Gold's failure last week to sustain gains over $1,790 an ounce triggered profit-taking by frustrated longs and technically inspired selling by institutional traders and speculators in "paper gold" derivative markets, so much so that the yellow metal briefly traded under $1,730 on Monday.
As gold tumbled in recent days, short-term market psychology has, not surprisingly, turned increasingly gloomy – suggesting gold could possibly go lower before staging an inevitable recovery and renewed assault at the $1,800 level.
Nevertheless, we believe gold will move significantly higher by year-end or early 2013, possibly recording a new all-time high in the next three to four months – thereby rewarding those intrepid investors holding on to or augmenting their gold positions despite the short-term vagaries of the gold market.
Importantly, physical markets are already responding to lower prices with Asian buyers across the gold-friendly East Asian "arc of gold" sensing a bargain. In this region and elsewhere, some central banks that have been periodically building their official gold reserves in recent years were likely buying increasingly less as prices rose above $1,775 – but surely beneath $1,750 they, too, are sensing a bargain and returning to the market.
Demand for gold exchange-traded funds has been much less price responsive with steady accumulation in recent months. Gold purchased by these funds on behalf of their shareholders – mostly hedge funds, family offices, and high net worth investors – has steadily increased as gold rose and fell in the past few weeks. By our calculation, global gold ETF depository holdings stood at 87.2 million ounces in mid-October – up from 85.9 million ounces at the end of September, and 83.3 million ounces at the end of August.
We have long argued that bearish economic news is bullish for gold because a persistently under-performing economy pressures central banks to maintain or increase their stimulative policy initiatives. We've certainly had more than a fair share of bad economic news, not just here in the United States but also across Europe and the emerging economies (that were until recently thought to be immune from the global slowdown.) As a result, we have been served another big dose of monetary accommodation, not just by the Fed at its September FOMC policy-setting meeting, but also in recent weeks by the European Central Bank, the Bank of England, the Bank of Japan, and even the People's Bank of China.
These actions may bring some modest relief but they also portend rising inflation and currency debasement – with long-term bullish implications for gold. Indeed, the September gold-price rally was largely the result of the Fed's announcement of QE3, its latest effort to juice the economy.
With little new monetary policy initiatives expected from the Fed in the next few months, the financial markets – including the market for gold – are shifting attention to the upcoming US Presidential and Congressional elections – trying to discern the election outcomes and their implications for the economy and the markets.
I can tell you this much: Whatever the election results, recession-like economic conditions – or worse – will continue to plague the US and global economies for years to come. It took years, if not decades, for the United States and most other major economies to accumulate massive and unsustainable levels of public- and private-sector debt.
As we are now witnessing, spending, whether by governments or households, cannot continue without access to credit. So, we must ask ourselves realistically, who will continue to lend to already bankrupt borrowers? Only each nation's central bank. That's exactly what increasingly rapid monetary expansion (aka quantitative easing) is all about – but its eventual result will be rising inflation, currency debasement, and much higher gold prices.
Of course, there are many other price drivers that bode well for gold – and I'll have more to say about these in subsequent Rosland Capital Gold Commentaries.