US NATIONAL DEBT

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A Rollercoaster Ride for Gold Investors

September 6, 2013

Jeffrey Nichols, Senior Economic Advisor to Rosland Capital, had the following comments on the current gold-market situation and outlook:

Gold continues its rollercoaster ride, lurching one way then the other, leaving many investors with an uncomfortable feeling of uncertainty.  What’s behind this recent wave of gold-price volatility . . . and where is it likely to lead? 

Simply put, the market is reacting to shifting expectations and uncertainties that are pushing and pulling gold in different directions – expectations about prospective U.S, military involvement in Syria . . . and expectations about prospective U.S. monetary policy. 

To Taper . . . or Not

Many Fed watchers, financial-market traders, and investors expect the Fed will begin scaling back its monetary stimulus in the next month or, at least, announce a start date following its mid-September FOMC policy-setting meeting.

In April, when Chairman Bernanke hinted that a reduction in monetary stimulus could begin later this year, surprised gold-traders panicked and the metal’s price fell precipitously.  Now, however, the possibility of tapering – a gradual dialing back of its super-stimulative monetary policy – is, for the most part, already reflected in the current price of gold and the prices of other financial assets.  

If, indeed, the Fed initiates – or simply announces – a start-up date for the implementation of a decreasingly stimulative monetary policy, the yellow metal’s price would likely suffer, at most, a short-lived setback.  Alternatively, if following its September 17th-18th policy-setting meeting, the Fed continues to postpone the start of tapering gold prices could rally smartly.

But tapering is not tightening – and monetary policy will, in any case, remain in a stimulative pro-gold mode for months, if not years, to come as the economy continues to struggle to regain its footings.  And, in any event, as important as it is, there’s more to gold-price prospects than U.S. monetary policy. 

When the Missiles Fly

Rising economic and geopolitical uncertainty associated with possible U.S. military action against the Syrian regime – and fear of possible unintended and unpredictable consequences possibly involving Russia, Iran, Hezbollah, Saudi Arabia, Turkey, and Israel – contributed much to the late August gold-price rally by increasing both safe-haven and speculative demand.  And, the subsequent easing of war-related fears contributed much to the early-September gold-price decline. 

When it seemed President Obama was on the verge of ordering a military strike, safe-haven demand propelled gold right through overhead resistance around $1,400 an ounce and sent the metal briefly above $1,420.  But then, the British Parliament’s resounding rejection of that country’s participation in any U.S.-led military action against Syria – and Obama’s lack of popular support here at home – together made a U.S. military action seem somewhat questionable and, in any case, not so imminent.  Thus, began the downward correction that brought gold prices back to the $1,360 to $1,370 range of support late this week. 

However, as of this writing, it now looks like the President will eventually receive bipartisan Congressional support for some limited military strike – and, if so, I’d expect the gold price to rebound, at least briefly, depending on concurrent monetary policy developments from the Fed.  Indeed, the drag on U.S. and global economic activity arising from higher oil prices and the uncertainty-related postponement of business and household spending decisions could discourage the Fed from early tapering.

Seasonal and Other Factors

Looking ahead to the official start of autumn, seasonal factors, especially the approaching festival season and associated rise in gold demand in India, the restocking by jewelry manufacturers after the summer holidays, continuing strong demand from China, and a pick-up in central-bank acquisitions, should also contribute to gold's recovery. 

There may be other positive wildcards for gold over the horizon: 

For one thing, fiscal gridlock and the approaching Federal debt ceiling could raise financial-market anxieties, weaken the greenback, and worse, trigger a downgrading of U.S. Treasury debt by the credit-rating agencies. 

Not much discussed, the long-term decline in world gold-mine output already underway – and the strike by South African gold miners – is likely to further encourage some of the gold bulls, even if it has little significant affect on the metal’s overall supply/demand situation. 

And, in the background, playing a supporting role, has been record physical demand from the gold-friendly Asian markets and cash-rich central banks as well as retail investors buying coins and small bars in Western markets.

Taken together, these bullish gold-market trends and developments should be enough – irrespective of prospective Federal Reserve monetary policies – to assure gold prices move higher in the months ahead.  

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 coins, platinum, palladium, and other precious metals. Rosland also helps people who wish to protect their wealth by including a gold or precious metal-backed IRA in their asset portfolio. Click here for more information.

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.