US NATIONAL DEBT

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Gold Bears Watching

June 14, 2013

Jeffrey Nichols, Senior Economic Advisor to Rosland Capital (www.roslandcapital.com), had the following comments on the current gold market situation and outlook:

Gold continues to suffer under a cloud of bearish expectations.  Its price has been trending lower for some 20 months now – and, at recent lows, is off some 30 percent from its September 2011 all-time high of $1924.  Some investors, analysts, and journalists are already writing obituaries for the decade-long bull market and foresee only a grim future for the yellow metal. 

These naysayers, most prominently economist Nouriel Roubini who gained some renown for predicting the financial-market debacle of 2008, point to a number factors to support their bearish predictions.  They say inflation will remain subdued, the U.S. dollar will continue to appreciate, interest rates will rise, Europe will pull through without sovereign defaults, and the central banks of some deeply indebted countries with substantial gold reserves (like Italy or Spain) may sell some of their official gold reserves.  Moreover, they say gold has been over-hyped and don’t see why investors would want to own an asset that earns no income.  

It seems to me that the bears have a fairly provincial view and a limited understanding of gold’s increasingly bullish long-term fundamentals.  By “provincial” I mean they are ignoring more than half the world – the half that loves gold and will accumulate more.  They seem to think not much is important to the future of gold outside the United States and Europe.

They also are overly optimistic about U.S. economic prospects and the implications for U.S. monetary policy.  In recent months, expectations of Federal Reserve policy have been a powerful short-term influence, affecting much of the day-to-day movement in gold prices.

What happened to China, India, the Middle East, Turkey and other gold-friendly countries?  If anything is certain, it is this: Households, institutional investors, and central banks in these countries will in the next few years continue to acquire increasing quantities of gold – and much of these acquisitions are for the long term. In other words, much of this gold won’t come back to the world market even at much higher prices levels, contributing (as I’ve frequently said in the past) to a future shortage of physical gold and steep price increases for the yellow metal in years ahead. 

Indeed, looking out beyond the next year or two, demand for gold in these countries will be enough to move gold prices higher even if economic and investment conditions in the United States and Europe are not propitious for gold. 

In the meanwhile, however, a faltering U.S. economy – particularly employment-market conditions and the declining pace of consumer price inflation – could trigger a surprisingly robust recovery in the price of gold. 

The Fed is targeting a decline in the unemployment rate to 6.5 percent and a rise in the inflation rate to at least two percent.  As long as these targets both remain illusive, the Fed is likely to continue its program of Treasury and mortgage debt purchases, known as quantitative easing, at $85 billion per month – and if the economy falters, as I think it might, financial markets may be surprised to see an even more stimulative monetary policy, surely a recipe for higher gold prices.

Financial markets are anticipating an early reduction in the pace of quantitative easing, a “tapering” or scaling back in the pace of monthly bond purchases.  As a rosy economic scenario becomes more doubtful, possibly with a spate of disappointing economic news, gold could rally sufficiently to reverse the gold market’s price momentum and reestablish the long-term bullish uptrend. 

Employment market conditions are even worse than the headline unemployment rate suggests with stagnant wages, a shrinking workweek, a torrent of part-timer workers who would like full-time employment, and a rising number of discouraged workers dropping out of the work force.  Don’t expect any reduction in central bank monetary stimulus until the labor market shows meaningful signs of improvement. 

What about inflation and the dollar?  Investors and observers of the gold scene have been misled by the very low reported rate of consumer price inflation and by the apparent strength of the U.S. dollar in world currency markets.  I don’t know anyone who really believes that inflation is near zero.  It may be low, but not that low . . . and, eventually, all that new money the Fed is creating month after month will come home to roost. 

Gold prices have been restrained by the “appearance” of a strong U.S. dollar.  In reality, the currencies of all of the old industrial-world countries are devaluing together as each country attempts to increase international competitiveness and boost exports.  These currencies – including the euro, the pound, the Swiss franc, the yen, the Australian dollar and others – are all losing value in terms of their true purchasing power – only the dollar’s decline is a bit slower than most others.  This “beggar-thy-neighbor” competition is reminiscent of the Great Depression . . . and must surely be supportive of gold. 

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.