I recently received an email from a reader of our Rosland Capital Gold Commentary admonishing me for being "perennially bullish" as if this made our on-going analysis in these reports less than objective.
I wrote back: "Yes, you are right: I have been perennially bullish ... because my long-term views have not changed ... except to be reinforced by on-going developments. I am not offering short-term trading advice in these reports ... and regularly caution to expect big corrections and volatile markets."
I consider myself to be a gold analyst and economist - and certainly am not a "gold bug" with a theological belief that gold is the ultimate savior. Instead, I strive to be honest and objective in my analysis and recommendations.
And, objectively, I expect the price of gold to hit US$2,000 an ounce in the next few years ... followed by $3,000 an ounce and possibly still higher at the yellow metal's next cyclical peak.
If anything, my confidence that the bull market in gold has a long way to go, both in duration and magnitude, has only increased as the US and global economic situation has unfolded in the past few years.
With this in mind, it should come as no surprise that I continue to view gold-price declines, however sharp, as opportunities for investors to establish or add to their holdings of physical gold. Price swings of 5% or 10% percent, up and down, are not sufficient to dull my positive outlook for the metal's price.
Structural changes in the gold market - particularly the introduction and huge popularity of gold exchange-traded funds, the growing legitimization of gold as an investment class, the rapid expansion of key geographic markets (particularly China and elsewhere in Asia), the entry of major institutional investors (including hedge funds, sovereign wealth funds, pensions and endowments), and the unprecedented global retail investor interest - promise much higher gold prices in the years ahead, much higher than many now believe possible.
It is important to remember that the gold market remains a relatively small market -- in terms of aggregate asset value as well as investor participation - compared to world equities, bonds, real estate, commodities, or currencies. As a result, a small reallocation of assets may hardly affect asset prices in these bigger markets but can - and will have a much more important price effect for gold.
A variety of factors will continue to push gold higher. Very briefly, some of the key drivers are:
- America's fiscal dilemma - bigger than expected Federal deficits, overly optimistic tax-revenue projections, slower than projected economic activity, Federal bail-outs of state and local governments, and more spending to revive the economy.
- America's monetary dilemma - with bigger deficits and a sluggish, if not contracting, economic activity, the Fed will be become the financier of last resort, monetizing Federal debt and printing money, in the hope that massive monetary creation will get the economy going. This will be compounded by the growing reluctance of foreign central banks and other investors to buy and hold US Treasury securities. Already we see the People's Bank of China, the largest financer of US Federal debt, looking for alternative investments, either directly or indirectly through a variety of government agencies and state-controlled corporations.
- Rising U.S. price inflation - despite idle capacity and excessive economic slack as households, businesses, foreign central banks and other institutional investors holding dollar-denominated investments lose confidence in America's currency and seek alternatives and/or higher rates of return.
- The European sovereign debt crisis - remains a problem that will resurface as voters in the weaker overly-indebted nations say "no" to further belt-tightening economic policies. Notwithstanding the recent "stress tests" to determine the solvency and viability of Europe's larger banks, many will face problems when their sovereign debt holdings are again deemed of questionable value.
- Official sector gold demand -- central banks will become increasingly important buyers of gold as they seek to diversify and diminish their exposure to the US dollar. In 2009, central banks, as a group, were net buyers of gold for the first time in two decades. After average annual sales of some 400 tons a year, the official sector last year bought more than 425 tons. Among the buyers of the past year and a half include China, India, Russia, Kazakhstan, Sri Lanka, Mauritius, Venezuela, and probably others that chose not to report increased gold holdings. We think some of these countries will acquire more in the years ahead ... while other central banks join the list of buyers.
Jeffrey Nichols, managing director of American Precious Metals Advisors and senior economic advisor to Rosland Capital, has been a precious metals economist for over 25 years.
