Investment to drive gold price to $2,000-$3,000 or more but only over a few years.
Jeff Nichols sets out his views on gold and the gold price in a presentation in Hong Kong.
Author: Lawrence Williams
28 October 2009
Gold guru Jeff Nichols, in his latest presentation to a Far Eastern audience at
the Gold Outlook Asia conference in Hong Kong last Thursday, made some very
pertinent points regarding gold and the U.S. and global economy - the two being
very much interlinked.
Some of his particular comments were as follows:
- The root cause of the current world economic crisis has been decades of easy money, low interest rates, a persistently expansionary monetary and fiscal policy by the U.S. -- aided and abetted by China and the other major Asian exporting countries.
- These same policies are now responsible for the bull market in gold -- a bull market that will likely to carry the metal into the $2,000 to $3,000 range or even higher over the next few years, but not immediately.
- The U.S. economy is showing signs of life only because of massive injections of liquidity from the Fed and unprecedented fiscal stimulus from by the U.S. Treasury along with a temporary period of inventory restocking.
- There remains a significant risk of a "double-dip" recession with further contraction and a second down-leg in U.S. equity prices yet to come.
- In lieu of paying down America's huge debts, we can expect currency debasement and higher rates of inflation to reduce the real value of its debts at home and abroad. And, with higher inflation and a depreciating dollar, gold will likely continue its spectacular rise.
These are at the heart of the current position we find ourselves in.
Gold is taking a bit of a breather at the moment, which is hardly surprising
given its recent very sharp increases. Likewise, in its contrary role, the
dollar is also taking a breather from its recent very sharp falls and this may
take a little time to play out. The gold price has been particularly
volatile over the past week or so reacting sharply to every nuance and rumour in
the sector. But overall market consensus seems to be developing that the
recent rises were too far too fast, but the yellow metals' reluctance to fall
back even more sharply is perhaps testimony that there are many big investors
out there who have little faith in a prolonged dollar recovery and little
confidence in the overall state of the global economy - and that of the U.S. in
particular.
Nichols commented in his speech: "We are in this mess today because America
borrowed and spent too much, because we created too much credit, pumped out too
much liquidity, and often kept interest rates too low- and the rest of the world
was willing to go along. Now, the politicians and policy-makers are telling us
the cure is more spending, more borrowing, bigger deficits, more credit, more
liquidity and negative real interest rates.
"How can this be? It was too much liquidity, too much credit, too much spending,
and too much borrowing that created the economic crisis in the first place. Yet,
Americans are told by mainstream economists and politicians that the
prescription is more of the same - only in bigger doses."
A salutary statement but one which is very true to this observer.
On gold's fundamentals Nichols commented that global gold production peaked in
2001 at 2,645 tonnes and has been declining since. He expects it to fall
to around 2,300 tonnes before perhaps stabilising as the recent higher prices
have been stimulating exploration - although it takes anything up to ten years
to bring a new large scale mine to production from discovery.
Scrap supply surged late last year and early this, stimulated by higher prices,
but since then have become more muted despite the plus $1,000 metal price of
late.
He also feels that jewellery demand may begin to pick up after a severe slump as
Eastern economies at least recover and consumers become more used to the higher
price levels.
Central Banks, which have been net suppliers to the market over the years, seem
to have been more reluctant to sell of late and the market has largely
discounted the planned IMF gold sale amid speculation that it may perhaps be
swallowed up as a chunk by gold-poor Central Banks - although the speech
pre-dated the recently rumoured Russian proposed sale of 50 tonnes (since
postponed) to plug a budget gap.
On the investment front, the arrival of the gold ETF is seen as being perhaps
the key market driver in the past few years as huge inflows of gold have been
swallowed up by these easy-investment options. He also commented on the
Chinese push by state-controlled organisations to make gold a medium for
investment for the small saver, which has enormous potential for the market.
While he didn't mention it, India too has been pushing out easy to hold small
gold coins and bars via state-owned and private banks, and even the Post Office,
for investment by the general populace, which has similar ramifications for the
market.
On the future price of gold, Nichols reckons the price will remain dependent for
the moment, not on the fundamental supply position, but more on gold's appeal as
a financial and monetary asset - an asset held as a savings medium, store of
value, portfolio diversifier, and insurance policy by individuals, investment
institutions, and central banks alike.
On historical data Nichols reckons that gold has tended to show strength
inversely related to the real (or inflation adjusted) rate of return on U.S.
Treasury securities and that today, real "inflation-adjusted" interest rates
across a range of maturities are negative . . . so, if history is a guide, we
can expect the price of gold to continue moving higher over the next year.
Nichols remains "extremely optimistic" on the gold-price outlook - but believes
the metal's ascent will take several years to reach its next long-term cyclical
peak. In the meantime he expects high volatility and a difficult climb, with
sharp reversals along the way that will, at times, cause some observers to
wonder if the market has already topped out.
But ultimately, "thanks to the extremely expansionary monetary policy - and with
a little help from ETF investors, central banks, and new or evolving geographic
markets - like China and India - gold will most likely climb into the US$2,000
to $3,000 range - and it could go even higher given the right confluence of
economic and political developments . . . or if a late-cycle mania produces a
final hyperbolic bubble before the gold-price cycle moves into its next
bear-market phase."
The text complete speech may be found on www.nicholsongold.com