(Posted: April 16, 2013)
MoneyWeb: We saw that astonishing decline in the gold price and in gold stocks yesterday. The biggest one-day drop in the price of bullion since 1980 and it has fallen about 13% since Thursday. ? Gold’s price is down nearly 25% since last October.
We are far off those all-time highs of $1,900/oz back in 2011, with the gold price currently trading at $1 382.63.
We welcome Jeffrey Nichols, MD of American Precious Metals Advisors to the programme. Jeffrey, you are calling the latest moves in the gold market “insanity”. Why?
JEFFREY NICHOLS: Absolutely – because this past week’s sharp retreat is not based on real world gold-market fundamentals. The fundamentals – in terms of supply/demand trends, in terms of price sensitivity of supply and demand, in the current global macroeconomic environment with the United States, Japan, and Europe each struggling to maintain momentum, and with monetary policy continuing to loosen up – all these factors suggest that gold should be moving higher . . . and I think it will at some point – but in the short run we are still very vulnerable. There’s no telling, no predicting, where an insane market will go.
MoneyWeb: We’ve seen gold and the price of gold react to risk in recent years. Gold is traditionally treated as a safe haven. It seems to be anything but a safe haven at the moment.
JEFFREY NICHOLS: Here’s the thing: There’s a belief that quantitative easing in the United States, and maybe in Europe as well, has run its course. Remember, a couple of years ago gold registered its all-time high near $1,924/oz on the back of quantitative easing. There’s a consensus in financial markets the Fed may, later this year, be keen to unwind their bond purchases – and this has weighed heavily on the gold market. I think when it becomes apparent that the United States economy is still in the dumps, Europe is faltering, and economies elsewhere are under pressure, slowing as well here in South Africa, we are going to have more monetary easing, perhaps another round of QE. It will come as a surprise and shock to world financial markets later this year – and that will be the deuce that sends gold back up again to it’s previous all-time high and beyond.
MoneyWeb: In terms of the movements that we’ve seen in the most recent couple of days, you point to the important distinction between the physical market for gold in contrast to the paper market for gold where all manner of derivatives being traded.
JEFFREY NICHOLS: In the last few days, weeks, and months all the action has been in derivative markets – and it’s been shorting gold in these paper markets that has been mostly responsible for pushing gold prices lower. But remember, unlike most gold investors and unlike the central banks that have been accumulating gold reserves, these are traders who are operating in futures and options markets based on technical indicators, momentum, computer-based program trading. These short-term traders have no lasting long-term commitment to gold . . . and at some point they may unwind or reverse their positions. But it could be days, weeks, even months before that happens. More importantly, the physical market has been picking up more and more physical gold in the last several months – and indeed even in the last few days we’ve had reports from China, India, from elsewhere in Asia that physical demand is now improving. The bar premiums in Hong Kong, in Shanghai are well over London prices – and that’s an indicator that buying is exceeding local supply. So we are continuing to see gold travel from the West to the East – and that gold isn’t going to come back to the market again at any price. It’s being bought, not for a quick gain, but for generations – to be passed on to their heirs, not to be re-sold except in dire circumstances. ? The same is true, even more so, for central banks. I can guarantee you that the Russian central bank and the Chinese central bank are having a heyday acquiring gold at these prices – and there are probably several other central banks that are using recent low price levels as opportunities to further diversify their exposure to US dollars and, to a lesser extent their exposure to the euro.
MoneyWeb: Our thanks to Jeffrey Nichols. He’s managing director of American Precious Metals Advisors in New York and publishes NicholsOnGold.com. You can follow his views most weekdays on Twitter @NicholsOnGold.
