Archive for Jeffrey Nichols

Gold - Recovery and Resurrection

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Gold is coming to life again - and looks poised to move higher in the weeks and months ahead.  Having fallen precipitously from its all-time high just over $1,923 an ounce in early September to a recent low near $1,540 in early October, a peak-to-trough correction of some 20 percent, gold has been, of late, range-bound, trading between $1,640 and $1,680.

Having moved to the top of this range and even slightly higher, I sense gold is just now resuming its long march upward, a march that could, before long, carry the price to the $1,850 region and perhaps even to its historic peak of $1,923 by the end of the year.

The Safe-Haven Paradox

Ironically, Europe’s continuing sovereign debt crisis - a situation that should promote fear-driven demand for gold - has, in recent weeks, weighed heavily on the yellow metal’s price.   In addition, a sharp reversal in speculative positions on futures exchanges and other derivative markets has contributed to gold’s two-month consolidation.

Ordinarily, investors and analysts might expect Europe’s impending economic and political disaster to send gold prices rocketing skyward - but this has not yet been the case.  Instead, it triggered “safe haven” demand for the U.S. dollar and boosted the greenback’s exchange rate against the euro to gold’s detriment.

With flight capital and hot money going into the U.S. dollar as a safe haven from Europe’s woes, dollar-denominated hard assets like gold and other commodities have been under pressure, in large measure due to the behavior of institutional traders and speculators, many of whom have reduced their “long” positions or “shorted” gold in derivative “paper” markets.

Gold’s Fortunes Set to Improve

I have no doubts that the recent downward pressure on the gold price arising from the U.S. dollar’s “apparent” strength - and I stress “apparent” - will prove to be temporary.   Indeed, in recent days, with demand suddenly surging for investment-size bars and gold exchange-traded funds, it looks like safe-haven gold demand may finally be picking up even as the flow of funds into the dollar continues.   ”

In any event, gold’s fortunes are set to improve in the weeks ahead:  If Europe’s debt crisis subsides, the dollar will no longer benefit from its safe-haven role.  If it continues to worsen, investors, particularly in Europe, are likely to accelerate their rush into physical gold, buying bullion coins, small bars, and ETFs, as they did in mid-2010 when Euro-angst was, like now, at a feverish pitch.  But, either way, as traditional physical demand continues to grow, especially in Asia and from central banks in that region and elsewhere, gold is increasingly going into stronger hands that are less likely to sell even at much higher prices.

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 long-term forecast of higher gold prices over the next several years.

Robust Physical Demand

While speculative pressures have pushed gold lower, physical demand has remained quite firm - not just from European’s seeking a safe haven - but, even more so, from Asian markets, particularly India and China, where investors and consumers are taking more gold for reasons that have little to do with the world political and economic situation.

India, for example, is now celebrating (this year beginning on Wednesday, October 26th) the Diwali “festival of lights.”  Considered an auspicious time to buy gold - investment-grade jewelry, small bars, and coins - Indians are showing no reluctance to acquire gold at what are historically very high rupee-denominated prices.

Our friends in the Indian bullion community expect continued strong physical demand in the months and years ahead - reflecting growth in personal income, particularly in the agrarian and rural communities that traditional buy and hoard gold, as well as worrisome domestic inflationary pressures.  Not to be understated, India’s central bank purchase of 200 tons of gold in 2009 was an official endorsement of the metal’s role as a reliable store of value and savings asset that many private households are now following.

Chinese gold demand is also robust, due to income growth, rising wealth, and also inflation fears.  Higher gold prices, rather than discouraging demand, have attracted new investors to the market.  And, the central government has been pro-active in promoting investor access to gold by encouraging the development of physical and futures exchanges and retail gold distribution through banks and other retail outlets across the country.

Sticky Gold

Not counting official purchases by the People’s Bank of China, Chinese consumers and investors are now the world’s biggest end-market for gold.  And, this is long-term “sticky” demand, much of which is unlikely to come back to the market anytime soon, perhaps not in our lifetimes, even as the metal rises to a multiple of today’s price.

In addition to solid private-sector physical demand, the official sector has been an increasingly important buyer.  Russia and China have been most prominent, buying fairly regularly and stepping up acquisitions whenever the price dips as it has in the past couple of months.  The list of central banks buying gold this year includes South Korea, Mexico, Kazakhstan, Thailand, Bolivia, and Colombia.

With both the U.S. dollar and the euro looking tarnished and risky to central bank reserve managers, official-sector gold acquisitions have likely increased in recent weeks at lower price levels where purchases could be made discretely without any noticeable affect on gold-price volatility.  And, this too, is sticky gold that is unlikely to return to the market any time soon.

What few gold pundits realize is that the amount of physical gold available in the world gold market - the “free float” - is shrinking, thanks not only to Chinese and other Asian buyers, but also due to renewed interest and accumulation of gold by a growing number of central banks.  For central banks, the holding period may be measured in decades if not longer.  As a consequence, future demand will have a much more high-powered affect on the price of gold - and this is one of the reasons we expect much higher prices in the years ahead.

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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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Gold’s Long March Upward Continues

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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.  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.  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.  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.  Should the market lose upward momentum, speculative pressures could quickly turn negative.  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.   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!  Nor would we see this summer a seasonal relaxation in price volatility.  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:  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.  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.  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.  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.  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  also yielding around 6%.  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.  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.  Nearly everyone knows it, even if the official statistics show some positive growth in real GDP.  Unemployment remains stuck at over 9 percent.  The huge inventory of foreclosed homes held by banks continues to weigh heavily on home prices.  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.  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.  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.  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.  This is what we did in the 1970s, a decade of stagflation, and we’re already doing it again.  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.  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.  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.

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