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Gold Continues To Soar, Again, Explains Jeffrey Nichols - Senior Economic Advisor For Rosland Capital

Published 07/22/2011

NEW YORK (July 22, 2011) - Jeffrey Nichols, Senior Economic Advisor to Rosland Capital (www.roslandcapital.com), had the following commentary based on recent market activity:

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 is no evidence of a buying frenzy or over-extension of long speculative positions in derivative markets to suggest we are anywhere near a top but there are plenty of rock-solid fundamental trends that suggest the 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.

Interestingly, much of the recent selling pressure around the $1600 level has come from institutional speculators and traders operating in "paper" derivative markets, but bullion coin demand in the United States and Europe has not waned.

My forecast reported in these Rosland Gold Commentaries and in other speeches and reports published by American Precious Metals Advisors, of $1700 gold by year-end 2011, 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 $2000 an ounce, possibly by the end of next year, with prices heading still-higher - to $3000 and possibly $5000 or more in the mid-to-late years of this decade.

From a long-term perspective, gold prices near $1500, should we ever return to that level, $1600, or even $1700 an ounce will prove to be bargains. As I have cautioned in the past, expect high two-way price volatility and periodic sharp corrections, corrections that some will mistake as the end of the bull market, but consider these opportunities for "scale-down" buying, opportunities to acquire additional metal at bargain-basement prices.

A Pause that Refreshes

With gold recently at new historic heights after rising more than $120 in just a few weeks and the psychological price barrier presented by big round numbers, there certainly is some risk of a short-term price correction - especially if Congress authorizes an increase in the U.S. Treasury's debt ceiling.

A compromise between President Obama and both houses of Congress to raise the U.S. Treasury debt ceiling and narrow the Federal deficit in future years will remove or reduce one important source of anxiety that has contributed to gold's recent strength. News of positive movement toward or actual completion of an agreement could trigger a swift - but temporary - gold-price retreat.

Adding to my short-term caution has been a price-related relaxation of physical demand and the appearance of increased quantities of gold scrap returning to the market, especially from India and other price-sensitive national markets in recent weeks as prices rose above $1550 and approached $1600 an ounce.

I expect Indian and Chinese scrap reflows will diminish significantly and fresh buying interest will pick up should gold approach or fall below the $1550 level, creating price-related support under the market.

Hot Summer, Hotter Autumn

Contrary to the view expressed by most serious gold analysts, we said in past Rosland Capital commentaries that gold would not pause for its typical summer vacation and relaxation in price volatility. Indeed, it has been a very hot summer as gold moved up smartly to achieve new all-time highs with plenty of fireworks and price volatility both up and down.

However, come September, positive seasonal factors will kick in - and, other things being equal, give gold still more firepower. 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 autumn festivals and wedding season, and in expectation of good harvests with healthy household incomes in the gold-friendly agrarian sector; and (3) later in the year and in early 2012, a sharp rise in gold investment and jewelry demand associated with the approaching Chinese lunar new year.

For sure, irrespective of the season, price-sensitive 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.

Central Banks Rediscover Gold

Official statistics published monthly by the IMF show that central banks, as a group, have been busy buying gold. Russia, India, China, Saudi Arabia, Mexico and Brazil have been among the big buyers in recent years and a number of other countries have added smaller amounts of gold to their official reserves. One big surprise was Mexico's purchase of some 100 tons earlier this year as a hedge against the possible decline in the value of their U.S. dollar reserve holdings.

Moreover, a survey of 80 central bank reserve managers predicted that the most significant change in their reserve holdings in the next 10 years will be their intentional build up in official gold reserves. They also predicted that gold will be their best performing asset class over the next year and sovereign debt defaults will be their principal risk.

Sovereign Debt Crisis Prompts Safe-Haven Demand

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 and he also warned of the "potential contagion effects across the [European] Union and beyond."

Meanwhile, Europe's sovereign debt problems are worsening and the likelihood of sovereign default by Greece or another of the more vulnerable periphery economies is increasing, despite all the talk among Finance Ministers seeking a solution acceptable to both the stronger "core" countries (led by Germany), the weaker "periphery" countries and the private credit-rating agencies.

Several factors suggest that the European debt crisis will continue to worsen:One clearly is that the more restrictive fiscal policies the periphery nations (Portugal, Ireland, Italy, Greece, and Spain - the so-called PIIGS) have been asked to accept will push their economies deeper into recession - and increase rather than decrease government deficits and borrowing needs for years to come.

Another is that the downgrading of sovereign debt by the rating agencies raises interest rates and borrowing costs - and pushes these countries closer to the brink (a lesson that the United States needs to learn before it also finds itself with higher Treasury borrowing costs due to a cut in our debt ratings).

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. Reflecting their deteriorating credit ratings, Greek two-year bond yields are over 35%, Spanish 10-year bonds are at a record 6.3% and Italian 10-year bonds are also yielding around 6%. Higher borrowing costs will increase government deficits and make repayment of past debt all the more unlikely.

An important aspect of the crisis is that default on European sovereign debt, debt that is held by many European banks, will require the banks to write-down these questionable assets, leaving them with insufficient capital and effectively bankrupt.

The broader effect of bank failures on the European economy, capital markets and banking system could be far more devastating than the Bear Sterns and Lehman Brothers debacle in the United States - and would likely result in the European Central Bank along with the U.S. Federal Reserve flooding financial markets with newly created money, depreciating paper currencies, inflating prices and boosting gold.

I continue to believe that ultimately the euro, Europe's single currency, will be replaced by a multi-currency system - with the core countries possibly retaining the euro while the periphery nations will revert each to their own monetary unit or a deeply devalued renamed euro of their own.

With no solution in sight, Europeans will continue to abandon the euro for "safe havens" including gold and, ironically, the U.S. dollar. At the same time, the problems of the euro will discourage its acceptance as a reserve asset by some central banks - and make gold an even more attractive alternative.

Meanwhile, Back at the Fed

The U.S. economy is still mired in recession, or worse. Nearly everyone knows it, even if the official statistics show some positive growth in real GDP. Unemployment remains stuck over 9 percent. The huge inventory of foreclosed homes held by banks continues to weigh heavily on home prices. Various economic indicators released in the past few days and weeks are pointing to the second dip in what may be called a double-dip recession.

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 economic policies that, if enacted, would exacerbate the developing downturn and which future history books will liken to the policy mistakes of the 1930.

The Fed also fails to see, at least publically, the writing on the wall. Having ended its program of quantitative easing at the end of June as scheduled, it will - in my view - soon be forced by rising unemployment and sluggish business activity to resume monetary stimulus in one form or another. Contrary to popular belief, the Fed can stimulate the economy and liquefy the financial system through open-market purchases of securities and even real assets, not just Treasury securities but stocks, corporate bonds, commercial paper, mortgages, credit-card debt, student loans and even real estate.

As I have said in past reports and speeches, the only viable and politically acceptable means for America to dig itself out of its unbearable burden of excess debt - federal, state and local, housing, and other private-sector 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. Indeed, under Chairman Bernanke's lead, the Fed is quietly pursuing this policy of targeting somewhat higher U.S. price inflation.

Pursuit of a mildly inflationary monetary policy will not however excuse the Congress and Administration from developing a responsible believable program of long-term spending restraint and deficit reduction. However, now is not yet the time to impose these restrictions on an ailing economy - though articulation of a realistic bi-partisan plan for long-run deficit and debt reduction would help calm world financial and currency markets.

Whatever happens in the U.S. 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.

And I haven't even mentioned other important bullish factors including:

To arrange an interview with Jeffrey Nichols, please contact Carrie Simons of Triple 7 Public Relations, LLC at (615) 254-9389 or carrie@triple7pr.com.

About Rosland Capital
Rosland Capital LLC is a leading precious metal asset firm based in Santa Monica, California that buys, sells, and trades all the popular forms of gold, silver, platinum, palladium and other precious metals. Founded in 2008, Rosland Capital strives to educate the public on the benefits of investing in gold bullion, numismatic gold coins, silver, platinum, palladium, and other precious metals. For more information please visit www.roslandcapital.com.

About Jeffrey Nichols
Jeffrey Nichols, Managing Director of American Precious Metals Advisors and Senior Economic Advisor to Rosland Capital, has been a leading precious metals economist for over 25 years. His clients have included central banks, mining companies, national mints, investment funds, trading firms, jewelry manufacturers and others with an interest in precious metals markets.