GOLD: Still Waiting for the Fed

Jeffrey Nichols, Senior Economic Advisor to Rosland Capital (www.roslandcapital.com), had the following comments on the current gold market situation and outlook:

Gold shed more than $50 an ounce in a blink following last Wednesday’s news from the Federal Reserve that America’s central bank would not, at least not now, initiate another round of quantitative easing, opting instead for more muted monetary stimulus by extending its “Operation Twist” through year-end.

Operation Twist, in which the Fed sells short-term U.S. Treasury securities from its portfolio and simultaneously purchases longer-dated Treasury notes and bonds, is intended to stimulate the economy by lowering medium- and long-term interest rates without actually speeding up growth in the money supply. In contrast, quantitative easing (QE for short) expands the Fed’s holdings of Treasury securities – what some call expanding the Fed’s balance sheet – thereby creating new money and prompting a stepped up pace in monetary growth . . . and ultimately more inflation.

The recent correction in gold and silver prices has some precious metals pundits already writing obituaries for these metals. Last week, gold in New York was off more than three percent, falling from a recent high near $1,627 to $1,570 – just about giving up all of this year’s gains and, worse yet, down some 18 percent from its all-time high last September. Meanwhile, silver fell by more than six percent from $28.75 an ounce to $26.90 – and at week’s end silver was off some 3.4 percent for the year to date and more than 45 percent from its April 2011 peak.

This backtracking in gold and silver does not signal a new bearish phase for precious metals prices. At worst, it calls for more patience from investors and savers holding these metals as they await the next major move up in a still very much intact bull market. More importantly, the current weakness in gold and silver prices simply gives smart investors and fearful savers more time to buy the protection and financial insurance offered by these metals.

The timing of more monetary stimulus from the Fed – and the next major upward move in gold and silver prices – depends either on the economic news here in America (with bad news raising the chances of more quantitative easing sooner rather than later) or an impending financial disaster in Europe.

I expect continued weakness in the U.S. economy, especially an unacceptable low rate of new jobs creation, to prompt another round of quantitative easing (QE3) by the Fed later this year (possibly as soon as the August Federal Reserve policy-setting meeting) or in early 2013 – that is, if events in Europe don’t first call for coordinated monetary stimulus from central banks on both sides of the Atlantic and around the world.

Despite yet another round of funding for Europe’s sickest economies and banks – and regardless of whatever decisions are taken at the upcoming European summit later this week – the Eurozone will continue to unravel. There’s just no way that citizens of the peripheral economies will continue to accept austerity, collapsing economies, rising joblessness, and deteriorating living conditions for years to come.

Sooner or later, I expect default by one or another sovereign borrower or the failure of one or another major European bank (what some are calling a “Lehman” moment recalling America’s 1998 banking crisis) will trigger an unprecedented flood of new money from the Fed, the European Central Bank, and other central banks in Europe and Asia – assuring that gold and silver once again shine brightly.

To arrange an interview with Jeffrey Nichols or Rosland Capital’s CEO Marin Aleksov, please contact Carrie Simons at Triple 7 Public Relations (310.571.8217 | carrie@triple7pr.com).

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. For more, read our customer reviews.

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.