(Posted: April 18, 2013)
The future price of gold will likely reflect a wide variety of prospective developments.Â That’s what makes gold so interesting . . . and so difficult to predict.
The intensity of private-sector demand in China, India, and elsewhere in Asia is high on my list of gold-price influencers.
Similarly, the magnitude of net central-bank reserve acquisitions will almost certainly play an important role.
So too could the unfolding economic and political situation in Europe.
Alternatively, gold prices may wind up hinging most of all on some black swan or unpredictable event in the ever-volatile Middle East or Korean peninsula.
But on the top of my list of prospective gold-price determinants, three related factors stand out:
- First, prospects for the U.S. economy. Will we see further recovery . . . or a slide back toward recession?
- Second, what will be the monetary-policy response expected by the financial markets and actually implemented by the Federal Reserve?
- Third, will Wall Street sustain current stock-market valuations?
With households still overly indebted, how can we expect consumers (who account for more than two-thirds of GDP) to increase spending sufficient to fuel continued economic expansion?
With the European economies stumbling and with the euro and yen both sharply devalued relative to the U.S. dollar, how can we expect exports to contribute to economic growth here at home?
With sequestration taking a growing bite out of demand, how can we expect Federal expenditures to give the economy a lift and the workforce any succor?
The answer to each of these questions is “We can’t!”
Moreover, if we are looking for a bubble, we need look no further than Wall Street where equity prices have been inflated to levels far above any rational measure of intrinsic value by $85 billion in new money created every month by the Fed.
When it becomes apparent that the economy is faltering, the Fed will step up monetary accommodation, extending its program of quantitative easing - let’s call it QE5.Â And, if the past is any guide, easy money will again send gold prices higher, just as it did in 2011 when quantitative easing sent the price of gold to its all-time high near $1,924 an ounce.
Moreover, in a faltering economy - with or without more monetary accommodation - stock-market investors will be forced to recognize that corporate earnings are insufficient to justify inflated equity prices.Â As stocks move lower, Wall Street will cease competing so successfully with gold for investment funds . . . and the yellow metal will again become the principal beneficiary of the Fed’s hyperactive printing press.
(Posted: November 7, 2012)
Tuesday’s election outcome - with President Obama returning to the White House, the Democrats retaining a weak majority in the Senate, but without enough seats to overcome a Republican veto on important legislation, and a strong Republican majority in the House of Representatives - may be the best of all possible world’s for gold investors.
Just a month ago, on October 5th, gold reached an 11-month high just over $1,795 an ounce.Â Since then, in the run up to yesterday’s election, the yellow metal slumped as low as $1,672 - reflecting the prospects that a Romney victory might bring a reversal in economic policies, a reversal that would be “unfriendly” to gold.Â Beginning late last week, as the polls shifted back in favor of Obama gold again rallied, nearly touching $1,730 before settling down on speculative profit taking in paper markets.
Gold prices are likely to remain volatile, continuing to exhibit big day-to-day and week-to-week ups and downs as the market sorts out the long-term consequences of four more years like the last four years - four more years of recession-like economic activity or worse, four more years of fiscal gridlock with annual trillion-dollar federal deficits, and most importantly for gold-price prospects, four more years of accommodative Federal Reserve monetary policies.
With the election now behind us, the market’s short-term attention will re-focus on possible Federal Reserve policy initiatives that may be discussed or even initiated at the December 12th FOMC policy-setting meeting.Â There is already talk of further quantitative easing, expectations of which could soon become a strong up-side price driver.
From a longer-term perspective, the Obama Administration will likely continue to endorse aggressive monetary stimulus as the only game in town to counter recessionary tendencies in the U.S. and global economy.Â Moreover, when Chairman Bernanke’s term expire in 2014, President Obama is likely to appoint another monetary “dove” to head the Fed.
Similarly, the financial markets (including the market for gold) will increasingly react to the impending “fiscal cliff” mandating a combined $500 billion in tax increases and spending cuts beginning at the start of the new year - that is unless Congress and the Administration can agree to a more tolerable solution to American’s fiscal profligacy - or more likely, Washington will simply “kick the can down the road,” by agreeing to revisit deficit reduction at some later date.
However this sorts itself out, America is following Europe down the road toward ill-timed fiscal restraint, restraint that will only exacerbate recessionary tendencies, and force the Fed to counter with still more stimulative monetary policies.
These and other positive price drivers and physical market fundamentals could form a “perfect storm” for gold in the closing weeks of 2012 - and, quite possibly, we could see the metal approach or even surpass its record high by year-end or early 2013.
(Posted: June 27, 2012)
Gold shed more than $50 an ounce in a blink following last Wednesdayâ€™s news from the Federal Reserve that Americaâ€™s central bank would not, at least not now, initiate another round of quantitative easing, opting instead for more muted monetary stimulus by extending its â€śOperation Twistâ€ť through year-end.
Operation Twist, in which the Fed sells short-term U.S. Treasury securities from its portfolio and simultaneously purchases longer-dated Treasury notes and bonds, is intended to stimulate the economy by lowering medium- and long-term interest rates without actually speeding up growth in the money supply. In contrast, quantitative easing (QE for short) expands the Fedâ€™s holdings of Treasury securities â€“ what some call expanding the Fedâ€™s balance sheet â€“ thereby creating new money and prompting a stepped up pace in monetary growth . . . and ultimately more inflation.
The recent correction in gold and silver prices has some precious metals pundits already writing obituaries for these metals. Last week, gold in New York was off more than three percent, falling from a recent high near $1,627 to $1,570 â€“ just about giving up all of this yearâ€™s gains and, worse yet, down some 18 percent from its all-time high last September. Meanwhile, silver fell by more than six percent from $28.75 an ounce to $26.90 â€“ and at weekâ€™s end silver was off some 3.4 percent for the year to date and more than 45 percent from its April 2011 peak.
This backtracking in gold and silver does not signal a new bearish phase for precious metals prices. At worst, it calls for more patience from investors and savers holding these metals as they await the next major move up in a still very much intact bull market. More importantly, the current weakness in gold and silver prices simply gives smart investors and fearful savers more time to buy the protection and financial insurance offered by these metals.
The timing of more monetary stimulus from the Fed â€“ and the next major upward move in gold and silver prices â€“ depends either on the economic news here in America (with bad news raising the chances of more quantitative easing sooner rather than later) or an impending financial disaster in Europe.
I expect continued weakness in the U.S. economy, especially an unacceptable low rate of new jobs creation, to prompt another round of quantitative easing (QE3) by the Fed later this year (possibly as soon as the August Federal Reserve policy-setting meeting) or in early 2013 â€“ that is, if events in Europe donâ€™t first call for coordinated monetary stimulus from central banks on both sides of the Atlantic and around the world.
Despite yet another round of funding for Europeâ€™s sickest economies and banks â€“ and regardless of whatever decisions are taken at the upcoming European summit later this week â€“ the Eurozone will continue to unravel. Thereâ€™s just no way that citizens of the peripheral economies will continue to accept austerity, collapsing economies, rising joblessness, and deteriorating living conditions for years to come.
Sooner or later, I expect an impending if not actual default by one or another sovereign borrower or failure of one or another major European bank (what some are calling a â€śLehmanâ€ť moment recalling Americaâ€™s 1998 banking crisis) will trigger an unprecedented flood of new money from the Fed, the European Central Bank, and other central banks in Europe and Asia â€“ assuring that gold and silver once again shine brightly.
Despite gold’s recent run up to new historic highs, I believe the yellow metal’s price has far to go - both in future percentage appreciation and duration before the great gold bull market comes to its ultimate cyclical end.
Right now, there is no evidence of a buying frenzy to suggest we are anywhere near a long-term top . . . but there are plenty of rock-solid fundamentals that suggest the market is healthy with plenty of room to move higher.Â Moreover, the world economic and geopolitical environment remains very supportive - and seems likely to remain pro-gold for years to come.
My forecast, published here on NicholsOnGold and in other speeches and reports, of $1700 gold by year-end 2011, now seems within easy reach.
And this is just the beginning of gold’s next great leap upward, a leap that will carry the metal to $2000 an ounce in 2012 - with prices heading still-higher, quite possibly to $3000, $4000 and maybe even $5000 an ounce by the mid-to-late years of the decade.
From a long-term perspective, gold prices near $1500, should we ever return to that level, $1600, or even $1700 an ounce will prove to be bargains.
As I have cautioned in the past, expect high two-way price volatility and periodic sharp corrections, corrections that some will mistake as the end of the bull market - but consider these opportunities for “scale-down” buying, opportunities to acquire additional metal at bargain-basement prices.
A Pause that Refreshes
Rising some $300 an ounce from its January 2011 low point and more than $120 in just the past few weeks, gold has scored a series of successive all-time highs.Â Now, however, there is certainly some risk of a sharp short-term correction, particularly if the political-economic news on either side of the Atlantic looks less threatening to financial market stability.
A political compromise to raise the U.S. Treasury debt ceiling and agreement to narrow the Federal deficit in future years that avoids any downgrading of Treasury debt by the rating agencies would remove or reduce an important source of anxiety that has contributed to gold’s recent strength.Â News of positive movement toward or actual completion of an agreement could trigger a swift - but temporary - gold-price retreat.
Speculative long positions held by institutional traders on world derivative markets have increased sharply in recent days.Â Should the market lose upward momentum, speculative pressures could quickly turn negative.Â Moreover, if the short-term news turn bearish for gold, liquidation of these long positions and/or institution of new speculative short positions could leave the market especially vulnerable to a swift correction .
Adding to my short-term caution has been a 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 in recent weeks as prices rose above $1550 and approached $1600 an ounce.
I expect Indian and Chinese scrap reflows will diminish significantly over time, even at high price levels.Â Â In the meanwhile, should gold approach or fall below the $1550 level, scrap supplies will quickly abate and price-sensitive demand, smelling a bargain, will re-appear.
Hot Summer, Hotter Autumn
Contrary to the view expressed by most serious gold analysts, we said in past reports that gold would not pause for its typical summer vacation — and it hasn’t!Â Nor would we see this summer a seasonal relaxation in price volatility.Â Indeed, it has been a very hot summer as gold moved up smartly to achieve new all-time highs with plenty of fireworks and price volatility both up and down.
However, come September, positive seasonal factors will kick in - and, other things being equal, give gold still more firepower. There are three distinct sources of seasonal demand, all of which will likely contribute to demand and higher prices as we move into the later few months of 2011: Â First, jewelry manufacturers step up fabrication demand ahead of Christmas gift-giving late in the year; second, Indian dealers begin stocking up ahead of the autumn festivals and wedding season, and in expectation of good harvests and healthy household incomes in the gold-friendly agrarian sector; and, third, later in the year and in early 2012, we should expect a sharp rise in gold investment and jewelry demand associated with the approaching Chinese lunar new year.
For sure, irrespective of the season, price-sensitive Asian demand - principally from China and India - for physical metal will continue to underpin these markets and limit downside risks.
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.
Central Banks Rediscover Gold
Official statistics published monthly by the IMF show that central banks, as a group, have been busy buying gold.Â Russia, India, China, Saudi Arabia, Mexico, and Brazil have been among the big buyers in recent years and a number of other countries have added smaller amounts of gold to their official reserves.Â One big surprise was Mexico’s purchase of some 100 tons earlier this year as a hedge against the possible decline in the value of their U.S. dollar reserve holdings.
Moreover, a recent survey of 80 central bank reserve managers predicted that the most significant change in their official reserve holdings in the next 10 years will be their intentional build up in gold reserves.Â They also predicted that gold will be their best performing asset class over the next year and sovereign debt defaults will be their principal risk.
Sovereign Debt Crisis Prompts Safe-Haven Demand
European Central Bank president Jean-Claude Trichet a few weeks ago raised the alarm level on Europe’s debt crisis to “red,” warning that the crisis is nowhere close to being resolved . . . and he also warned of the “potential contagion effects across the [European] Union and beyond.”
Meanwhile, Europe’s sovereign debt problems are worsening and the likelihood of sovereign default by one or another of the more vulnerable periphery economies is increasing, despite the past week’s patchwork aid package that avoided (or more likely postponed) a sovereign default by Greece.
Despite all the talk among finance ministers and the European central bank, it looks like the future fate of “periphery’ country debt is increasingly in the hands of the credit rating agencies who view any delay in full repayment as partial default.
Several factors suggest that the European debt crisis will continue to worsen:
Longer term, the more restrictive fiscal policies the periphery nations (Portugal, Ireland, Italy, Greece, and Spain - the so-called PIIGS) have been asked to accept will push their economies deeper into recession - and increase, rather than decrease, government deficits and borrowing needs for years to come.
More immediately, the downgrading of sovereign debt by the rating agencies raises interest rates and borrowing costs - and pushes these countries closer to the brink (a lesson that the United States needs to learn before it also finds itself with higher Treasury borrowing costs should we suffer a cut in our own debt ratings on U.S. Treasury securities).
As credit ratings decline for the peripheral countries, the rising cost of refinancing maturing debt make it all that much more difficult to keep their heads above water.Â Reflecting the recent deterioration in credit ratings, Greek two-year bond yields last week were over 35%, Spanish 10-year bonds hit a record 6.3%, and Italian 10-year bonds were Â also yielding around 6%.Â Higher borrowing costs will increase government deficits and make repayment of past debt all the more difficult.
An important aspect of the crisis is that default on European sovereign debt, debt that is held by many European banks, will require the banks to write-down these questionable assets, leaving them with insufficient capital and effectively bankrupt.
The broader effect of bank failures on the European economy, capital markets, and banking system could be far more devastating than the Bear Sterns and Lehman Brothers debacle in the United States - and would likely result in the European Central Bank along with the U.S. Federal Reserve flooding financial markets with newly created money, depreciating paper currencies, inflating prices, and boosting gold.
I continue to believe that ultimately the euro, Europe’s single currency, will be replaced by a multi-currency system - with the core countries possibly retaining the euro while the periphery nations will revert each to their own monetary unit or a deeply devalued renamed euro of their own.
With no solution in sight, Europeans will continue to abandon the euro for “safe havens” including gold and, ironically, the U.S. dollar.Â At the same time, the problems of the euro will discourage its acceptance as a reserve currency by some central banks - and make gold an even more attractive alternative.
Meanwhile, Back at the Fed
The U.S. economy is still mired in recession, or worse.Â Nearly everyone knows it, even if the official statistics show some positive growth in real GDP.Â Unemployment remains stuck at over 9 percent.Â The huge inventory of foreclosed homes held by banks continues to weigh heavily on home prices.Â Various economic indicators released in the past few days and weeks are pointing to the second dip in what may be called 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.Â Instead, they are arguing for restrictive economic policies that, if enacted, would exacerbate the developing downturn . . . and which future history books will liken to the policy mistakes of the 1930.
The Fed also fails to see, at least publically, the writing on the wall.Â Having ended its program of quantitative easing at the end of June 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.Â Contrary to popular belief, the Fed can stimulate the economy and liquefy the financial system through open-market purchases of securities and even real assets, not just Treasury securities but stocks, corporate bonds, commercial paper, mortgages, credit-card debt, student loans and even real estate.
The resumption of quantitative easing (QE3) or some other program of monetary stimulus will be reflected in a swift and significant jump in gold prices.
As I have said in past reports and speeches, 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 pragmatic policy of higher inflation that will deflate the ratio of outstanding debt to nominal gross domestic product (GDP) to historically acceptable and manageable levels.Â This is what we did in the 1970s, a decade of stagflation, and we’re already doing it again.Â Indeed, under Chairman Bernanke’s lead, the Fed is 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.Â 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.
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 in the months and years ahead.
Other Pro-Gold Trends Continue
Meanwhile, other important pro-gold trends continue unabated.Â These bullish trends include:
- The growth in Chinese, Indian, and other Asian gold demand accompanying their expanding economies, growing wealth, rising inflation, and historic affinity to gold in jewelry and as a saving and investment medium.
- The expansion of the gold investment infrastructure around the world - such as the development of gold exchange-traded funds and other forms of physical gold . . . or the implementation of gold distribution systems through banks and other retail outlets in China, India, and elsewhere).
- The recognition of gold as a worthy asset class for inclusion in investment programs and portfolios of individuals; pensions, endowments and other institutions; sovereign wealth funds; and central banks.
- The relative stagnation of new gold-mine production (certainly in comparison to the growth in gold demand) and the rising costs of discovery, development, and operation of new mines.