game: the more often you cry wolf, the less people will listen to you – and this what will happen eventually to these people. If you look at Mr. Nadler from Kitco, who has stated many times throughout the last five years why gold should come down, nobody really listens to him any longer – at least no one who takes this topic seriously. And the same applies for banks, for example Barclays. They missed out the whole rally of precious metals during the last nine years. In that respect, I do not care for these people or institutions, rather I think it is charming to listen to them to have a good laugh.

And to do the opposite…


…of their calls. Yes. – Do you think silver has a fair chance to outperform gold?

Indeed, yes. Silver is more volatile, but there is greater opportunity to the upside. First of all, there is no reasonable amount of silver located within central banks. The industrial use is increasing significantly. With world growth around 4 to 5 percent, again, that will increase the demand picture. Also it is the precious metal of the ‘small man’. In that respect, percentage wise, it has an upside chance for a sustained outperformance in comparison to gold. But we have to also look in the rear view mirror because corrections in silver are more aggressive than those in gold. Any player who is heavily invested in silver has to bear in mind that correction risks are markedly higher than those in gold.

Mr. Hellmeyer, it seems to me what Mr. Altucher and people like him tend to forget all the time is the problem of huge short positions in the gold and silver future markets. JPM Chase in particular seems to face major difficulties in that respect. What are your thoughts on this, particularly since a representative of the CFTC admitted that the silver market is subject to “fraudulent“ influences?

I’m a friend of free markets and I’m a friend of perfect markets, and perfect markets require the structure of a polypoly. In particular the situation in the precious metals market is a situation where two players – JPMorgan Chase on the one hand and HSBC on the other hand – have a very dominant role and a dominant role does not fit into the setup of a perfect market or a free market. In that respect, yes I have real difficulties accepting this situation. And given the latest arguments by Bart Chilton of the CFTC, indeed, the risk that these markets are corrupt is extremely high.

To put it bluntly: We have a misallocation of market share that is a prime driver of the risk of a manipulated market. And if there is one thing that has to be altered then it is that the so called "banking aristocracy" or global financial players have to be split up into players that comply with the needs of the perfect market and, thus, of the free market. That is what I expect from the individuals and organisations in charge of the setup of the financial system. The fact that nothing has been done in re-structuring the system is, in my eyes, proof that the lobbyists of the banking aristocracy is still in control of important positions in our free market system and that is a shame!

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