NEW YORK - Gold's recent performance has certainly been a major disappointmentto the many analysts and investors who have been anticipatinganother stellar year for the yellow metal. But the year is hardlyover . .|
nor is gold's long-term bull market. I believe we will see a reversal of gold's fortunes and newall-time highs, if not this year then certainly in 2013. Moreover,the now decade-long advance in the metal's price could last anotherfive-to-ten years given the global economic challenges that lieahead. For now, gold's short-term prospects remain uncertain. So far thisyear, gold has traded at well beneath its all-time high of $1,924recorded last September.
Its subsequent low near $1,520 an ounceregistered in late December now, in recent days, again seems to bea vulnerable support level. As we have previously cautioned, afall back to $1,520 - or even lower - is certainly possible beforegold resumes its long-term ascent. What could trigger gold's next up-leg and march into virginterritory? The answer is another wave of monetary accommodation, not just bythe U.S. Federal Reserve but also by the European Central Bank (theECB) and other European central banks, the People's Bank of China(the PBOC), the Reserve Bank of India, and a host of others who donot want to see their currencies appreciate against the dollar.
In the U.S. and China, the catalyst bringing on more monetaryreflation will be continued signs of weakening economies along withlower commodity prices and consumer price inflation. Meanwhile,the ECB will be responding not only to rapidly contractingeconomies - but it will be staging the biggest bail-out of alltime. Gold's reversal from last September's record high and itscontinuing anemic performance reflect an Olympian tug of warbetween short-term institutional traders and speculators operatingin derivative markets trading paper proxies for gold, proxies thathave no supply limitation and are, in effect, created by thesellers themselves .
. and physical markets where long-terminvestors, jewelry consumers, and central banks have continued toaccumulate a growing quasi-permanent stock of metal. It is in the physical realm - the real world of supply and demandfor gold bullion - where the long-term average price of gold isset. And here the fundamentals are decidedly bullish.
In fact,thanks to continued central bank buying, rising Chineseprivate-sector demand despite signs of a slowing macro-economy, andlimited mine supply availability, the fundamentals are becomingincreasing bullish despite the current episode of price weakness. It is worth noting that global gold-mine production has grown inrecent years - but much of this growth has occurred in China andRussia - and every ounce these countries produce is absorbedlocally by central bank accumulation and private-sector investmentand jewelry demand. You'd think gold prices would, by now, be flying at much higheraltitudes what with Europe sinking deeper into recession, bank runsspreading from Greece to Spain, Portugal, and Italy, Greeceincreasingly likely to secede from the Eurozone, and the EuropeanUnion coming apart at the seams. Instead, the flight from the euro has favored the U.S. dollar - andthe appearance of a stronger U.S.
dollar has contributed to ashort-term bet against gold by institutional traders andspeculators. But the greenback is merely the best-looking horse onits way to the glue factory and its recent strength is merely areflection of the euro's decline. It is not supported by a healthyAmerican economy and sound U.S. monetary and fiscal policies.
The key short-term players are a small number of banks, hedgefunds, and other financial firms who operate with the benefit ofleverage and sometimes little cash down and trade not in real goldbut in futures, options, and more opaque over-the-counter markets. What motivates these traders is the necessity to make short-termtrading profits. For a good part of last year, as a group, the specs were on thelong side of the gold market, contributing to gold's stellaradvance last summer. But as they demonstrated later last year,they have no lasting or long-term commitment to gold as aninflation hedge, portfolio diversifier, or insurance policy againsteconomic or political risk.
More recently, it has been these short-term players operating onthe short side of the market who have held sway . . . andforestalled the price advance that is surely coming. At some point - perhaps when the Greek economy and financialmarkets seize up, or the country launches its own currency, or theblack plague of lost confidence spreads to other vulnerable, overlyindebted nations - gold will return to vogue and these traders andspeculators will again favor the yellow metal as an opportunity toprofit.
Alternatively, the European Central Bank could come to the rescue,issuing a euro-denominated "mutualized" debt instrument - aEuropean version of U.S Treasuries - in order to provide sufficientrefinancing to bail out Greece, the other heavily indebtedcountries, and those essentially insolvent private banksover-exposed to European sovereign debt. The cost, however, would be borne by much higher inflation acrossthe continent and a deep long-lasting devaluation of the euro. This time, however, not only might the U.S. dollar look stronger asthe euro weakens - but gold would likely shine for reasons I haveexplained in great detail in the past.
*Jeff Nichols is Managing Director of American Precious Metals Advisors - and Senior Economic Advisor to Rosland Capital - . SUBSCRIBE to Mineweb.com's free daily newsletter now.
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