The “Great Recession”

Jeffrey Nichols, Senior Economic Advisor to Rosland Capital

Managing Director of American Precious Metals Advisors

Precious metals prices tumbled today on news that China’s monetary authorities were taking steps to rein in the economy. Gold, which began the New Year on a very strong note, was off as much as $25 in New York trading.

With the China’s economy recovering smartly, the People’s Bank of China is taking action to dampen real estate and stock market speculation and pre-empt rising inflation expectations.

U.S. policy makers, unlike the Chinese, have no room to tighten policy. Indeed, as we get closer to the November mid-term Congressional elections, the probability diminishes that the Fed will nudge interest rates higher.

With high unemployment expected to hurt Congressional incumbents – and the Obama Administration worried about losing its majority in the Senate – the Federal Reserve will be under increasing pressure to hold policy steady until after the November elections.

Unfortunately, the Fed is between a rock and a hard place. Tightening policy to ward off inflation runs the risk that the economy will deteriorate so much that the “Great Recession” will be recorded in the history books as the “Second Great Depression.”

Without a doubt, and to the long term benefit of gold prices, the Fed, the Treasury, the Congress, and President Obama would prefer higher inflation to the alternative.

As a result, I believe we are heading into an extended period of stagflation – low real economic growth and high inflation – much like we saw in the 1970s. And, as we saw in the 1970s, gold will continue to appreciate for years to come.

This year alone, I expect gold to reach a high of at least $1,500 an ounce.

Moreover, gold’s bull market seems destined to continue for another few years, carrying the yellow metal to at least $2,000 and quite possibly $3,000 or higher before the bull market for precious metals comes to an end.