Un-Seasonal Expectations

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Despite the winding down of East Asia’s Lunar New Year gold buying binge, I expect the yellow metal’s price will continue to move up in the weeks ahead - but not without some struggle as gold works to reestablish upward momentum and renewed credibility.

Historically, with the arrival of the Lunar New Year, gold demand and the metal’s price typically enter a seasonally weak period — but the typical seasonality is no longer a reliable guide to gold price prospects.

The usually weak summer months this past year saw gold run up to new historic highs above $1,900 an ounce . . . and, contrary to expectations, the seasonally strong autumn months saw gold prices fall sharply, all the way back down to $1,525 or thereabouts.

Changes on the Demand Side

Now, with winter upon us, I don’t expect gold prices will drop with the temperature as they often have at this time of year.  Instead, I believe that there have been important changes on the demand side of the gold market that now overpower or outweigh any remnants of seasonality.

For one thing, institutional investor participation has grown by leaps and bounds, as has retail demand for bullion coins and small bars.

Similarly, official-sector gold accumulation has become an extremely important non-seasonal factor effectively removing several hundred tons of gold from the market in each of the past two years.

I expect central bank demand not only to continue but possibly expand in 2012 with China and Russia leading the pack — and a growing number of countries underweighted in gold relative to U.S. dollar-denominated reserves joining in this official-sector gold rush.

These buyers - private investors and governments alike - don’t care what the weather is.  Instead, their behavior is a reaction to macroeconomic and political developments in their own countries and around the world without regard to the time of year.

And, institutional traders and speculators - who lately account for much of the short-term volatility in the metal’s price - are often governed by new and changing trading modalities and algorithms.

For example, the increased importance of “portfolio rebalancing” by index, commodity, and hedge funds has, for now, introduced a new element of seasonality, one that weighed heavily on gold in late December and early January when many of these funds were large-scale sellers of gold, mostly in futures and other derivative markets, but nevertheless with negative price consequences that are now past.

Shrinking Free Float

Continuing Chinese gold accumulation has important long-term significance that is not generally acknowledged by many gold analysts and market pundits.   Simply put, China’s private-sector gold purchases are unlikely to be sold back to the world market any time soon, certainly not for many years to come and even at much higher prices.

Not only are gold exports from China illegal - but many, if not most, Chinese savers and investors buy gold with no intention of selling sometime in the future just because prices rise, inflation subsides, equity prices tumble, or any of the other drivers that might trigger sales by Western investors.  For the Chinese, these are long-term, quasi-permanent holdings.

The same can be said of central-bank gold purchases, not just by the People’s Bank of China, but by most of the central banks that have been building gold reserves in recent years.

As a result, the supply of available gold in the marketplace — what I call “free float” – is diminishing . . . and any pickup in gold demand for jewelry, investment coins and bars, official reserve accumulation, etc. will have a more high-powered affect on the metal’s price than might have been the case a few years ago.

More Money Will Fuel Gold’s Ascent

Prospects of further monetary easing by the world’s three top central banks - the U.S. Federal Reserve (the Fed), the European Central Bank (the ECB), and the People’s Bank of China (the PBOC) - also know no season and are also becoming more supportive.

In each region, signs of slowing economic activity, unacceptable or worsening labor-market conditions, and continuing restrained consumer price inflation suggest that central banks will press harder on the monetary accelerator in the months ahead.

As in the past, quantitative easing or other steps to raise credit availability by the Fed, the ECB, and the PBOC could fuel surprisingly big moves in the price of gold in the months ahead.

Wild Cards

Finally, there are a number of “wild cards” that may affect gold prices - for better or worse - in the days and weeks ahead.  At the top of my list:

• America’s political log-jam and Washington’s inability to reach a consensus on important federal debt and budget measures;

• Heightened tensions in the Middle East - with saber-rattling by Iran, oil-price uncertainties, approaching Egyptian elections, and the threat of civil war in Syria;

• Europe’s continuing sovereign-debt crisis, further downgrades by the credit-rating agencies, the looming Greek default and departure from the euro-zone, possibly followed by other deeply indebted countries.

• And, perhaps most importantly, how the U.S. dollar reacts in world currency markets to any of these unfolding developments and to further monetary easing by the U.S. Fed.

Filed under: Gold Briefs | American Precious Metals Advisors, central banks, China, euro, European Central Bank, fiscal policy, gold investment, Jeffrey Nichols, monetary policy, Quantitative Easing, Russia, sovereign risk, U.S. dollar|No Comments

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 26^th) 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.

Filed under: Gold Briefs | American Precious Metals Advisors, central banks, China, ETFs, gold, gold investment, gold price, India, Jeffrey Nichols, monetary policy, Russia, sovereign risk, U.S. dollar|No Comments

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 6^th all-time high around $1,923 an ounce to this Friday’s (September 23^rd) 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.

Filed under: Gold Briefs | American Precious Metals Advisors, central banks, China, ETFs, Exchange-Traded Funds, gold, gold investment, gold price, India, Jeffrey Nichols, monetary policy, money supply, Russia, sovereign risk, U.S. dollar|No Comments

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 19^th.

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.

Filed under: Gold Briefs | American Precious Metals Advisors, central banks, China, euro, European Central Bank, gold, gold investment, gold price, inflation, Jeffrey Nichols, monetary policy, Quantitative Easing, sovereign risk|No Comments