Contrarian Gold Rally Into Year's End, Says Fund Manager

Contrarian Gold Rally Into Year's End, Says Fund Manager
Fund manager:  If you believe in math, buy gold!  Why gold is going to $1,550

Brent Johnson of Santiago Capital says "you either believe in math or you believe in magic," and math points to gold going much higher. 

Johnson believes that economic problems in the United States will lead to a $200 rally in gold (GLD) over the next two months.

"It wouldn't surprise me to be back at $1,500 or $1,550 by the end of the year," the portfolio manager said on CNBC.

Gold, which settled recently at $1,350 per troy ounce, hasn't touched $1,500 since early April, when it shed more than $200 in two harrowing sessions.  [BigTrends.com note:  GLD ETF was around 150 then, currently 130].

Johnson does note that sentiment around gold is "really low."  The latest example of that came on Oct. 8, when the head of commodities research at Goldman Sachs, Jeffrey Currie, said that gold would become a "slam dunk sell" after the government shutdown ended and the debt ceiling debate was settled.

"A number of different firms around the world are saying 'Sell gold,' that it's a 'slam dunk sell,' so there's still a lot of negative sentiment out there," Johnson said. "And there are a lot of shorts out there."

To Johnson, this is actually good news.  "You can get a bit of a pop, and all of the sudden those shorts start to cover, people start to realize that QE is here to stay and not going anywhere, and things can change very quickly," he said.  "I mean, gold can go up just as quickly as it came down."

For Johnson, the bottom line is that debt leaves the U.S. in dire shape, and this situation will end up being very helpful for gold.

"My kind of unofficial tagline is: You either believe in math, or you believe in magic," Johnson said.  "I happen to believe in math.  And the projection that our U.S. debt level is on is starting to go exponential- and the way the system is designed, it's going to increase even more."

So why does this matter for gold?

"There's a very high correlation between the monetary base, the national debt and gold," Johnson said.  "For the long-term picture, that's the main driver" of gold.

In Johnson's view, then, the U.S. will have to create more inflation to pay down its debt.  And if dollars lose value due to inflation, then it will take more of those dollars to buy an ounce of gold-consequently driving the gold price much higher.

"I do think the correction in gold is largely over," Johnson said. "I expect gold to go much higher even toward the end of the year, and on into next year."

Courtesy of Alex Rosenberg, cnbc.com