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I’m No Gold Bug — Just Super Bullish

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I've been unwaveringly bullish on gold for nearly a decade . . . and suspect I'll remain bullish for at least a few more years.  Indeed, I strongly believe that the price of gold will more than double - and possibly triple - before the end of this decade.

But, please don't label me a gold bug.  I see nothing magical about the yellow metal . . . and those who attribute to it miraculous powers or foresee it resuming its sometimes historical role as the central anchor of the world monetary system are sure to be disappointed.

I consider myself a dispassionate economist, analyst, and observer of the U.S. and global economic, political, societal, and demographic trends - and what I see ahead is a super-bullish long-term future for the yellow metal.

The key here is "long-term."

From day to day and month to month the financial, commodity, and precious metals markets dance to their own seemingly irrational tune, driven largely by institutional speculators - banks, hedge funds, and other financial firms - many utilizing computer models, momentum indicators, and what is now referred to as "program" or "high-frequency" trading.

But over longer time periods, gold's price is set by a "stock-adjustment" mechanism - that is to say the willingness or desire of current and prospective private and official (central bank) investors to increase or decrease their aggregate holdings - and their desire to hold gold is influenced by the economic, geopolitical, social, and demographic trends along with the metal's own supply/demand fundamentals.

These days it seems most economists, analysts, and investors don't get this crucial law of the market.  Instead, they look at the last few months of data, much of which is just meaningless noise, and extrapolate.

At best, it is like driving a car forward while looking out the rearview mirror.  When gold is rising for a few weeks or months, they think it will continue rising indefinitely.  When gold is in a falling trend for a few weeks or months, they think the metal's future is forever gloomy.  And, when gold seems constrained to a narrow trading range, as it has in recent months, many don't know what to think.

Although I'm a super-bull I've never suggested gold would go straight up . . . but instead have warned that major price corrections - sometimes as much as 20-to-30 percent or more - would have many analysts, investors, and pundits questioning the metal's future, shaving their expectations, or going to the bearish side altogether.

Now it's no different.  After scoring an all-time high price near $1,924 last September, gold has fallen to a subsequent low around $1,520 - a decline of about 20 percent.  And in recent months, the metal has been locked in an increasing narrow trading range between $1,575 and $1,685.

The release of the latest FOMC meeting minutes this past Wednesday raised market expectations that another round of quantitative easing is just around the corner . . . and quickly sent the price of gold toward the high end of this trading range.

In the days and weeks ahead, gold traders, investors and analysts will continue to look closely at each and every economic indicator.

Signs of an improving economy would diminish expectations of Fed easing and could push gold lower . . . while indicators of economic weakness would increase expectations of Fed easing and benefit gold.  In addition, the market will be paying close attention to Bernanke's Jackson Hole speech next week for more clues to the Fed's intentions . . . and depending on what they see in the tea leaves, gold could react one way or the other.

Which way gold breaks out of this band is anyone's guess.  I'm betting it will be to the upside in reaction to the next phase of Federal Reserve monetary stimulus.

But either way gold goes in the next few weeks and months, it is crucial to remember that the factors, forces, trends, and developments that have underpinned the 11-year old bull market in gold are likely to continue for at least several more years.

For more, read my previous post "The Fed Speaks . . . and Gold Listens" below.