Jeffrey Nichols, Senior Economic Advisor to Rosland Capital, had the following comments on the current gold-market situation and outlook:
I’ve been surprised by the recent decline in the price of gold. I expected a stronger finish to the first quarter with gold somewhat higher – possibly even breaking out above the $1,400 an ounce level by the end of March – but this will now have to wait.
Two recent developments 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. Neither the United States nor the European Union reacted with any serious economic or political sanctions . . . and the outmanned Ukraine military has stood down, avoiding a shooting match with Russian forces.
Second, expectations of future U.S. Federal Reserve policy also shifted. The Fed’s announcement following its late-March policy-setting meeting that it would continue to “taper” its monthly bond-buying program with another $10 billion reduction in April purchases was widely anticipated.
However, the suggestion from Fed Chair Janet Yellen that the central bank might begin raising short-term interest rates as early as mid-2015 was a big surprise – one that strengthened the U.S. dollar and pulled the carpet out from under gold.
Having done their damage to the gold price, I think there’s a good chance we will see these two factors become more supportive and positive for gold during the next few months.
Looking forward, much depends on the flow of geopolitical and macroeconomic “outside-the-market” news, the price sensitivity of physical demand, especially from China, and the possible softening of anti-gold import policies by the India government.
The assertion by some reporters and market commentators that investors are backing away from gold is just a lot of hooey from people who ought to know better. Here’s my reading of recent gold demand trends:
- The Chinese are continuing to buy gold like there’s no tomorrow. One indicator of Chinese gold demand is the net export data from Hong Kong to the Mainland reported by the Hong Kong Census and Statistical Department. Data through February show strong demand in the first two months of the year – and anecdotal reports from a number of major Chinese gold-market participants indicate continued buying, especially in the jewelry sector, through late March.
- Indians also want more of the yellow metal. Gold has been in short supply in India owing to the imposition last year of import policies aimed at restricting the flow of gold into the subcontinent. Our Indian friends say we should expect an easing of anti-gold import restrictions sometime this year, if not before the April-May national elections, then soon thereafter. Importantly, there is much pent-up demand that could prompt a surge in local gold buying with important implications for the world price.
- At least until the last few days, hedge funds and other institutional investors have been buying gold exchange-traded funds (ETFs) again after two years of net selling.
- My friends in the retail gold business tell me small-scale investors in the United States are continuing to buy bullion coins and small bars from their local coin shops and national telemarketers.
- Moreover, central-bank gold accumulation continues with net official purchases of 74 tons in the first quarter based on the most recent reports. For its part, Russia purchased almost 20 tons so far this year and Iraq has just announced purchases of some 36 tons in March. Importantly, I believe that China’s central bank (the PBOC) – and possibly a few others – continue to buy gold without counting the acquired bullion as official reserves and without reporting these purchases in their published accounts.
In conclusion, though I’m disappointed in gold’s recent price action and would not be surprised to see further weakness ahead, I feel confident that the years ahead will be rewarding times for gold investors.
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. 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.