This past week’s dramatic gold-price action - with the metal falling some 5.8% from a Wednesday high of $1,790 an ounce (in European trading) to a low of $1,687 (in after-hours New York trading) - does nothing to dissuade us from our super-bullish long-term view of gold-price prospects.
Indeed, we have often warned clients and readers of NicholsOnGold to expect occasional episodes of great price volatility with sizable corrections that would lead many investors and pundits to prematurely eulogize the end of gold’s bull run. Wednesday’s decline was just such a correction – and it wasn’t even that dramatic despite all the media brouhaha.
In the context of gold’s past performance – up some 500% or 19% annually over the past ten years and 14% this year through Tuesday evening before latest price correction – a little backtracking should be little surprise.
Had some popular stock-market equity fallen one dollar from $17.90 to $16.87 – also a 5.8% decline – hardly anyone would notice. But such is gold’s glamour and glitter, with so many either loving it or hating it, that it made the Wednesday evening news.
As best as we can tell, the correction was entirely a paper-market affair – with the bulk of selling occurring on Comex, the US gold futures market, where speculative long positions equivalent to some 10 million ounces were literally dumped on the market in fairly short order.
Some say the selling was touched off by Federal Reserve Chairman Ben Bernanke’s Wednesday morning Congressional testimony on monetary policy and the state of the economy. By citing tentative signs of economic recovery while saying nothing about a possible third round of quantitative easing, or QE3 in the jargon of economists, the Chairman may have disappointed those who were betting on more monetary stimulus, thereby deflating any QE3 premium already in the market’s gold valuation.
Others say technical factors, especially the loss of upward momentum as the price approached $1,800 an ounce, triggered the sell off – aided, abetted, and exacerbated by automatic program trading and stop-loss selling.
Our forecast of much higher gold prices depends not one iota on the day-to-day ups and downs, no matter how extreme, in the yellow metal’s price. Instead, the average long-term price is entirely a function of world economic and political developments, which affect the intensity of investor interest (what we might call long-term hoarding demand) and on gold’s own supply/demand fundamentals.