I recently sat down with Mining.com to talk about gold and the outlook for the yellow metal. Here's a summary of that conversation:
Jeffrey Nichols has been a precious metal economist for over 25 years, so if there’s someone who knows every nook and cranny of the gold market, that is him.
Like many others, including American lawyer and author Jim Rickards and RBC Capital Markets, he has been predicting that the price of gold is going rise before January 1, 2017, especially taking into account that it has been up by 25% for the past six months.
“This is far better than the major stock-market averages,” he wrote in a recent op-ed. “The reason I mention this is that gold has been trading inversely to equities – and, consequently, the yellow metal stands to gain much when Wall Street tumbles, an outcome that seems increasingly likely as world stock markets edge higher despite widespread expectations of slow economic growth and disappointing corporate earnings.”
His prediction? “I think there’s a good chance that we’ll get to $1,400 before the end of the year,” he said Wednesday, in a phone interview from New York City.
That price -he added- would mark a pivotal point that would signal “the beginning of the next phase in the gold boom market.” Before too long, he sees the price of an ounce rising above the all-time high of $1,924 registered in September 2011.
Nichols, a senior economic advisor to precious metals asset firm Rosland Capital, believes there’s a good chance that gold will get to $1,400 before the end of the year.
But, despite the optimistic outlook and sudden spikes such as the $58.8 hike in one day following Brexit, Nichols says that change is not going to happen overnight.
He anticipates the price will drop further in the next few days or weeks. “There are a bunch of statistics showing the economy is a little stronger, so the markets believe that that means the Fed might increase interest rates sooner rather than later. That puts downward pressure on the gold price.”
Over time, the expert explains, these short-term factors become less important and what becomes significant is investment demand from large institutional investors, hedge funds, and large-scale speculators.
Looking beyond North America
Rosland Capital’s advisor also emphasized that it is crucial to understand fluctuations in the price of gold from a global perspective. “What matters isn’t only US economic activity and policy, but factors that influence demand in other major market areas, in Europe, in Asia, particularly in China and India, where the driving forces can be much different from what we think here in North America.”
He said that the next few months will see a rise in demand from India, given that the country is having a healthy monsoon season that is yielding large crops and, therefore, is increasing incomes in the agrarian sector.
“Farmers are very much gold-oriented and they tend to buy gold not only as an investment, but for cultural and religious reasons,” Nichols said. “For some of these people there’s really little alternative to gold, because they’re very much rural, outside of the cities, they don’t necessarily have access to banks and to broker firms, and what they traditionally do, as a store value and as a form of saving, is buy more gold when they have more income.”
Similarly, he explained, the Chinese demand is driven by higher incomes and has very little to do with what is happening in the United States and in western economies.
The expert pointed out that the key thing to take into account is that, once they buy gold, both the Chinese and the Indians are very unlikely to sell it back to the market. “They are not short-term investors, who are trading-oriented, so much as long-time savers and consumers of gold jewellery, too.”
On top of these individual buyers, China’s central bank, together with Russia’s, has been aggressively purchasing gold in recent years. These institutional players are also prone to hold onto their bullion.
The result of such practices is a reduction of the available supply. “It means that when investors in the western markets, U.S., Europe and so forth, return with force to the gold market, they find that they have to be more aggressive in bidding the price up in order to affect their purchases,” Nichols said.
Now or never?
Given the aforementioned context and forecast, Jeffrey Nichols is seeing more hedge funds and institutional speculators switching from gold-sellers to buyers. “Some of it has to do with their own interpretation of fed policy; some of it has to do with hedging stock market risk; some of it has to do, simply, with their feeling that gold is now at a point where it’s more likely to rise, so they jump on the bandwagon,” he said.
Even though he understands that there is no golden rule for everybody and that it all depends on what each investor owns, he does have a piece of advice. “They should put 5% to 10% of their investable assets in physical gold. For many, that’s bullion coins, small bars…”