The Gold Bull Begins to Stir

By Jeffrey Nichols

These days I am feeling very bullish on the prospects for gold – and I would not be surprised to see prices double or possibly do even better over the next three-to-five years.

Moreover, there is even some chance gold prices will break into record high territory (exceeding $1,924 an ounce) later this year or next.

I expect that the U.S. and other major economies will perform poorly for several years to come with recession or near-recession business conditions forcing the Fed and other leading central banks to pursue reflationary monetary policies and low interest rates – a bullish long-term mix for gold that promises stagflation and much higher prices for gold later in the decade.

From its all-time high just over $1,924 in September 2011 to its subsequent low point near $1,080 last year, the price of gold suffered a loss of some 44 percent.

But so far this year, the yellow metal has marched to a different drummer, recovering 15 percent from last year’s low point to reach its recent high around $1,240 an ounce.

This should have been enough to declare an end to the four-year bear market – but gold’s naysayers thus far remain unwilling to declare the start of a new bull market.

Instead, my former colleagues at Goldman Sachs (and traders at many other big institutional players in the gold market) have been quite outspoken recently predicting a further decline in the metal’s price to as low as $1,000 an ounce.

In contrast to this pervasive bearishness, I’m feeling increasingly bullish on gold – for this year . . . and for the longer term.

First of all, the technical picture looks increasingly supportive with buyers ready to accumulate both physical metal and paper proxies just under the market. Indeed, in recent days, as gold retreated a bit from its short-term high briefly over $1240 an ounce, buying interest has picked up nicely with support emerging as the price dipped toward the psychologically important $1,200 level.

More importantly, the inverse relationship between world equity markets and the price of gold is now reversing.

Over the past four years, gold prices have suffered as institutional speculators, hedge funds, bullion banks, and the like sold their under-performing gold positions and plowed their money into over-performing equity markets. The return on equities seemed just too rich to ignore, especially with gold prices under pressure.

One feature of gold’s bear market over the past four years has been a massive shift in gold ownership from West to East; from the older industrialized nations to the rising Asian economies; from paper gold and ETFs to physical bars, bullion coins, and investment-grade jewelry; from traders and speculators to long-term investors and hoarders; and importantly, from “weak” hands to “strong” hands.

In addition, wealthy retail investors in the United States, Europe, and elsewhere have also been big buyers of bullion coins and small bars . . . and, importantly, share a long-term affinity to the yellow metal.

More than anything else, the massive flow of funds out of gold in favor of equities and other inflating assets explains why gold has fared so poorly in recent years.

But now the tide may be turning. Equity markets here and abroad have stumbled into the New Year . . . while gold prices have recently recovered some lost ground.

Moreover, when markets do turn, we would not be surprised to see gold prices rise briskly – continuing to new historic highs over the next few years.

When gold sellers become gold buyers once again, the yellow metal’s price could rise to record heights as available supplies prove insufficient to fulfill demand from those that were so eager to sell in the past four years.