Gold: If Not Now, When?

Jeffrey Nichols, Senior Economic Advisor to Rosland Capital, had the following comments on the current gold-market situation and outlook:

Gold’s recent failure to sustain brief rallies and generate any lasting upward momentum has many gold bulls asking “If not now, when?”

Indeed, the early-autumn economic and financial news should have fueled a significant advance in the metal’s price – or so conventional thinking would suggest, what with the Fed’s postponement of tapering, the fiscal impasse and partial government shut-down in Washington, and the approaching debt-ceiling and possibly perilous U.S. Treasury default in world financial markets.

Instead, for the past couple of years, a small number of institutional investors and large-scale speculators trading in “paper” markets have continued to weigh gold down despite the strength of demand in “physical” markets. Stated differently, Western selling has so far trumped Asian buying.

But this market imbalance is not sustainable, if only because the buyers have very deep pockets and very strong hands. Hundreds of tons of bullion bars have traveled from depositories in New York, London, and other Western vaults to Hong Kong, Shanghai, and millions of Eastern households. When sentiment shifts and Westerners look more favorably on gold, Asian holders will not likely sell, except at extraordinary price levels.

The correction that saw gold tumble from its September 2011 all-time high over $1,920 an ounce – and the advance that immediately preceded it – owed much to at most a few hundred large-scale institutional investors who were late to buy gold after the yellow metal already had a sizable run . . . and were just as quick to sell once gold stalled and failed to continue the quarter-to-quarter gains that these investors required to look good to their shareholders.

Equally important to gold’s detriment in the past couple of years, a small number of institutional speculators – mostly the trading desks of the big financial firms trading gold from the short side in futures and over-the-counter markets – drove gold lower and profited greatly by selling strategically at price points that were sure to trigger still more selling and the opportunity to buy back at still-lower price levels.

Gold remains vulnerable and possibly quite volatile in the short term . . . but it is becoming increasingly attractive to long-term buyers with a significant rise in the price all the more likely over the next three-to-five years.

Talk of tapering and uncertain developments on the U.S. fiscal and debt fronts could drive gold one way or the other in the weeks ahead.

For sure, the partial Federal government shutdown – depending on how long it continues – will negatively impact consumer spending, unemployment, and economic activity. And the longer it lasts, the less likely is any imminent change in U.S. monetary policy. The Federal Reserve will not risk adoption of policies that might trigger a full-blown recession.

But tapering or not, monetary policy will, in any case, remain in a stimulative pro-gold mode for months, if not years, to come as the economy continues to struggle to regain its footings. And, in any event, as important as it is, there’s more to gold-price prospects than U.S. monetary policy.

So far, there seems to be little “default premium” in the gold price and little “default discount” in the dollar’s exchange rate against key foreign currencies – but this could change dramatically in gold’s favor if Congress remains intransigent as D-Day approaches.

Looking ahead, Indian festival and wedding-related demand, restocking by jewelry manufacturers worldwide in anticipation of Christmas and New Year retail buying, continuing strong demand from China, and a pick-up in central-bank acquisitions, should underpin the gold price and could contribute to a resumption of the long-term uptrend in the metal’s price.

About Rosland Capital

Rosland Capital LLC is a leading precious metal asset firm based in Santa Monica, California that buys, sells, and trades all the popular forms of gold, silver, platinum, palladium and other precious metals. Founded in 2008, Rosland Capital strives to educate the public on the benefits of investing in gold bullion, numismatic gold coins, silver, platinum, palladium, and other precious metals. Rosland also helps people who wish to protect their wealth by including a gold or precious metal-backed IRA in their asset portfolio. Click here for more information or contact us.

About Jeffrey Nichols

Jeffrey Nichols, Managing Director of American Precious Metals Advisors and Senior Economic Advisor to Rosland Capital, has been a leading precious metals economist for over 25 years. His clients have included central banks, mining companies, national mints, investment funds, trading firms, jewelry manufacturers and others with an interest in precious metals markets.