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Gold
is coming to life again
- and looks poised to move
higher in the weeks and months
ahead. Having fallen precipitously from its all-time high just over
$1,923 an ounce in early
September to a recent low near $1,540 in early October, a peak-to-trough correction of some 20 percent,
gold has been, of late,
range-bound, trading between $1,640 and $1,680.
Having moved to the top of
this range and even slightly
higher, I sense gold is just now resuming
its long march upward, a march that could,
before long, carry the price to
the $1,850 region and perhaps even
to its historic peak of $1,923 by the end of
the year.
The Safe-Haven Paradox
Ironically, Europe’s
continuing sovereign debt crisis - a situation that should promote fear-driven demand for gold
- has, in recent weeks, weighed heavily on the yellow metal’s price. In addition, a sharp reversal in speculative positions on futures exchanges and other derivative markets has contributed to gold’s two-month consolidation.
Ordinarily, investors
and analysts might expect Europe’s impending economic and political disaster to send gold prices rocketing skyward - but this has not yet been the case.
Instead, it triggered “safe haven” demand for the U.S. dollar and boosted
the greenback’s exchange rate against the euro to
gold’s detriment.
With flight capital and hot
money going into the U.S. dollar as a safe
haven from Europe’s woes, dollar-denominated hard assets like gold
and other commodities have been under pressure,
in large measure due to the behavior of institutional traders and speculators,
many of whom have reduced
their “long” positions or “shorted” gold in
derivative “paper” markets.
Gold’s Fortunes Set to Improve
I
have no doubts that the
recent downward pressure on the gold price arising
from the U.S. dollar’s “apparent”
strength - and I stress
“apparent” - will prove
to be temporary.
Indeed, in recent days, with demand
suddenly surging for investment-size bars and gold exchange-traded
funds, it looks like safe-haven
gold demand may finally be
picking up even as the
flow of funds into the
dollar continues. ”
In
any event, gold’s fortunes are set to
improve in the weeks ahead: If Europe’s debt crisis subsides,
the dollar will no longer benefit
from its safe-haven role. If it continues
to worsen, investors, particularly in
Europe, are likely to accelerate their rush into
physical gold, buying bullion coins, small bars, and ETFs, as they did
in mid-2010 when Euro-angst was, like now, at
a feverish pitch. But, either way, as
traditional physical demand
continues to grow, especially in Asia and from
central banks in that region and
elsewhere, gold is increasingly going into stronger
hands that are less likely
to sell even at much
higher prices.
Short-term
trading in derivative markets
may, at times, produce a great deal of gold-price volatility but, in my book, it
does not affect the long-term price trend. What governs the price of
gold over the long term
are the market’s real-world supply and demand
fundamentals - and these have been
decidedly bullish . . . and are becoming
even more so. Hence, my long-standing
long-term forecast of higher gold
prices over the next several
years.
Robust Physical Demand
While speculative
pressures have pushed gold lower,
physical demand has remained quite firm - not just from European’s seeking a safe haven - but, even more so, from Asian markets, particularly India and China, where investors and consumers are taking more gold
for reasons that have little
to do with the world political
and economic situation.
India, for example, is now
celebrating (this year beginning on Wednesday, October 26th)
the Diwali “festival of lights.”
Considered an auspicious
time to buy gold - investment-grade jewelry, small bars, and coins
- Indians are showing no reluctance to acquire gold
at what are historically very high rupee-denominated prices.
Our friends in the Indian bullion community expect continued strong physical demand in the months and years
ahead - reflecting growth in personal income, particularly in the agrarian and rural communities that traditional buy and hoard
gold, as well as worrisome
domestic inflationary pressures. Not to be understated, India’s central bank purchase of 200 tons of
gold in 2009 was an official
endorsement of the metal’s role as a reliable
store of value and savings
asset that many private households are now following.
Chinese
gold demand is also robust, due to income growth, rising wealth, and also inflation fears. Higher gold prices, rather than discouraging demand, have attracted new investors to the market. And,
the central government has been pro-active in promoting investor access to gold
by encouraging the development of physical and
futures exchanges and retail gold
distribution through banks and other
retail outlets across the country.
Sticky
Gold
Not
counting official purchases by the People’s Bank of China, Chinese consumers and investors are now the
world’s biggest
end-market for gold. And, this
is long-term “sticky” demand, much of which
is unlikely to come back to the market
anytime soon, perhaps not in our lifetimes, even as the metal
rises to a multiple of today’s price.
In
addition to solid
private-sector physical demand, the official
sector has been an increasingly important buyer. Russia and China have been most
prominent, buying fairly regularly and stepping up acquisitions
whenever the price dips as
it has in the past couple
of months. The list of central
banks buying gold this year
includes South Korea, Mexico, Kazakhstan,
Thailand, Bolivia, and Colombia.
With both the U.S. dollar and the euro
looking tarnished and risky to
central bank reserve managers, official-sector gold acquisitions have likely increased in recent weeks at lower price
levels where purchases could be made discretely
without any noticeable affect on gold-price volatility. And, this too,
is sticky gold that is
unlikely to return to the
market any time soon.
What few gold pundits realize is that
the amount of physical gold
available in the world gold market
- the “free float” - is shrinking, thanks not only to Chinese and other Asian buyers, but also due to renewed interest and accumulation of gold by
a growing number of central banks.
For central banks, the holding
period may be measured in decades if not longer. As a consequence, future demand will have a much more
high-powered affect on the price of
gold - and this is one
of the reasons we expect
much higher prices in the years ahead.
Jeffrey Nichols
NicholsonGold.com
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