Gold: Short-Term Risks, Long-Term Rewards

Gold remains vulnerable to more institutional selling . . . but could surprise, bouncing back to recover at least some of the ground lost in the recent “flash crash.”

Asian buying and retail investment demand have provided some support under the market but many buyers are holding back, looking for confirmation that prices have hit bottom. When that confirmation comes, pent up demand could give the metal a short-term boost . . . and, from there, who knows?

Recent talk of Fed tapering (that is reining in its accommodative monetary policy by reducing the magnitude of its monthly bond purchases) has been, at least partly, responsible for the swift sell-off in gold.

However, today’s rash of disappointing U.S. economic indicators is raising questions, once again, about the economy’s staying power — and expectations among Fed watchers have begun shifting, albeit subtly, toward more accommodation. If this view (that is expectations of more stimulus) gains credence, gold would be a major beneficiary.

Indeed, we’ve long argued that recession-like economic conditions — with unacceptably low growth and unacceptably high unemployment — would persist for several years, forcing the Fed (in the absence of supportive fiscal policies) to adopt still-more stimulative monetary policies . . . and that this would be the juice, or at least the trigger, carrying gold to new historic highs.

This remains my view despite the latest gold-price flash crash!