US NATIONAL DEBT

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Easy Money – The Elixir of Gold

February 20, 2014

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

So far, 2014 has been a year of recovery for gold.  Trading recently near $1,320 an ounce, the metal is already up some 10 percent from its 2013 year-end price of $1,201.50 in the London bullion market. 

Gold’s improvement was apparently quite a surprise to many of the most prominent analysts and investors who, forecasting the price through a rear-view mirror, expected prices to head further south.  With gold possibly on a sustainable upswing, they are now busy jacking up their gold-price targets.  

Although gold has recovered smartly in recent weeks, an uninterrupted upswing to progressively higher levels is hardly assured.  Indeed, the yellow metal may have a steep uphill fight, very likely with occasional setbacks that are mistakenly taken as signs of further weakness and deeper setbacks ahead.  

In part, this rag-tag recovery is a reflection of the uncertain and ambiguous economic circumstances here in the United States and abroad . . . and the changing expectations for prospective monetary policies in the major economies. 

For sure, monetary policy prospects in the United States will continue to be a key driver of the gold price in the year ahead and beyond.  But Federal Reserve policy is not the only factor likely to push gold higher this year. 

For one thing, we expect disinvestment by professional and institutional investors has mostly run its course if only because most of the metal in weak hands has already been shed.  This wave of disinvestment – amounting to a staggering 880 tons in 2013 – was perhaps the most negative factor underlying last year’s nearly 30-percent price decline.  This year, there’s just not that much left to sell . . . and most of what was sold is now in strong hands.

For another, we expect China’s appetite for gold to remain ravenous regardless of the macroeconomic and financial market situation in that country.  And we expect Indian gold imports and domestic hoarding demand to recovery with a relaxation in the government’s anti-gold policies. 

Returning to prospects for the U.S. economy and Federal Reserve policy, we believe the economy is weaker than generally perceived and in danger of stumbling badly.  Despite all of the talk to the contrary emanating from a number of “hawkish” Fed officials, a worsening economy could force the Fed to slow down or postpone altogether its policy of tapering and, perhaps, adopt additional stimulative measures. As in the past, indeed throughout thousands of years of history, “easy money,” even at times of economic distress, is the elixir of gold.  

Expectations of continued economic recovery are wishful thinking by economists wearing rose-colored glasses.  U.S. economic growth as measured by gross domestic product (GDP) expanded by 1.9 percent last year, slower than the 2.8 percent pace recorded in 2013 – and it looks like GDP could slow still further this year. 

Already, the January indicators are disappointing with industrial production off, capacity utilization falling, business inventories rising (a sign of weaker-than-expected consumer spending), softer home sales and durable goods orders.  Many economists, including those at the Fed, excuse these signs of stagnation as weather-related – but the data is seasonally adjusted and downward revisions to earlier data suggest there is more than a few snowstorms at play. 

As news of a stumbling economy gains credence, gold stands to gain . . . and investors in the yellow metal will be rewarded. 

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 by Marin Aleksov, 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.