Jeffrey Nichols, Senior Economic Advisor to Rosland Capital, had the following comments today:
Gold prices have been driven lower by excessive negative sentiment and bearish technical signals among a small number of large-scale institutional speculators – bullion banks, hedge funds, program traders and the like – most trading for very short-term gains while remaining indifferent to long-term fundamentals.
But, over the long run, gold should do very well as an investment asset despite the extreme bearishness now ruling the day. Household incomes are rising as the middle classes in China and India expand; China and India are – by far – the biggest gold-consuming nations. And, economic growth in these two countries – even if disappointing – will be sufficient to support growing middle classes with expanding appetites for precious metals.
In addition, gold will benefit from continued net demand from the official sector as a number of central banks underweighted in gold strive to reduce their dependence on the U.S. dollar as the world’s dominant reserve asset and trade-settlement currency.
Indeed, whichever way gold prices move next – up, down, or just sideways – I expect super-sized gains over the next three to five years with prices more than doubling their all-time historic high.
Despite occasionally better economic indicators, I remain pessimistic about the broad macroeconomic prospects for the U.S. and other old-world industrial economies.
The Europeans are sinking back into recession. Growth in China and other newly industrialized economies are slowing. And, in the United States, the latest housing, retail sales, and labor-market indicators remain disappointing. This means that major central banks will have no choice but to pursue easy monetary policies for years to come – and gold will be an important beneficiary.
Prior to the financial crisis of 2008, many years of excessive spending by households and governments – much on borrowed money – have left us overly indebted and incapable of sustaining growth in personal consumption consistent with healthy employment and housing markets.
In my view, the aging industrial economies will remain anemic – continuing to underperform for a very long time to come, suffering from what some economists have labeled “secular stagnation.”
Regardless of any current talk to the contrary by central bank policymakers, I believe the Fed may not only keep interest rates near zero for longer than anticipated by the U.S. and world financial markets – but also may reinstate its program of quantitative easing or implement other stimulative policies sometime next year.
Unprecedented easy-money policies have kept the U.S. and world economies from slowing to a standstill or worse . . . but at what cost?
One unintended consequence has been the emergence of gigantic bubbles in stocks, bonds, and many other assets – including fine art, vintage cars and other collectables, New York City apartments, and Midwestern farmland, to name a few. Indeed, gold is one of the few assets that looks relatively cheap!
It’s hard to imagine how the radical monetary policies of the past several years might end – but it probably won’t end well.
Gold markets can no longer count on rising geopolitical risk to support rising prices. Lately, gold has largely ignored the myriad of global risks that occupy the daily headlines. Significant events attract some brief attention and produce short-lived bumps in safe-haven demand for a day or a week with prices briefly spurting higher, but soon giving up any gains.
If geopolitical events are to have a more long-lasting influence on gold prices, they must have significant and long-lasting economic consequences.
As noted above and in past reports, much depends on the whims of a small number of large-scale institutional speculators and their trading models. Much will also depend on which direction the traffic is moving on Wall Street – and the perceived attraction of equities versus gold.
Stock-market valuations are excessive . . . but if irrational exuberance continues to draw funds into equities, gold will have trouble moving higher and could be set up for another great fall.
Instead, if stock prices turn lower and sentiment on Wall Street turns negative, investors will begin discarding equities – and some of the freed up funds will find their way into gold. I’ll have more to say about these investment themes in future Rosland Gold Commentaries.
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. Rosland also helps people who wish to protect their wealth by including a gold or precious metal-backed IRA in their asset portfolio. Founded in 2008, Rosland Capital strives to educate the public on the benefits of buying gold bullion, numismatic gold coins, silver coins, platinum, palladium, and other precious metals. Click here for more information or contact us.
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.