In recent days and weeks, in the face of Europe's seemingly intractable economic troubles - the continent's worst crisis since World War II, according to German Chancellor Angela Merkel - gold has had difficulty moving higher. Many market participants are wondering why the metal is not responding more positively to Europe's never-ending sovereign debt crisis and other worrisome economic and political developments around the world.
Having failed to hold above the $1,800 an ounce level a week or two ago, technical analysts say that gold must build more support in the $1,750 to $1,800 an ounce range before it can muster enough strength to sustain a meaningful and lasting rally.
But sooner or later, thanks to a continuously improving fundamental picture, gold will register a sustainable advance above $1,800 an ounce, possibly never again to see prices below this level.
A Matter of Perspective
Even though gold remains well below its all-time high near $1,924 an ounce (reached briefly on September 6, 2011) it is, nevertheless, some 25% to 30% above the trading range that prevailed at the beginning of the calendar year - making gold just about this year's best performing asset class, even outpacing the major equity indexes, over the past 11 months.
The explanation for gold's failure to move higher in recent weeks, following its spectacular rise earlier in the year, has much to do with which currency we choose as the numeraire or yardstick with which to measure gold's price.
In US dollar terms, gold may be off its all-time high, but when measured in many other currencies - the euro, the British pound, and the Swiss franc, for example - or in the currencies of the two biggest gold-consuming countries, the Chinese yuan and the Indian rupee - gold is today trading at or near its historic all-time highs . . . and perceptions of the gold price among residents of these countries is somewhat more positive than those who think of gold only in US dollars.
Behind the Scenes
What's happening behind the scenes, so to speak, is that safe-haven and short-term speculative demand for US dollar-denominated US Treasury securities has been disproportionately large compared to safe-haven and short-term speculative demand for gold.
It's not that demand for gold in world markets has actually diminished in the weeks since the early September all-time high. In fact, demand - physical demand for real gold in all of the major markets around the world - has remained firm. It's just that demand for the US dollar has been relatively stronger. And the result has been a rise in the dollar's exchange rate with other currencies - and, if you will, the dollar's exchange rate with gold.
Much of the short-term gold-price action this year has been dominated by institutional speculators - the trading desks of the major banks, financial firms, and funds - seeking short-term gains or hedging against possible losses if they're holding vulnerable assets.
Importantly, most of these players have little or no lasting interest in gold, one way or the other - and, for now, their super-strong demand for US Treasury securities and the resulting up-valuation of the dollar vis-`a-vis many other currencies is resulting in gold's "apparent" lackluster performance.
Just as importantly, the greenback's relative strength is not an indicator of the dollar's value or purchasing power. American consumers - when they go to the grocery store, heat their homes, fill up at the gas station, go out to dinner and the movies, or attend a professional baseball or football game - will tell you the value of their dollar is shrinking. And, this is one reason a growing number of American investors are keen on gold.
Driven By Fundamentals, Not By Traders
While institutional traders, speculators, and hedgers may be of short-term importance, producing a great deal of gold-price volatility, they have absolutely no affect upon the long-term trend and average prevailing price over a span of years.
What governs the price of gold over the long term are the market's real-world supply and demand fundamentals - and these continue to be bullish, in fact, increasingly so. Hence, my strong belief that the price of gold - in US dollars and virtually all other currencies - is heading higher, much higher, over the next several years.
I have no doubt that the recent downward pressure on the gold price arising from the US dollar's "apparent" strength will prove to be temporary.
I sense gold will soon resume its long march upward, a march that could, before long, carry the price to the $1,850 region and perhaps even to its historic peak of $1,923 by the end of this year or in early 2012. And, more importantly, gold prices will continue trending higher, albeit with plenty of volatility and corrections along the way, through at least the middle years of the decade.
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.