After registering an all-time high near $1,924 an ounce Sept. 6, 2011, the gold price tumbled all the way back down to $1,523 on Dec. 29, 2011. Since then, gold has made some feeble attempts to rally – at one point briefly approaching $1,800 an ounce – but it has not been able to hold onto any meaningful gains.
Despite this recent weakness - and even if the metal tumbles further in the days and weeks ahead – I believe the long-term outlook for gold remains extremely positive.
Very briefly, here are some of my reasons for anticipating much higher gold prices in the years ahead:
- Past and prospective US Federal Reserve monetary policy, characterized by low or negative real interest rates and unprecedented monetary creation in the United States virtually guarantee rising inflation and higher gold prices.
- It's not just the Fed but just about all of the world's top central banks – the European Central Bank (the ECB), the Bank of England, the Swiss National Bank, the Bank of Japan, and the People's Bank of China (the PBoC) – are all busy creating money and pumping up credit to stimulate their domestic economies.
- As long as economic activity and employment growth remain sub-par, it is likely that monetary policies in the major economy nations will remain under pressure to over stimulate. And, in many of these countries – particularly in the United States and Europe – central banks will be compelled to counter increasingly restrictive fiscal policies.
- But, if economic growth turns out better than expected in the United States, Europe, China, India and Brazil we will suffer global shortages of both agricultural and industrial commodities with serious implications for inflation and, therefore, gold.
- In any event, food and other agricultural prices are heading higher over the years and decades to come. World population growth (from 6.8 billion today to over 9 billion in 2050) along with more protein-intensive diets, the decline in arable farmland, higher fuel prices, water shortages and changing weather patterns in some important farming regions promise food shortages and higher prices.
- Central bank accumulation – net official demand – will not only continue but will likely expand in 2012 and for years to come. With China and Russia leading the pack, a growing number of central banks, underweighted in gold and over-weighted in dollars and euros, will join the line to buy gold.
- Long-term demand from investors and jewelry buyers in both China, India and other emerging-economy nations will continue to boost gold prices – not just in the next year or two, but for many years to come – reflecting the rising incomes and growing middle classes in these two countries.
- Persistent tensions and instability in the Middle East and North Africa – uncertainty about Iran's nuclear ambitions, vulnerable oil supplies, civil war in Syria and possibly in Iraq and Afghanistan too after America's military exit, unrest in one or another country as authoritarian regimes are challenged from within.
- Despite a temporary respite, Europe's sovereign-debt crisis will continue to provide more financial market drama and investor anxieties in the years ahead. Thanks to overly restrictive fiscal policies, some of the EU economies will inevitably slip deeper into recession and some of the newly elected political leaders will likely advocate a renunciation of sovereign debt and departure from the euro zone – all with unknown economic, social, and political consequences.
- The expected future depreciation of the US dollar in world currency markets and the continuing erosion of its status and role as the world's key official reserve asset. And, the dollar is not the only currency suffering a loss of respect. The euro, the British pound, and even the Swiss franc are following the greenback down hill – just as the Chinese yuan and currencies of some other newly industrialized nations are in their ascendency.
- The continuing expansion and maturation of the gold-investment infrastructure with the development of new gold investment vehicles and channels of distribution – especially gold exchange-traded funds – that facilitate physical gold investment by both retail and institutional investors (including pensions, endowments, insurance companies, sovereign-wealth funds,and hedge funds) and lead to increasing participation, one way or another, by investors of all stripes in the gold market.
- World gold-mine production, although growing, will not keep pace with the expected growth in global gold demand. Even a rash of new mine discoveries would take five to 10 years – or more – to contribute significantly to supply . . . and, meanwhile, existing resources are being depleted, nationalized by unfriendly governments who tend not to be good mine operators, or are simply mined out.
Together these bullish building blocks have resulted in a notional gap between world supply and aggregate demand - a gap that has been and will be closed only by high and rising prices in the years ahead.