Jeffrey Nichols, Senior Economic Advisor to Rosland Capital (, had the following comments on the current gold-market situation and outlook:
The Fed’s latest change in monetary policy has been no gift for gold investors.
Gold prices have been under pressure in recent days following last week’s announcement by Federal Reserve Board Chairman Ben Bernanke that the Fed would commence “tapering,” – that is, cutting back its monthly bond purchases by a relatively modest $10 billion in January – and continuing its withdrawal of monetary stimulus in subsequent months “in further measured steps” if the economic recovery stays on track.
Once again, a small number of institutional traders and speculators, acting independently, led the way, cognizant that their large-scale sales would likely drive prices lower – allowing them to close out their short positions at tidy profits ahead of the crowd.
Although near-term gold prices look vulnerable, I believe the market’s reflexive response to the commencement of tapering has been exaggerated. In my view, even if prices dip further on technical trading, gold will, before long, begin a sustainable recovery.
The Fed’s decision to taper was intended to communicate an optimistic economic assessment and forecast – to reassure us that the economy is in a sustainable recovery mode on the principle that if we believe it so, it will be so.
When the economy finally gets going, whether in one year or five, all those cheap dollar bills, trillions of them printed by the Fed, will likely find their expression in a worrisome acceleration of price inflation. Fed policymakers may now be genuinely concerned about disinflation or, worse yet, actual deflation, but the bigger risk down the road is a resurgence of worrisome inflation.
So far, all this liquidity resulting from quantitative easing has fueled rising global equity prices and, to a lesser extent, global real estate prices – bubbles that will deflate one way or the other.
Just as important to precious metals markets as is the start of tapering next month is the Fed’s promise to hold short-term interest rates near zero for an extended period of time well beyond the end of quantitative easing. After all, cheap money can be a gold bull’s best friend.
From a technical perspective, the short-term outlook for gold remains uncertain. If the gold price manages to hold above its recent low point just under $1,180 an ounce, institutional traders and speculators may cover their short positions and begin moving back to the long side of the market. On the other hand, a breakdown below this level could trigger another wave of institutional selling before prices stabilize and begin to recover.
Moreover, other market fundamentals – aside from Fed policy responses to the unfolding U.S. economic situation – may have a say in the matter: Indian and Chinese gold imports; U.S. fiscal policy and the still-uncertain budget and debt debate now taking place on Capitol Hill; the performance of equities, bonds, and real estate; gold exchange-traded fund liquidation or resurgence; world central bank demand; and the outlook for the dollar in world currency markets.
Any of these factors may have much to do with which way gold prices go from here. Unfortunately, we’ll have to wait and see.
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.