Jeffrey Nichols, Senior Economic Advisor to Rosland Capital had the following comments on the current gold-market situation and outlook:
The past few weeks have been trying times for gold investors. Just when it looked like gold was set to break out into higher territory, the market shifted into reverse, leaving many investors and analysts wondering what was going on. To put some numbers on it, gold has now dropped some eight percent from its March 17th six-month high and is now hovering just above the technically significant $1280 support level.
We’ve never put much faith in short-term forecasts, preferring instead to focus our attention on the long term where gold’s own supply/demand fundamentals and global macroeconomic trends rule the market’s price-setting function. Indeed, this explains our multi-year bullishness despite gold’s failure to satisfy our immediate desires.
However, we can look at the market retrospectively for insight into gold’s recently disappointing performance.
A few weeks ago – as gold prices were beginning to soften – I wrote in these Rosland Gold Commentaries that two recent developments had “shifted trader expectations and triggered the recent round of selling . . . First, Russia’s annexation of Crimea failed to provoke any serious response from the West . . . Second, expectations of future U.S. Federal Reserve policy also shifted . . . [with] the suggestion from Fed Chair Janet Yellen that the central bank might be raising short-term interest rates as early as mid-2015.”
To be sure, these developments played a key role. But, now, looking back, it appears there was more to gold’s mid-course correction than previously thought.
Ukraine Gold Reserves
What has not even been mentioned, amid all the sturm und drang over the Ukraine, is the possibility that the country’s central bank, the National Bank of Ukraine, has sold or, more likely, collateralized its official gold reserves, which last we looked were some 42 tons (about 1.4 million ounces).
On the brink of financial insolvency, it seems unlikely that Ukraine’s official gold reserves would not have been mobilized. Even if collateralized rather than sold, the lender would have probably sold the gold with the intention of repurchasing the metal at the time of repayment by the borrower, if that were ever to occur. However, for the term of the loan, the collateralized gold might continue to be reported by the central bank as official reserves.
Regardless, the sale of Ukraine’s gold might have been enough to stall the yellow metal’s ascent and trigger still more technical selling as key chart points were breached. In any event, this would be a one-off event without any continuing bearish influence on the market price.
Interest Rates – A Reversal of Expectations
Over the past few weeks, the financial market’s assessment of prospective U.S. monetary policy has continued to weigh heavily on the price of gold. It all began in mid-March when Fed Chair Janet Yellen suggested U.S. short-term interest rates might begin their next ascent in mid-2015. Contributing to expectations of higher interest rates next year has been the recent improvement in a number of U.S. economic indicators, suggesting the recovery is gathering sufficient momentum so that the Fed can continue its policy of tapering, in other words weaning the bond markets from a continuing infusion of liquidity.
As a rule, rising interest rates are a negative for gold, representing the “opportunity cost” for holding the metal . . . and although higher rates are still at least a year away, expectations alone have been enough to weigh on today’s price.
In my view, the economy remains anemic – and will continue to underperform for a very long time to come, suffering from what some economists have labeled “secular stagnation.” The household sector cannot fund a recovery in consumer spending because it remains overly indebted and underemployed while much needed government spending is politically impossible.
It will soon become apparent that the recent statistical improvement is nothing more than a bounce back from the past winter’s weather-induced economic chill. As this pessimistic view of economic prospects takes hold, the markets will re-assess expectations of Fed policy – and this should be a big plus for 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, 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.
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.