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In
case you hadn’t noticed, gold prices have
been surging to new all-time high rising to $1,878.90 an ounce in intraday trading on Friday, August 19th.
Whether gold continues to skyrocket, settles into a new trading
range around recent levels, or plummets as
high prices discourage buyers and encourage
profit-takers is anyone’s guess.
At some point, however,
we will see a correction, perhaps a sizable one. After all, even strong bull markets never move up in straight
lines. I would not be surprised to see gold
stumble - falling back
$100, $200, or even $300
- before prices begin working their way higher
once again.
My advice to
gold investors is to use
sell-offs, when they occur, as
opportunities for scale-down buying. And, those who
are underweighted or own no
metal should gradually acquire physical metal with their focus
on long-term portfolio protection rather than short-term profits.
Adding to my short-term caution has been
some price-related relaxation of physical demand and the appearance
of increased quantities of gold scrap returning
to the market, especially from India and
other price-sensitive
national markets.
I’m confident gold’s long-term uptrend will continue in the months and years
ahead, ultimately reaching a multiple of today’s record level.
Limited Downside Risks
Gold
will soon begin to benefit from
increased seasonal demand - demand that should support
the yellow metal’s price and limit downside
risks right through New Year’s Day.
There are three distinct sources of seasonal
demand: (1) Western jewelers
step up fabrication demand ahead of Christmas gift-giving late in the year; (2) Indian dealers begin stocking up ahead
of the late summer and
autumn festivals and wedding season;
and (3) in December and January, the approaching Chinese lunar new year triggers
another sharp rise in gold demand.
For sure, irrespective
of the season, Asian demand - principally from China and India - for
physical metal will continue to underpin
these markets and limit downside
risks as buyers step-up on any sharp price dips that may
occur.
So,
too, will bargain hunting by a number of central
banks eager to raise their
official gold holdings without disrupting the world gold market
by increasing upward price volatility.
Bullish Economic Forces to Continue
There is no reason to
believe that the forces and
factors pushing gold higher - in the past weeks,
months, and years - are simply
going to disappear anytime soon. I’ve been talking about many of
these for years . . . and, I expect I’ll still be talking about
these same pro-gold forces
for years to come.
At the top of
my list of bullish forces
supporting the long-term gold-price uptrend are: (1) recognition of recessionary trends in the industrial economies and the implications for future monetary
policy; (2) the lack of faith in the
U.S. dollar and the euro; (3) increasing Western investor participation - both retail and institutional
- in the gold market and the
re-legitimization of gold as an asset
class; (4) continuing expansion of the big Asian markets, China and India, even if
growth moderates in these
countries; (5) rising official-sector
demand as emerging-economy central banks seek reserve
diversification.
Steroids for Gold
The recent rush of gold buying
is, in large part, a
rational response to rising uncertainty, anxiety, and fear that the
U.S. and European economies
are stumbling badly . . . and world financial markets are increasingly
vulnerable to an epileptic
seizure, or worse.
World
stock markets and industrial commodity prices are reacting
to the same uncertainties, registering the downward shift in expectations about future economic growth.
In
recent days, signs of renewed
recession on both sides of the
Atlantic and Europe’s worsening sovereign-debt crisis are raising expectations
that the Federal Reserve and European Central Bank (ECB) will both
be compelled to pursue evermore
stimulative monetary policies beginning with a new round
of quantitative easing in
the United States and stepped-up ECB purchases of sovereign debt and/or
interest-rate cuts in
Europe.
These policies - and the implications for future inflation
and monetary debasement - are like steroids for the gold
market, causing investors and central-bank reserve managers to seek
the protection of gold.
In
any event, whatever happens in the U.S. and European economies, it is hard to
imagine a realistic scenario that won’t push gold prices significantly higher.
Central Bank Acquisition:
More Important Than You Think
Importantly, contributing to gold’s recent swift rise has
been the growing interest and stepped-up acquisition of gold by the
official sector.
This
was underscored by the Central Bank of Venezuela’s recent announcement that it was repatriating much of its
official gold reserves from foreign custody. Statistics from the Bank for International
Settlements (the BIS) suggest
that a number of other countries have, in the past year, repatriated
gold rather than store it
in the custody of the Bank of
England, the New York Federal Reserve Bank, or in the vaults
of other central banks.
While these are not purchases of gold affecting
the world market supply/demand balance, the trend toward
repatriation illustrates the special role
gold plays as an asset of
last resort among central bank reserve managers.
Increasingly, central banks are buying gold:
South Korea announced a couple
of weeks ago that it
had purchased 25 tons over the
past two months, almost tripling its central bank gold holdings. Thailand’s central bank, too, has
been an important buyer, recently adding nearly 18 tons to its
official gold stocks. Even the Banco de Mexico bought 100 tons earlier this year, joining
China, Russia, India, and Saudi Arabia - all of which
bought large quantities
in recent years. Russia continues to buy gold
regularly from its domestic production - and, we think, China does likewise though it chooses
not to report its purchases.
Recently published statistics of official-sector gold demand greatly under-estimate actual central bank purchases. In addition to significant on-going purchases by the People’s
Bank of China, a number of other central
banks are likely buying gold on the sly.
At the top of my list
of candidates are the reserve-rich OPEC central banks, like Saudi Arabia and possibly
Kuwait, which may use their sovereign
wealth funds to purchase metal
on their behalf without the need to
include this metal on the central bank’s books.
News of central-bank gold repatriation - and, even more
so, outright purchases - is likely to
encourage more central banks underweighted in gold to begin or
continue buying. Like much of
the new demand coming from private investors, central bankers are apt to
be purchasers for the long
haul, holding gold as a diversifier
and insurance policy against what they perceive
to be the
growing risk of U.S. dollar and European currency depreciation and debasement.
I
expect the rising trend in central bank interest and accumulation of gold will be an important force in the market for
many years to come. In the meantime, bargain hunting by a number of
central banks eager to raise
their official gold holdings without disrupting the world gold
market will help limit downside risk.
Jeffrey Nichols
NicholsonGold.com
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