In my view, there is a very high probability gold will surpass $2000 an ounce by year-end 2013 - and it could go much higher. Moreover, by mid-decade, the metal’s price could double or even triple from recent levels.
Looking backward, gold is off some $250-$260 from its September 2011 all-time high of $1924 an ounce. This is a decline of roughly 13 percent - in line with past bull-market corrections.
In the weeks ahead, much depends on institutional speculators at the big banks and hedge funds. In the past year or so, these large-scale players have made good money trading futures, options, and other leveraged derivatives based on technical trading models and the latest bit of news — economic or political — out of Washington.
As a result, gold prices have been range bound, most recently trading between $1625 and $1695. There is even some chance the price of gold, under pressure from speculative selling, will temporarily dip lower - but, sooner or later, we should see gold break out on the upside, surpassing $1700, and then resuming its long-term bull-market uptrend.
In brief, here are the key bull points promising higher gold prices ahead:
Continuing official-sector gold accumulation - with China and Russia leading the way as substantial buyers . . . but other emerging-economy central banks are also continuing to build their official gold reserves.
These countries consider their U.S. dollar- and euro-denominated investments to be of higher risk and are trying to raise the proportion of official reserves held in the form of physical gold.
At the same time, private-sector physical demand for investment and jewelry from China, India, and other Southeast Asian gold-friendly countries remains firm - and will continue to grow in the years ahead.
Many investors and jewelry buyers in China, Hong Kong, India, Turkey and elsewhere in Southeast Asia and the Middle East care little of the daily economic and political news out of New York, London and other Western financial centers. They just know it’s a good time to buy or have spare income seeking a secure home.
Importantly, the recently announced introduction of gold ETFs on the Shanghai Stock Exchange (probably by mid-year) will encourage more gold accumulation by retail and individual investors, just as it has in the United States and elsewhere.
These gold buyers — both central banks and private sector — are long-term hoarders, that is “strong hands” unlikely to sell back to the world market even at much higher prices. In fact, gold exports from China are prohibited — so any gold that enters the country is indefinitely off the world market and unavailable to meet demand elsewhere.
As a result - unbeknownst to most gold analysts and traders - the physical market is becoming increasingly tight with bullion bars going on a one-way ticket to the Asian markets (as evidenced by the high bar premiums in China and Hong Kong) and to a number of central banks.
Put another way, gold is moving into strong hands — and recent buyers, be they the “man in the street” across Asia or the reserve managers at central banks — are unlikely to sell anytime soon, even at much higher prices.
Sub-par, recession-like, business conditions in the United States with persistently high unemployment — aggravated by inappropriately restrictive fiscal policy - assures continued monetary accommodation by the Fed for at least a couple of years. Ditto for Europe.
Meanwhile, if it’s politics as usual in Washington - with continued gridlock over Federal spending, taxes, and the debt ceiling - we could see the credit-rating agencies downgrade U.S. Treasury debt, sending the greenback lower and gold higher.
Further Mideast turmoil remains an unpredictable wild card that could give gold a surprising skyward kick. The possibility of regime change in Saudi Arabia and other Persian Gulf states, renewed unrest in Egypt, Syria’s civil war somehow affecting other nations in the region, hostilities between Israel and Iran - any of these could result in a big jump in oil prices, big enough to aggravate global inflation and retard economic activity.
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