Gold continues to disappoint, mired in a trading range between about $1,700 and $1,750. Recent efforts to move higher have been thwarted by stepped-up speculative selling and softer physical demand with many buyers now conditioned to wait for the next dip. At the bottom of this range, bargain hunting in the form of stepped up physical demand from central banks, sovereign wealth funds, and some of the gold-friendly hedge funds has created a floor under the market.
As the days pass by, it seems less likely that gold will approach or surpass its all-time high near $1,925 by year end or early 2013. Less likely, but not impossible: After all, from recent price levels, a quick and quite imaginable rally of some 11%-to-12% would see gold breech its record high. For short-term traders, timing may be everything . . . but for long-term investors (like ourselves) timing is much less important. Whether you bought physical gold at $1,500 an ounce or $1,700 or even $1,924 you will see good, if not great, returns as gold continues its long-term upward trend – an upward trend that is likely to persist at least for another few years.
Changes in the aggregate gold holdings of exchange-traded funds (ETFs) have been a fairly consistent leading indicator of future gold prices over the past few years. Globally, gold ETFs purchased nearly 250 tons (about 800 million ounces) so far this year – and the total quantity of ETF gold held on behalf of investors now amounts to more than 2,600 tons.
It may well be that money flowing into gold exchange-traded funds is a consequence of the very accommodative monetary policies now being pursued by the Federal Reserve and many other major central banks across Europe and Asia – with rapid central-bank money growth a causative factor explaining both strong demand for ETF gold and the long-term upward trend in the metal's price.
Although some of the recent economic data (in the housing and personal consumption sectors) have been encouraging, other statistics (in manufacturing, for example) have painted a less encouraging picture. In any event, the employment/unemployment indicators remain unacceptable to the Fed policymakers while inflation – at least according to the official statistics followed by the Fed – remains subdued, and on the surface, provides no reason for a reversal in monetary policy.
My own careful reading of the Federal Open Market Committee minutes from its last policy-setting meeting – along with statements and speeches by various Fed officials in the past few weeks – suggests there is a good chance the Fed will announce further expansionary monetary-policy measures following its upcoming December 11-12 meeting.
Predictions (most recently from the OECD) of a worsening synchronized worldwide economic slowdown and a spreading sense of global gloom and doom are also contributing to the Fed's sense of urgency, boosting the odds of further monetary accommodation sooner rather than later.
This fourth round of quantitative easing (or QE4) is likely to have more bang for the buck compared with QE3, which included among its measures the sale of short-term Treasury securities to fund its purchase of long-term Treasury notes and bonds. With its inventory of short-term securities now mostly depleted, any future purchase of long-term securities must be funded with newly created bank reserves – which is, in essence, printing new money – some of which will find its way into gold and probably other asset markets.
Surprisingly, America's fiscal sclerosis – and the approaching "fiscal cliff" – have had little observable, direct, and immediate influence on the price of gold in recent weeks and months, if only because amid all the confusion, no one really knows how this crisis will sort itself out.
But, however it sorts itself out, we expect some combination of spending cuts and revenue hikes are in America's economic future. Whenever and however this sorts out, fiscal policy is set to become more restrictive – exactly the wrong medicine for our ailing economy at this juncture, raising the risks of recession or worsening recession-like conditions along with a deterioration in employment/unemployment indicators.
This bad news for the economy is, as bad news often is, good for gold. Fiscal policies that promise slower business activity, falling after-tax household incomes, reducing household spending, slower recovery in the housing and construction sectors, etc. increase the likelihood of still-more stimulative Federal Reserve monetary policies. Indeed QE4 may be right around the corner . . . and QE5 could come by mid-2013 as the Fed struggles to prop up a faltering economy. If the past is a reliable predictor, these efforts by the Fed (and similar policies by other major central banks) suggest much higher gold prices ahead.