Gold Reckoning Ahead

Although the price of gold is up some 25 percent so far this year, the metal still remains 30 percent below its all-time high of $1,924 registered in September 2011 – so there’s still plenty of room overhead for the price of gold to move higher – as I think it will – without excessive resistance.

I’m no gold bug – but I have been “super bullish” on gold for the past few years. Now, I think the yellow metal’s day of reckoning is quickly approaching.

A decisive break above $1,400 an ounce could be just around the corner – and, to my mind, would signal the start of gold’s next major advance.

Indeed, it looks like gold is setting itself up for a major price advance that will see the metal challenge its previous historic high in the next few years – and, longer term, continue into still higher virgin territory.

Near term, gold prices will continue to be “data driven” – that is dependent on the flow of economic news as it affects expectations of Federal Reserve interest-rate policies. Good news leads to expectations of a near-term rate increase and a weaker gold price. Bad news leads to expectations of continued near-zero short-term rates and a higher gold price.

But, whatever the news in the weeks and months ahead, I believe the Fed will have little room to raise interest rates by anything more than a token increase. What’s more likely, the U.S. and global economic news will continue to disappoint – and this could be enough to support a rising gold price.

Another near-term catalyst could be seasonal buying from both India and China, the world’s two-biggest gold-buying nations. Gold demand in India has a strong seasonal component, reflecting the annual monsoons, the associated rise in agrarian incomes, and the autumnal festivals beginning in September.

Gold demand in China also typically picks up late in the year in anticipation of the Lunar New Year holiday in January 2017. In addition, once it is clear we are in a rising market, Chinese gold buyers are likely to chase the market higher, fearful of missing out on still-attractive prices.

In past Commentaries, I have written of the shift in gold ownership to “strong hands” in Eastern markets (led by China and India) from “weak hands” in Western markets (led by the United States and Europe). This tendency has allowed for an orderly recovery in the price of gold over the past few years.

Now, however, we are beginning to see rising competition between Western buyers and Asian buyers – and greater day-to-day price volatility.

Key to the bullish outlook, as Western investors and institutional speculators collectively decide that it would be good to own more of the metal, they will find a shortage of “available supply” – with buyers increasingly having to pay a higher price to encourage sellers to part with their metal – and probably much higher than the past historic peak of $1,924 an ounce reached in September 2011.

Importantly, several thousand tons of gold have gone into the Asian region in recent years . . . yet not one ounce of gold will come out during the next few years despite the much higher prices that lay ahead.