Contrary to some commentators who say "gold's extraordinary run is nearly over" or "the gold-price bubble will soon pop," I believe the yellow metal's price has far to go, perhaps to the end of the decade or even longer, before the great gold bull market comes to its ultimate cyclical end.
Right now, there are plenty of rock-solid fundamentals that suggest the gold market is healthy with plenty of room to move higher. Moreover, the world economic and geopolitical environment remains very supportive - and seems likely to remain pro-gold for years to come.
My forecast of $1,700 gold by year-end 2011 first reported in the Jan. 4 Rosland gold commentary now seems within easy reach. And this is just the beginning of gold's next great move up, a move that will carry the metal to $2,000 an ounce, possibly by the end of next year, with prices heading still-higher - to $3,000 and possibly $5,000 or more in the mid-to-late years of this decade.
We expect continuing two-way price volatility and periodic sharp corrections, corrections that some will mistake as the end of the bull market - but you should consider these opportunities to acquire additional metal at bargain-basement prices.
With gold recently at new historic heights, there is certainly some risk of a short-term price correction - especially if the US Treasury debt ceiling and Federal budget crisis is resolved expeditiously with the promise of long-term deficit reduction. Positive news on the debt and deficit front could trigger a swift - but temporary - gold-price retreat.
In any event, gold will soon begin to benefit from increased seasonal demand, demand that should support the yellow metal's price right through New Year's Day. There are three distinct sources of seasonal demand: (1) Western jewelers step up fabrication demand ahead of Christmas gift-giving late in the year; (2) Indian dealers begin stocking up ahead of the late summer and autumn festivals and wedding season; and (3) in December and January, the approaching Chinese lunar new year triggers another sharp rise in gold demand.
For sure, irrespective of the season, Asian demand - principally from China and India - for physical metal will continue to underpin these markets and limit downside risks.
So too will bargain hunting by a number of central banks eager to raise their official gold holdings without disrupting the world gold market by increasing upward price volatility.
European Central Bank president Jean-Claude Trichet a few weeks ago raised the alarm level on Europe's debt crisis to "red" warning that the crisis is nowhere close to being resolved. Indeed, I believe the sovereign-debt crisis will continue to worsen.
First, the more restrictive fiscal policies being forced on the periphery nations (Portugal, Ireland, Italy, Greece and Spain) will push their economies deeper into recession and increase, rather than decrease, government deficits and borrowing needs for years to come.
Second, as credit ratings decline for the peripheral countries, the rising cost of refinancing maturing debt make it all that much more difficult to keep their heads above water.
The peripheral countries desperately need a devalued currency to bring their economies into balance. But meanwhile, Europeans will continue to abandon the euro, Europe's single currency, for "safe havens" including gold and, ironically, the US dollar.
Higher Inflation Ahead
The US economy is still mired in recession, or worse. Recent statistics show real GDP virtually stalled in the first half of the year. Unemployment remains stuck over 9 percent. The huge inventory of foreclosed homes held by banks continues to weigh heavily on home prices.
So far, most Washington politicos and Wall Street bankers are in denial, refusing to see the worsening signs of renewed recession. Instead, they are arguing for restrictive budget-balancing economic policies that will exacerbate the developing downturn.
Having ended its program of quantitative easing at the end of June as scheduled, the Federal Reserve, in my view, will soon be forced by the worsening economic environment to resume monetary stimulus in one form or another - and this will be a big plus for gold.
Ultimately, the only politically acceptable means for America to dig itself out of its unbearable burden of excess debt is to pursue a policy of higher inflation that will deflate the ratio of outstanding debt to nominal gross domestic product (GDP) to historically acceptable and manageable levels. This is what we did in the 1970s, a decade of stagflation, and we're already doing it again.
Whatever happens in the US and European economies, it is hard to imagine a realistic scenario that won't push gold prices significantly higher in the months and years ahead.
Jeffrey Nichols, managing director of American Precious Metals Advisors and senior economic advisor to Rosland Capital, has been a precious metals economist for over 25 years.