GOLD ANALYSIS

Gold's long term price determinants still unequivocally bullish - Nichols

Jeff Nichols gives his six reasons why he remains unequivocally bullish on the gold price with Wednesday's fall giving gold investors a great buying opportunity.

Author: Jeffrey Nichols
Posted: Saturday , 03 Mar 2012

NEW YORK - 

This past week's dramatic gold-price action - with the metal falling some 5.8 percent from a Wednesday high of $1,790 an ounce (in European trading) to a low of $1,687 (in after-hours New York trading) - does nothing to dissuade us from our super-bullish long-term view of gold-price prospects.

Indeed, we have often warned clients and readers to expect occasional episodes of great price volatility with sizable corrections that would lead many investors and pundits to prematurely eulogize the end of gold's bull run.  Wednesday's decline was just such a correction - and it wasn't even that dramatic despite all the media brouhaha.

In the context of gold's past performance - up some 500 percent or 19 percent annually over the past ten years and 14 percent this year through Tuesday evening before latest price correction - a little backtracking should be little surprise.

Had some popular stock-market equity fallen one dollar from $17.90 to $16.87 - also a 5.8 percent decline - hardly anyone would notice.  But such is gold's glamour and glitter, with so many either loving it or hating it, that it made the Wednesday evening news.

As best as we can tell, the correction was entirely a paper-market affair - with the bulk of selling occurring on COMEX, the U.S. gold futures market, where speculative long positions equivalent to some 10 million ounces were literally dumped on the market in fairly short order.

Some say the selling was touched off by Federal Reserve Chairman Ben Bernanke's Wednesday morning Congressional testimony on monetary policy and the state of the economy.  By citing tentative signs of economic recovery while saying nothing about a possible third round of quantitative easing, or QE3 in the jargon of economists, the Chairman may have disappointed those who were betting on more monetary stimulus, thereby deflating any QE3 premium already in the market's gold valuation.

Others say technical factors, especially the loss of upward momentum as the price approached $1,800 an ounce, triggered the sell off - aided, abetted, and exacerbated by automatic program trading and stop-loss selling.

Our forecast of much higher gold prices depends not one iota on the day-to-day ups and downs, no matter how extreme, in the yellow metal's price.  Instead, the average long-term price is entirely a function of world economic and political developments, which affect the intensity of investor interest (what we might call long-term hoarding demand) and on gold's own supply/demand fundamentals.

At the risk of sounding repetitious, we think gold's long-term price determinants are unequivocally bullish.  Very briefly, here are six reasons why I see much higher gold prices for years to come:

• Further monetary easing by the world's top central banks - the U.S. Federal Reserve (the Fed), the European Central Bank (the ECB), the Bank of England, the Swiss National Bank, and the People's Bank of China (the PBOC) - is likely as global economic activity and employment remain unacceptably depressed.

• Central bank interest will not only continue but will likely expand in 2012 - with China and Russia leading the pack, joined by a growing number of central banks underweighted in gold and over weighted dollars and euros.  The official sector  continues to underpin the price, buying on dips - and willing to absorb however many ounces and tons are available to them without disrupting the market.  In fact, it is likely that central banks took advantage of this week's bargain-basement price to accumulate gold.

• Long-term demand from investors and jewelry buyers in both China and India will continue to boost gold prices quite significantly - not just in the next year or two, but for many years to come - reflecting the rising incomes and growing middle classes in these two countries.

• Persistent Middle East tensions - with saber-rattling by Iran, oil-price uncertainties, civil war in Syria, growing unrest in one or another country, and the spread of Islamic fundamentalism.

• Europe's continuing sovereign-debt crisis, further downgrades by the credit-rating agencies, the still-likely Greek default and departure from the euro-zone, possibly followed by other deeply indebted European countries.

• And, importantly, the loss of purchasing power and devaluation of the old industrial world's major currencies (the U.S. dollar, the euro, the British pound and even the Swiss franc) and the ascendency of the Chinese yuan along with the currencies of some other newly industrialized nations.

Just where the gold price is heading in the days and weeks ahead is truly anyone's guess - but I feel confident that over the next few years gold will achieve rarified heights - with $3000, $4000, and possibly even $5000 an ounce more than likely.

Jeffrey Nichols is Managing Director of American Precious Metals Advisors - www.nicholsongold.com and Senior Economic Advisor to Rosland Capital - www.roslandcapital.com