Archive for Gold Briefs

Gold - Just an Innocent Bystander

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“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.”

That was my view published on NicholsOnGold.com in late August.

Gold has certainly taken a dive - and could stumble further in the days immediately ahead - but I think we will see the yellow metal begin its comeback sooner rather than later, possible in the next few days.

This summer we raised our year-end price forecast to $1,850 an ounce - but remained reluctant to adjust our expectations upward as the price moved past this level and briefly traded over $1,900 an ounce in early September.

Although physical demand in world bullion markets remained firm, it seemed to me that the price was moving up too fast too soon as institutional speculators extended their “long” positions in “paper” derivative markets.

Shoot the Speculators

Now - rather than any dramatic reversal in world physical markets - it looks like the precipitous price decline in recent days can be blamed entirely on these same speculators (including some prominent hedge funds and the trading desks of the big Wall Street banks) reversing their positions or cashing out of gold altogether.

Nothing that has occurred in the past few days in any way diminishes my long-term enthusiasm about gold-price prospects.  The same bullish gold-market fundamentals and macroeconomic trends that I have been discussing for many years now remain in place and promise significantly higher gold prices over the next five years or longer.

It is important to remember that violent sell-offs in equity and other asset markets typically spill over into the gold market . . . but after an initial selling wave, gold tends to disassociate itself from and act independently other asset markets.

At first, when other assets are under extreme pressure, as has been the case this past week, gold’s immediate reaction reflects reflexive selling by institutional speculators - including momentum, program, and other “black box” traders.  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.  In a sense, gold is an “innocent bystander.”

Nothing We Haven’t Seen Before

While the magnitude of gold’s decline seems stunning in absolute terms, keep in mind it is not unusual for gold prices to correct by 10%, 15%, 20% or even more after a run-up the likes of which we’ve seen this year.  Old timers may recall the 1970s, when we saw at least a couple of bigger percentage corrections in the midst of a long-lasting bull market.

Now, from its September 6th all-time high around $1,923 an ounce to this Friday’s (September 23rd) low around $1,628 an ounce in New York trading, we are off just about 15 percent - certainly not so much when you consider the previous advance . . . certainly not so much to those who remember gold’s volatile price history . . . and certainly not so much as to cause much alarm among those who pay close attention to gold’s fundamentals.

Fundamentals Count

And speaking of fundamentals — with the exception perhaps of India — physical demand in recent days has held of fairly well.  Meanwhile, it is not unusual for more price-sensitive trading-oriented Indian gold dealers to pause, at times like this, for the dust to settle before stepping back as buyers.  For sure, there is nothing here to diminish India’s long-term appetite for gold.

Meanwhile, my China contacts report no immediate diminution in retail gold demand from the world’s biggest national gold market.  Driving Asian demand - in India, China, and elsewhere has been the continuing rise in household incomes in tandem with worrisome inflation - and this pro-gold combination is unlikely to change in the foreseeable future.

Watch the Central Banks

For the past few years (in speeches, published articles, client reports, and on my website NicholsOnGold.com), I’ve been talking a lot about the revival and growth of central bank gold interest - and its long-term significance to the market and the future price.

I believe that a few central banks - central banks that have been fairly regular buyers, acquiring gold month in and month out - have already stepped up their purchases in reaction to the lower, more attractive, price levels now prevailing.  And other countries are likely to add to their own gold reserves in the days ahead as it becomes more apparent this correction has run its course.

The central banks of Russia and China (which does not report or publicize its on-going gold purchases) are the first that come to mind, but quite possibly other central banks will also use this episode of gold-price weakness to acquire metal without causing any overt market reaction.

In my book, gold’s own supply/demand situation and other recent-year institutional or structural changes in the gold market per se (such as the introduction and growth of gold exchange-traded funds or the legalization of private gold investment in China) suggest more gold price strength ahead.

And Shoot the Politicians Too

So, too, does the inability and disarray among of our economic policymakers and politicians, those entrusted with our financial and monetary wellbeing, to frame appropriate policies that would deal effectively with today’s economic realities.

Indeed, U.S. and European economic prospects continue to deteriorate, suggesting we will see still more desperate monetary stimulus from the Fed and the European Central Bank (the ECB) before the end of this year.

Here in the United States, the Fed will be facing continued signs of renewed recession or recession-like business and employment conditions.

Across the Atlantic, the ECB will be struggling to prevent the approaching Greek sovereign debt default and the insolvency of some European banks holding Greek sovereign debt.  Some fear this would be a catastrophe far worse than the Lehman Brothers bankruptcy - with dire consequences for the world economy.

While these problems are unlikely to trigger any immediate policy response from the Fed or the ECB in the next week or two, as pessimism grows among investors and traders, expectations of further monetary accommodation could stimulate more investment demand in the days and weeks ahead.

So, too, could U.S. Congressional bickering and inaction on both the U.S. Treasury debt ceiling and on the Federal budget impasse as these issues again become headline news.

Long-Term Buyers Rule

To recap:  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 forecast of much higher gold prices in the next several years.

Importantly, to the gold-price outlook, today’s buyers, both private investors and central banks, are likely to be long-term holders.  Much of this gold, once bought, is unlikely to be resold any time soon even at much higher price levels.  For central banks, the holding period will be measured in decades if not longer.  This promises less liquidity, more volatility, and much higher prices in the years ahead.

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Gold Sizzles

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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.

For more on gold’s day-to-day developments and short-term prospects, follow me on Twitter @NicholsOnGold.

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Dog Days of Summer: Cooling Off for Gold Unlikely

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The days and weeks ahead could be tumultuous for gold with the yellow metal’s price primed to move one way or the other depending on news from European finance ministers, the European Central Bank, the Greek Parliament and, last but not least, the Fed’s FOMC policy-setting committee and Chairman Bernanke’s news conference later this week.

Technically, gold remains range bound with good support, as we saw last week, between $1515-$1522 and overhead resistance in the $1545-$1555 range.  A break out in either direction, perhaps triggered by news of a more fundamental nature, could signal a bigger move.  Should prices fall, we would view this as a “scale-down” buying opportunity.

Zoned Out

Eurozone finance ministers meeting over the past week-end once again could not agree on a bail-out package for functionally bankrupt Greece, which runs out of cash to pay its debts in the next few weeks . . . and even if they could agree the European Central Bank (ECB) threatens to declare a Greek default if private lenders don’t share the burden with Greece’s public-sector creditors.

The chief risk is that a number of major French and German banks would have to mark down the value of Greek debt on their books, leaving them undercapitalized and in need of recapitalization by the ECB to remain solvent.  Moreover, as credit ratings decline for all of the peripheral countries, their rising interest costs to refinance maturing debt make it all that much more difficult to keep their heads above water.

Quite possibly the Greek parliament in a vote of confidence this week for Prime Minister Papandreou will accept more austerity measures as part of the deal to win Eurozone funding . . . but even this “favorable” outcome will only provoke more rioting in the streets of Athens by public-sector workers unwilling to accept more of the burden of adjustment and a further erosion in their living standards.

Chances are the Eurozone finance ministers and European Central Bank will find a way to postpone the hard decisions that will ultimately end Europe’s failed experiment with a single currency.  But, sooner or later, whatever happens, it is difficult to imagine a scenario in which gold does not emerge the winner, even if the immediate short-run reaction is a sell-off in gold, as we have seen at the start of past financial panics (think Lehman Brothers) as investors seek the liquidity of cash.

Eyes on the Fed

Meanwhile, U.S. and world stock markets are now undeniably in a downtrend if not a full-blown bear market . . . and incoming economic indicators are pointing to a second phase in what is quickly becoming a double-dip recession.

So far, most Washington politicos and Wall Street bankers are in denial, refusing to see the worsening signs of renewed recession.  Instead, they are arguing for restrictive economic policies that, if enacted, would exacerbate the developing downturn . . . and which the history books would liken to the policy mistakes of the 1930.

The Fed also fails to see, at least publically, the writing on the wall - and is preparing to end its program of monetary easing through the purchase of government bonds, a program that both creates new money in an attempt to liquefy the economy and finances the Federal debt at low interest rates without having to go hat in hand to our foreign creditors.

All eyes and ears in the gold and world financial markets will be focused later this week on the June FOMC meeting and Chairman Bernanke’s press conference for the Fed’s assessment of the economy, inflation and employment prospects, and any hints of forthcoming adjustments to Fed policy.

If the Fed, indeed, ends its program of quantitative easing at month-end as scheduled, it will - in my view - soon be forced by rising unemployment and sluggish business activity to resume monetary stimulus in one form or another.  Perhaps not QE2 - a second round of quantitative easing might be difficult to swallow - but a rose of some other name.

We think the only viable and politically acceptable means for America to dig itself out of its unbearable burden of excess debt - federal, state and local, housing, and other private-sector debt - is to pursue a policy of higher inflation that will deflate the ratio of outstanding debt to nominal gross domestic product (GDP) to historically acceptable and manageable levels.  Indeed, under Chairman Bernanke’s lead, the Fed is already quietly pursuing this policy of targeting somewhat higher U.S. price inflation.

Pursuit of a mildly inflationary monetary policy will not however excuse the Congress and Administration from developing a responsible believable program of long-term spending restraint and deficit reduction.  However, now is not yet the time to impose these restrictions on an ailing economy - though articulation of a realistic bi-partisan plan for long-run deficit and debt reduction would help calm world financial and currency markets.

Adjusted for consumer price inflation, using official government data (data that tends to seriously underreport actual inflation felt by American households), suggests that gold should be selling today for at least $2500 an ounce . . . and considerably more if we were to account for the government’s underreporting of actual inflation.

Paper Tiger

Europe’s troubles and the collapse of the euro as we now know it will make the dollar look good by comparison . . . and a rising dollar against the euro could briefly dent gold as traders fall back of the historical inverse relationship between gold and the U.S. dollar exchange rate vis-a-vis competing currencies in world foreign exchange markets.

But a rising dollar would be nothing more than a “paper tiger” soon to be deflated by America’s budget mess, sagging economy, and renewed U.S. monetary stimulus.  As noted at the outset of this brief essay, a setback for gold should be greeted by investors as another buying opportunity as it surely would by those central banks wishing to build gold holdings without disruptively sending gold prices higher.

Hot Summer Ahead

Most gold pundits are anticipating a traditionally quiet summer of the yellow metal.  Historically, gold prices have exhibited strong seasonality - with relative weakness in the Northern Hemisphere summer months and maximum relative strength late in the calendar year.  To a large extent, this seasonal pattern has been a reflection of culturally determined buying habits in the major gold-consuming countries and regions.

For example, India - often the biggest gold-consuming nation - usually enjoys a pick up in gold buying in September when harvests boost income and spending in the agrarian sector, a sector with a high propensity to buy gold for jewelry or saving with any excess income that comes their way.  Around the same time begins a string of festivals that continue into May, festivals that are propitious for marriage, hence requiring gold dowries.  These festivals are also believed by many Indians to be a lucky time to buy gold as an investment.

Also in September, in the United States and other Western nations, jewelry manufacturers begin stocking up and fabricating gold jewelry for the December Christmas gift-giving season followed closely by the February 14th Valentine’s day, which is also accompanied by much gold jewelry gifting.

Around the same time, the Chinese or Lunar New Year occurring in January or February heralds in a period of gold demand for jewelry fabrication and gift giving across Greater China . . . and is also seen by many as a propitious time for gold investment.

But these seasonal factors are diminishing - largely because investment demand, which knows no season, is growing rapidly in importance and, to some extent, displacing jewelry demand.  First, there is the expansion of secular, long-term, hoarding demand for gold reflecting the growth in incomes in Greater China and India.  As incomes rise, so does demand for gold jewelry and investment bars, in these countries - which increasingly occurs independently of seasonal, festival, marriage, or gift-giving considerations.

In many countries, too, we are seeing an increase in official or central bank buying:  In recent years the list of gold buyers has included China, India, Russia, and a host of other countries for whom seasonality plays no role whatsoever in the decision to accumulate gold reserves and diversify away from the U.S. dollar.

And, importantly, powerful economic and geopolitical forces that also exhibit no seasonality are now increasingly governing short-term investment and speculative trading demand for gold.  The extent to which the typical summer “doldrums” for gold will be overwhelmed by unfolding economic and political events remains to be seen.

But, clearly, gold-price direction and volatility will be affected in the weeks and months ahead by the economic developments discussed above, namely U.S. monetary and federal budget policies as well as Europe’s sovereign debt crisis and the coming disintegration of region’s common currency.

Moreover, what we haven’t talked about the potential for events across North Africa and the Middle East to trigger a rush into gold - because instability spreads to Iran and/or Saudi Arabia; because Afghanistan or Iraq deteriorate into all-out civil war; because democratic reform in Egypt or Tunisia is replaced with new tyrants less friendly to the West; because regime change in Libya, Syria, or Yemen herald in worse; or because oil supplies and prices become less secure.

Clearly, events in this region are not proceeding as first imagined by Western powers.

So, it remains to be seen if the coming summer will be a period of calm and relative stability for gold . . . or a period of great “sturm und drang” with sharply rising prices and greater volatility.  Odds favor the later.

Whatever the immediate future holds in store, we remain firmly committed to our bullish gold-price forecast with the metal trading at or close to $1700 later this year with still higher prices in the years ahead.

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Gold & Silver: The Long March Upward Resumes

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Just a few weeks ago, gold and silver prices were soaring, almost beyond belief.  A growing chorus of investors, analysts, and financial journalists opined that the “bubble” in precious metals prices would soon pop - and many predicted an imminent long-term bear market was just around the corner.

And, when precious metals prices tumbled - gold from its all-time intraday high of $1,576.50 on May 1st to an intraday low of $1,463.20 just four days later and silver from $49.59 on April 28th to $32.44 a couple of weeks later - pundits were quick to declare that the bubble burst . . . and many pronounced that the bull market in these metals was over, done, kaput, much like the end of the world that was also predicted around the same time and similarly garnered much media attention.

As gold and silver rocketed higher in March and April, I warned that prices were rising too far, to fast . . . and chances of an imminent correction were also rising day by day.

So it came as no surprise when gold and silver prices shifted into reverse - but I never doubted that this was anything more than a healthy correction in a long-term bull market, a bull market that had years to go and would ultimately carry gold and silver prices to multiples of their recent highs.

Although gold’s recent correction generated much media attention, from peak to trough it amounted to less than ten percent.  Early in my career as an economist and precious metals analyst, in the midst of a major long-term bull market, I saw the yellow metal retreat some 50 percent from over $200 an ounce in 1974 to near $100 in 1975.  I also remember what followed:  Gold rose by more than 700 percent to a long-term cyclical peak of $875 in January 1980.

Silver’s recent correction, about 35 percent from its April high to its May low point, attracted even more attention because the preceding advance had been so meteoric.  But, like gold, silver saw a number of short-term corrections in the midst of the great 1970s bull market, the biggest fall amounting to more than 60 percent.

What’s a Bubble?

A “speculative bubble” or “financial mania” is generally defined as a rapid run-up or spike in the price of an asset or asset class (equities, bonds, commodities, real estate, or even tulips, for example) caused by excessive or exaggerated expectations of future price appreciation, appreciation unrelated to market fundamentals, realistic trends in supply and demand, or “intrinsic” value.  Bubbles are driven by emotion, fear of “missing the boat” as an asset appreciates, and they are generally characterized by a high volume of trading and public participation.

By this definition, the recent rise in gold and silver prices was hardly a bubble.  While speculative demand by “momentum” traders in futures markets contributed to the rapid ascent (just as selling by the same traders contributed to the subsequent swift decline), these speculators are hardly irrational players driven by emotion.  Quite the opposite, they take long and short positions based on trading algorithms or years of experience watching markets rise and fall.

Instead, the long-term bull market in these precious metals has been, and will continue to be, driven by rock-solid long-run fundamentals including macroeconomic, geopolitical, and demographic trends, as well as each metal’s own supply/demand situation and outlook - all of which suggest gold and silver prices have a long way to go.

This is not to say we won’t see future price volatility in gold - and, even more so, in silver - with price swings that again attract attention, leading some to predict that sharp corrections are the start of a long-term bear market rather than a great buying opportunity like we saw in recent weeks when gold neared $1470 or silver traded under $34 an ounce.

Monetary Assets

Importantly, both gold and silver are monetary assets, a characteristic not shared by equities, bonds, commodities, or real estate.  As monetary assets, they are bought by a growing number of investors and savers who hold and hoard these metals, not only for profit when prices rise, but also, or even more so, as lasting stores of value in lieu of U.S. dollars, euros, Japanese yen, Chinese yuan, Indian rupees or whatever currency circulates in their home countries.  Even central banks are again buying gold as a monetary asset and store of value rather than acquiring and holding more depreciating foreign-currency assets.

Many of those in China, India, and other Asian nations who buy gold or silver as monetary assets, have contributed to higher prices for these metals - but they are not acting irrationally or emotionally.  Instead, as their household incomes rise, they are following the long historical and cultural traditions of their ancestors who over the millennia have held and hoarded these metals as lasting stores of value.

Even in the United States and Western Europe, many are buying gold and silver, not for fear of “missing the boat” and losing the opportunity for quick profit on a rising asset.  Instead, they are reacting to the current economic and political environment that on both sides of the Atlantic, and environment that has a growing number of investors and savers worried misguided government actions and policies are threatening their future economic security and wellbeing.

There is no simple answer or single reason why gold and silver have been moving from strength to strength for more than a decade - irrespective of the occasional price setbacks or corrections that have led some would-be Jeremiahs to foresee the death of gold and silver as worthy investment and savings assets.

Bullish Building Blocks

Over the past many years here on NicholsOnGold, in many public speeches, articles, and client presentations, I have discussed at length some of the building blocks underpinning the long-run bull market for gold and silver - but for readers worried that the world of precious metals, as we know it, is facing an early demise here are the highlights of the bullish case for gold and silver:

  • Current and prospective U.S. monetary and fiscal policies promise further erosion in the U.S. dollar overseas, an acceleration in consumer price inflation at home, and growing demand for gold as a hedge asset. Even with the end of quantitative easing next month, the Fed will feel compelled by persistently sluggish business conditions and high unemployment to keep real inflation-adjusted interest rates low or negative and the economy awash in liquidity. Moreover, despite all the rhetoric from both political parties, Americans will not soon agree to take the tough steps necessary to rein in the Federal budget and shrink the country’s immense Federal debt.
  • Inflation is not only a U.S. disease. It is accelerating virtually everywhere - China, India, Europe, America, Africa and the Middle East - thanks to many years of easy money policies worldwide, high and rising oil prices (in part, a consequence of political unrest and uncertainties in some of the oil-exporting countries) and, for a variety of reasons, rising agricultural and industrial commodity prices.
  • Fear of sovereign-debt defaults and bank failures in one or more of Europe’s “periphery” economies is also prompting many investors and fund managers to buy gold as the preeminent safe-haven asset. These periphery countries - including Greece, Portugal, Spain, and Ireland - continue to pursue self-defeating fiscal policies. Despite tax increases and deep spending cuts, their debt ratings are falling and the cost of refinancing sovereign debt is increasingly prohibitive. Moreover, the stronger “core” countries - led by Germany and France - are increasingly reluctant to bail out their southern neighbors. As a result, the viability of Europe’s common currency, the euro, is increasingly doubtful - and a break-up of the single-currency system would send gold and silver prices sharply higher.
  • Political turmoil across North Africa and the Middle East is prompting an increase in world gold demand - both as a reflection of heightened geopolitical uncertainties and in response to higher oil prices. Civil war in Libya continues and protests are raging in Syria, Bahrain and Yemen. No one knows where this “Arab Spring” will stop, which country may be next, and what the long-term consequences will be for political stability within these countries and throughout the region, or for future world oil supplies and prices.
  • The growing affluence of the emerging-economy nations, especially the two big-population countries, China and India, has already had - and will continue to have - a profound influence on the world gold and silver markets with rising long-term demand and prices of these metals. China’s already huge and growing appetite for gold - both jewelry and investment - will continue in tandem with economic growth, rising personal incomes, worrisome inflation expectations, and pro-gold government policies. Long-term gold demand from India and other traditional Asian gold markets is also rising, reflecting (as in China) growth in personal incomes and wealth, worrisome inflation, and the development of new gold investment vehicles and distribution channels.
  • Increasing central-bank interest in gold will continue to underpin the yellow metal’s price -as countries (such as China, Russia, and some of the OPEC nations) under-weighted in gold and over-weighted in U.S. dollar reserves seek the diversification offered by gold. Mexico purchased more than 93 tons earlier this year, joining a long list of countries that have increased gold holdings in the past couple of years. In addition to China, Russia, India, Saudi Arabia, and Mexico - all big buyers - the list of central banks that have increased gold reserves in the last couple of years includes Thailand, the Philippines, Sri Lanka, Mauritius, Kazakhstan, Venezuela, Bolivia, Peru and probably others that have bought gold surreptitiously and choose not to report an increase in their official gold holdings.
  • A growing recognition and appreciation of precious metals, both gold and silver, as a legitimate investment class is prompting greater participation from both retail and institutional investors in the United States and Europe. At the same time, the development of new products and channels of distribution - especially the growing popularity of gold and silver exchange-traded funds - makes gold and silver more convenient, more attractive, and more accessible to more investors around the world. It is especially noteworthy to see the entry of a number of leading hedge funds, pensions, endowments and insurance companies - some as short-term traders but many as long-term investors with a time horizon often of many years or decades.
  • As demand continues to grow, I expect no more than marginal growth in world gold-mine production for at least the next five years. Moreover, some of the biggest gold-mining nations, like China and Russia, are increasingly absorbing more of their own production for domestic jewelry consumption, investment, and additions to central bank reserves.

Together these bullish factors are responsible for a growing gap between new mine supply and aggregate demand - a gap that can be closed only by much higher prices in the years ahead.  Call it a “bubble” if you will - but gold and silver prices are heading higher, much higher, in the months and years ahead.

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