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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
of NicholsOnGold 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
NicholsonGold.com
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