Clients and readers of NicholsOnGold.com should not be surprised by gold’s
recent rebound.
In late January, as gold was testing recent lows near $1,310 an
ounce, we said “the fundamentals suggest much higher prices
ahead” with “market activity strengthening the case for a
surprisingly sharp snapback and new all-time highs later this year.”
Indeed, we anticipate gold will retake its all-time high near $1,432
an ounce in the months ahead . . . and reach $1,700 later this year . . . on
its way to $2,000 an ounce in 2012 . . . and still higher prices in the next
few years.
(Readers interested in frequent brief analysis, commentary, and
insights are invited to follow us on Tweeter @
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Global Inflation Rising
One of the key forces contributing to expected gold-price strength
is the acceleration in inflation now underway around the world.
It seems that almost everywhere - except here in the United States -
inflation is on the rise. We now read daily about the rise in
agricultural, energy, and industrial commodity prices from one country to the
next - and the consequential acceleration in consumer prices. China,
India, Brazil, the United Kingdom, and the Eurozone economies make the
newspapers because these are the largest economies after the United States
and they are the most populous, too.
But, less noticed outside their own borders, one country after the
next, is suffering from higher prices, especially for food and energy - and
the acceleration of inflation in some countries is beginning to have broader
social and political consequences as we have seen recently in Tunisia and
Egypt.
Today’s global inflation is largely a consequence of U.S.
monetary policy and the unbridled flood of dollars into the world economy on
the one hand . . . combined with an unwillingness among central bankers in
the other big economy countries to allow upward appreciations of their own
currencies.
Just as in the United States, central bankers in these countries
prefer economic expansion and happy workforces to low inflation with higher
unemployment. And, although some - China, India, and Brazil, for
example - are raising interest rates and restricting bank lending, these
measures are intentionally insufficient to greatly restrain future economic
growth and, therefore, insufficient to restore price stability in their
respective economies.
It’s no wonder that smart savers and investors in China and
India are buying hundreds of tons of gold a year - and will most likely
continue to do so even as gold prices move significantly higher.
Anyone worried about inflation should be worried about the fantastic
growth in the Fed’s holdings of U.S. Treasury securities.
Recently, the Fed surpassed China as the largest holder of U.S. Treasury
securities - and by mid-summer the Fed will likely hold more Treasury
securities than both China and Japan combined.
The explosive growth of U.S. Treasury securities - T-bills, notes,
and bonds - held by the Federal Reserve is the flip side of the central
bank’s policy of quantitative easing. The Fed has now replaced
foreign central banks as America’s financier, funding our Federal
budget deficit by creating new money.
This is a policy that must eventually result in a significant
erosion in the greenback’s purchasing power brought on through a
depreciation of the U.S. dollar in world currency markets and an acceleration
of inflation here at home - an acceleration that is bound to occur
irrespective of continuing economic slack, high unemployment and low capacity
utilization.
Other Pro-Gold Fundamentals
In addition to rising global inflation and inflation-fueling U.S.
economic policies, other on-going trends in the world of gold will also
contribute to higher prices later this year and beyond:
Continuing strong gold demand for jewelry and
investment - even
in the face of higher prices - from China, India, and other gold-friendly
Asian and Middle Eastern nations. Demand from these countries is driven
by rising household incomes and rising inflation expectations - and these
trends are likely to persist for some time to come.
Continuing official purchases by China, Russia, and other cash-rich
central banks with “under-weighted” gold reserves. Central
banks tend to buy on dips when their purchases are least likely to disrupt
the market - and official demand in recent weeks with prices near $1,320
helped stabilize and reverse the short-term price decline.
Expanding investment demand from a small but growing segment of
retail investors in the United States and Europe who are worried about rising
inflation and currency depreciation . . . and from hedge funds and other
institutional investors who understand gold’s bullish fundamentals.
Given the relatively small size of the gold
investment market
relative to world stock and bond markets or major currency markets, a very
small shift in portfolio preference away from conventional assets in favor of
gold may have a negligible affect on the stock and bond markets - but will
have a big affect on the price of gold.
Easier access to gold through new investment vehicles,
especially exchange-traded funds, is promoting the growth in gold investment
from one country to the next. Even India and China are jumping on the
bandwagon with new ETFs denominated in local currencies and weight units
familiar in each country.
Imagining the Unpredictable
In addition to these somewhat predictable gold-positive trends,
unpredictable geopolitical developments could, under certain circumstances,
have an overwhelming affect on the price of gold.
What if Egypt sinks into a prolonged period of social and political
chaos?
What if the Suez Canal is threatened or closed by political
developments or by terrorism?
What if similar spontaneous revolutions erupt in Lebanon, Yemen, or
Saudi Arabia, the world’s largest source of oil?
What if new governments in the region threaten Israel militarily?
What if Iran takes advantage of the political vacuum created by
these popular uprisings?
Or, in other regions . . .
What if North Korea launches another, but more serious, assault on
the South?
What if Europe’s sovereign debt problems erupt again,
triggering a flight from the euro?
And, closer to home . . .
What if Congress and the Obama Administration fail to make any
significant progress in balancing America’s Federal budget deficit,
triggering a flight from the dollar?
Any of these events are certainly plausible - and there are many
others we simply can’t imagine - but each has the potential to send
gold skyrocketing.
Jeffrey
Nichols
NicholsonGold.com
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