Gold's recent performance has certainly been a major disappointment to the many analysts and investors who have been anticipating another stellar year for the yellow metal. But the year is hardly over, nor is gold's long-term bull market. I believe we may yet see a reversal of gold's fortunes and new all-time highs, if not this year than certainly in 2013. Moreover, the now decade-long advance in the metal's price could last another five-to-ten years given the global economic challenges that lie ahead.
For now, gold's short-term prospects remain uncertain. So far this year, gold has traded at well beneath its all-time high of $1,924 recorded last September. It's subsequent low near $1,520 an ounce registered in late December now, in recent days, again seems to be a vulnerable support level. As we have previously cautioned, a fall back to $1,520 – or even lower – is certainly possible before gold resumes its long-term ascent.
Gold's reversal from last September's record high and its continuing anemic performance reflect an Olympian tug of war between short-term institutional traders and speculators operating in derivative markets trading paper proxies for gold . . . and physical markets where long-term investors, jewelry consumers, and central banks have continued to accumulate a growing quasi-permanent stock of metal.
It is in the physical realm - the real world of supply and demand for gold bullion - where the long-term average price of gold is set. And here the fundamentals are decidedly bullish. In fact, thanks to continued central bank buying, rising Chinese private-sector demand, and limited mine supply availability, the fundamentals are becoming increasing bullish despite the current episode of price weakness.
You'd think gold prices would, by now, be flying at much higher altitudes what with Europe sinking deeper into recession, bank runs spreading from Greece to Spain, Portugal, and Italy, Greece increasingly likely to secede from the Eurozone, and the European Union coming apart at the seams. Instead, the flight from the euro has favored the U.S. dollar - and the appearance of a stronger US dollar has contributed to a short-term bet against gold by institutional traders and speculators. But the greenback is merely the best-looking horse on its way to the glue factor and its strength is merely a reflection of the euro's decline. It is not supported by a healthy American economy and sound US monetary and fiscal policies.
The key short-term players are a small number of banks, hedge funds, and other financial firms who operate with the benefit of leverage and sometimes little cash down and trade not in real gold but in futures, options, and more opaque over-the-counter markets. What motivates these traders is the necessity to make short-term trading profits.
For a good part of last year, as a group, they were on the long side of the gold market, contributing to gold's stellar advance last summer. But as they demonstrated later last year, they have no lasting or long-term commitment to gold as an inflation hedge, portfolio diversifier, or insurance policy against economic or political risk.
More recently, it has been these short-term players operating on the short side of the market who have held sway . . . and held back the price advance that is surely coming. At some point, perhaps when the Greek economy and financial markets seize up, or the country launches its own currency, or the black plague of lost confidence spreads to other vulnerable, overly indebted nations, gold will return to vogue and these traders and speculators will again favor the yellow metal as an opportunity to profit.
Alternatively, the European Central Bank could come to the rescue, issue a euro-denominated "mutualized" debt instrument – a European version of US Treasuries – and provide sufficient refinancing to Greece and the other heavily indebted countries that, for now, they avoid a more disastrous outcome. The cost, however, would be borne by much higher inflation across the continent and a deep long-lasting devaluation of the euro. This time, however, not only might the US dollar look stronger as the euro weakens – but gold would likely shine for reasons I have explained in past Rosland Capital Gold Commentaries.