Five Minutes With Jeffrey Christian, CPM Group

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Five Minutes With Jeffrey Christian, CPM Group


Jeffrey Christian is the managing director and founder of CPM Group, a precious metals and commodities markets analysis firm formed through a management buyout of the Commodities Research Group at Goldman Sachs. Christian spoke last week at the Initiatives in Art and Culture gold conference in New York, and talked to editor/producer Nicole V. Rohr about the myths of gold, buying gold puts and the coming gold supply growth.

Q: What do you mean when you say that gold suffuses myths, and how has CPM Group helped debunk those myths?

A: First of all, gold has been in our culture for 5,000 years or longer, and there are all sorts of beliefs that have been built up about gold. I’m not just talking about the conspiracy theories. There are all kinds of things, like “Gold is a constant” and “Gold is the one true money.” What we try to do is deal with statistics. We realize that there are limits to the economic reality that it [prices] can be determined with statistics, but we try to be very quantitative as far as possible and objective. So, we don’t believe in gold. I often say that we’re agnostics. People pay us to be right.

When we merged with Goldman Sachs, I met Leon Cooperman, who was the head of investment research and who would be my boss’s boss under the merger, and he said, “I want you to know that I don’t believe in gold. I think gold is religion, and I was the most vociferous opponent of buying J. Aron at the executive level at Goldman Sachs.” I was 26 years old at the time, and I said, “I think you’re going to be very impressed with some of the quantitative research. I agree with you that for many people, gold is a religion, but that we think that gold can also be an investment that can be approached on a quantitative, scientific basis”... To which he said, “No, I won’t be.”

Just because some people believe in some things doesn’t mean that you can’t look at it objectively and make objective, rational decisions which can be very profitable. As George Soros says, “You have this reflexivity in the markets and that reflexivity is exacerbated and accentuated by beliefs.” So, gold goes from $280 to $1,900, and there are a lot of people believing it’s going to $3,000, $4,000, $5,000. If you have a body of scientific evidence that suggests that it won’t go there, at least on a scientific basis, you could position yourself to make a tremendous amount money on the rebound.

Q: How does an investor use scientific data to make investment decisions?

A: I’ll give you an example. We had an investor who wanted to start buying a lot of gold when the prices were around $780 in like 2007. By the time he was ready to buy, it was early 2008 and the price was $1,000. He said, “Did I miss this?” And I said, “No. In fact, don’t buy. Wait. We think that the gold price is going below $900, or down to around $900 or lower (this is March 2008)... by May or June. You should buy then. And when you buy gold, every ounce you buy, you should also buy a put as protection.” So, he waited, and he didn’t buy at $1,000 in March, the price got down to $900, [and] he bought. He started buying gold and he started buying puts. As the price rose, he bought more puts. The price then fell back in July and August. He sold those puts back and made a lot of money per ounce, which reduced his net-effective price. Then the price rose very sharply into September of 2008, and he bought more puts. And when the price plunged in October, he sold those puts back and he made more money, so that his net-effective acquisition price was probably close to $700. So, that’s a very concrete example of how you can apply math and science probabilities to a market suffused with myth.

Q: How is mining production exploding?

A: We have a table in our Gold Yearbook with probably 100 projects that are under development now that are slated to come into production between now and 2015. In the next four years, [there will be] something in the order of 20 million ounces of new capacity, in a market that is an 80-million-ounce mining market. So, that’s a 25-percent increase on a gross new capacity basis. And these are projects that are advanced, that are in various stages of feasibility studies, permitting, financing or construction. You know, there are other things in the pipeline, too. You saw the exact same thing in the 1980s and the 1990s after the price of gold rose. It went to $850 and then it came down, and it spent most of the next 17 years between $320 and $400. And between $320 and $400, it was so profitable that you saw this enormous expansion in mining. You’re seeing the exact same thing again.