Gold has been in retreat since hitting an all-time high of US$1,924 an ounce in September 2011. That’s an astonishing decline of more than 35 percent — a whooping correction in the midst of, in my view, a long-term bull market that began roughly a dozen years ago and still has years of life ahead.
Over the past year and a half, hedge funds and other institutional investors have been persistent sellers — mostly of gold ETFs. In doing so, they have provided ample supplies to meet the persistent and continuing demand for physical metal by Asian investors and central banks.
Short sales and program trading by a small number of major banks, bullion dealers, and other large-scale institutional speculators — about which I’ve written much in the past year — has also been a significant gold-price depressant.
Institutional divestment has been fueled, all along, by the expectation of higher returns in both equity and debt markets and, more recently, despair over gold’s poor performance with initial selling triggering more selling by momentum followers.
But now, those hedge funds managers wishing to switch from gold to equities and bonds have largely depleted their bullion holdings. In addition, with the recent rise in long-term interest rates, the bull market in bonds is probably over — and, though equities, remain strong, some fund managers are wondering just how long the party on Wall Street will last.
This shift in expectations is setting the stage for a turn-around and recovery in the price of gold.
Only now, having sold gold in the past couple of years, Western institutions may find it difficult to rebuild their gold ETF holdings without bidding gold prices to much higher levels because many of the buyers since 2011 — Chinese households or the Russian central bank, for example — have not interest in selling . . . not now and not for many years or even decades to come.
For more on the gold market situation and outlook — and the bullish case for gold — see my recent commentaries posted below on NicholsOnGold.com.
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