As
unrest and regime change threatens a swath of countries across North Africa
and the Middle East, gold is reverting to its historic role as the preeminent
safe haven - but it’s price is just beginning to reflect the rise in
political and economic uncertainty in the region and around the world.
Frankly,
given the political prospects for a number of strategic countries across the
region, the possibility of long-term uncertainties, and the threat to oil
supplies, I’m surprised gold has not performed better, especially in
light of its own bullish market fundamentals.
Inflation
Pressures:
Global food and commodity prices have been on the rise for the past year,
consumer price inflation has been unacceptably high China, India, and other
emerging economies . . . and signs of rising inflation are beginning to
appear in the United States.
U.S.
Monetary Policy:
Years of reflationary monetary policies in the United States - and the
financing of America’s federal budget deficit with newly minted money,
euphemistically called “quantitative easing” by our central
bankers - has, in effect, underwritten higher commodity prices and made the
coming acceleration in U.S. inflation inevitable.
Oil
Prices:
Higher oil and gasoline prices, partly a consequence of Mideast unrest -and
partly a consequence of the Fed’s dollar debasing policies - are just
now beginning to trigger more widespread price pressures across the global
economy. Global economic activity will suffer as higher prices - like a
tax paid to oil producers, rather than the U.S. Treasury, erode consumer
purchasing power and restrain business investment.
Faced
with stagflation, America’s central bankers may talk tough about
inflation - but will continue their stimulative policies to both promote
employment and reduce the burden of outstanding private- and public-sector
debt by currency debasement.
Bullish
Fundamentals:
Even without North African-Mideast turmoil and higher oil prices,
gold’s own bullish market fundamentals should be enough to push the
yellow metal’s price significantly higher this year and beyond.
Most
importantly, gold will also benefit from unfettered Asian buying and central
bank reserve accumulation. Both are sustainable long-term trends that
not only bid up current prices . . . but also put gold in strong hands that
will hold it for years, if not generations.
Global
Market:
Gold investors and traders, sitting in their homes and offices here the
United States may think that the day-to-day fluctuations - as well as the
long-term trend - in the metal’s price reflect the wiggles in U.S.
interest rates, the Federal budget debate raging in Washington, or the latest
news on Wall Street.
But
what also matters as much, if not more, is the seemingly insatiable appetite
for gold in China, India, and across much of Asia where many gold investors
and jewelry consumers are ignorant of economic developments here in the
United States but are buying because that is what they do when their own
incomes are growing or their home country’s domestic inflation rates are
worrisome.
Central
Banks:
After two decades of net central bank sales, the official sector has also
become an important long-term buyer in the past couple of years. Much
of the buying of late has come from China and Russia, both of which buy from
domestic gold production, thereby denying supply from the world market.
And, possibly one or more of the reserve rich oil-exporting countries have
also bought gold in light of popular unrest in their own neighborhood or
simply to diversify reserve holdings and reduce dependence on the U.S.
dollar.
In
fact, all of the central banks that have bought gold in recent years - a list
that includes not only China, Russia, and Saudi Arabia but India, Sri Lanka,
Bangladesh, the Philippines, Thailand, and others - today remain underweighted
in gold. All still hold the lion’s share of their official
reserves in U.S. dollar securities . . . and all have an incentive to
accumulate gold on price declines. By doing so, they limit the downside
risk to private gold investors and speculators.
Higher
Prices Ahead:
So far, there’s been no panic rush by investors into gold and silver .
. . and the markets show no signs of a blow-off or irrational bubble.
Investor
participation, both retail and institutional, in physical and futures
markets, though growing, remains low. As investor participation
continues to grow - as gold and silver go more mainstream - there will be
more funds chasing a limited number of ounces . . . or tons of metal.
Unlike dollars or euros or yuan, central bankers can’t just print more
of it.
The
uncertain geopolitical outlook and impact of higher oil prices - along with
gold’s very bullish supply/demand fundamentals and growing investor
participation - suggest the yellow metal’s price could easily reach the
vicinity of $1,700 an ounce by late this year - that’s about a 19
percent increase from recent prices - with $2,000 gold likely in 2012 and
still much higher prices in subsequent years.
Jeffrey
Nichols
NicholsonGold.com
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