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.

LONDON - 

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

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gold investing Gold ETFs may be the easy way to participate in gold's price action, but buying ETF shares is not the same as owning gold. When you own ETF shares, you own shares in a company that owns gold, and you get the price action but you do not own gold. . .more For info about owning gold, see www.cmi-gold-silver.com. . .less by Bill Haynes on October 30 2009, 11:13 Find this comment inappropriate? Report it

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