GOLD: Waiting for the Next Leg Up

NEW YORK (March 15, 2013) – Jeffrey Nichols, Senior Economic Advisor to Rosland Capital (www.roslandcapital.com), had the following comments on the current gold market situation and outlook:

Gold bears have been a gleeful group of late, pointing to the decline in gold exchange-traded fund holdings as evidence of investor disinterest and citing the market’s rather lackluster performance over the past year and a half along as evidence the decade-long bull market has run its course.

Yes, gold has retreated some 20 percent from its September 2011 all-time high (near $1,924 an ounce) to its subsequent low (just over $1,520).

Yes, Gold ETFs have seen some substantial and high-profile withdrawals in recent weeks.

But these developments in no way diminish my belief that the bull market in gold has plenty of life ahead with the yellow metal’s price doubling (or more) from recent levels in the next few years.

Historically, cyclical upswings in stocks, bonds and commodities have often been measured in decades and bull markets typically end with a rapid advance to record heights followed by a swift and resounding crash. This looks more like equity markets today while gold’s appreciation over the past decade has been a measured advance and its recent performance bears no resemblance to a bursting bubble or a mania run its course.

For all the attention in the financial press, the nearly 10-percent decline in gold ETF holdings from their all-time high in December really tells us very little.

First, it is quite possible that some of these sales were from institutional investors choosing to buy and hold the real thing, directly and under their own control, rather than hold a piece of paper representing ownership but not directly accessible by ETF investors.

Second, many hedge funds and institutional investors are driven by the need to perform well in short term – and simply could not resist jumping on Wall Street’s bandwagon where profits in the next month or quarter looked more attractive to them. Once gold again shows some real life (and it will), those who jumped ship will get back onboard, expecting gold to deliver relatively attractive short-term gains.

Third, gold sold by ETFs has to go somewhere – and where it’s been going is of great importance. On the other side of the market have been central banks, buying for the very long term and unlikely to re-sell anytime soon, perhaps not for decades or longer. It’s as if the gold has been permanently removed from the marketplace and indefinitely unavailable to meet future demand – not just from ETF investors but also from investors and jewelry buyers of every stripe. This means that prices will have to rise much more than might be expected as more buyers compete for a smaller supply of available metal.

In fact, central banks are likely to continue building their gold holdings in the months and years ahead –so that available supply, what I call “free float,” will continue to shrink as gold moves from weak to strong hands.

Ironically, America’s former cold-war rivals – Russia and China – have been the biggest and most persistent central-bank buyers, followed by a diverse group of newly industrialized and emerging economy nations including Mexico, Korea, Brazil, Mexico, the Philippines, Kazakhstan, Ukraine and others.

Both Russia and China see central-bank gold accumulation as an important step toward playing more important roles in the evolving global economic and political order – while ending America’s dominance in the world monetary system.

Moreover, for those central banks under-weighted in gold and over-weighted in dollars and euros, their motivation has been to diversify their official reserve assets and reduce their exposure to the U.S. and European currencies. With America unable to address its Federal budget deficit and limit its mounting sovereign debt and with economic policy on both sides of the Atlantic in disarray, central banks around the world have a strong incentive to buy and hold gold as a currency hedge and insurance policy.

Gold bears have also been quick to point to the recent strength of the U.S. dollar in world currency markets and the record highs on Wall Street as further confirmation that gold is past its prime.

In my view, the appearance of dollar strength does not reflect a healthy currency. The U.S. dollar is merely the least unattractive contestant in a beauty pageant of ugliness. As such, flight capital seeking a safe haven has been gravitating to dollar-denominated U.S. Treasury debt.

Nor is the record-breaking streak on Wall Street a sign of a healthy economy. It is a consequence of the Fed’s super-accommodative monetary policy and the need for many investors to register positive returns in a near-zero interest-rate environment.

But, when the dollar looks less attractive as a safe haven and big gains on equities look less certain to investors, gold will once again be the leading beneficiary of the Fed’s easy-money policies.

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 coins, 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.

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.