US NATIONAL DEBT

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The Next Move Up

April 5, 2010

Jeffrey Nichols, Senior Economic Advisor to Rosland Capital

Managing Director of American Precious Metals Advisors


From its recent low under $1090 an ounce on March 24th, gold has recovered some of its lost ground, trading above $1120 in early April. From a somewhat longer perspective, this is a gain of roughly 30 percent from its price of $870 exactly 12 months earlier -- but the metal still remains well below its all-time high of $1227 reached in early December.

The question now is "Where Next?" The answer will be determined by a number of prospective developments:

FIRST -- The Euro: Will the European currency regain its lost favor . . . or will sovereign risk considerations push the euro still lower against the U.S. dollar?

In the recent past, capital flight and currency speculation gave the dollar a boost . . . and the "appearance" of a stronger dollar has been gold's chief nemesis ever since Europe's sovereign risk crisis moved to center stage.

The announcement of a "bail-out" plan for Greece in late March eased sovereign-risk fears and gave gold some room to recover some of its lost ground from December's historic all-time high.

But Europe's currency crisis is far from over. Credit default markets are again signaling rising anxiety, not only over Greek debt but also over the sovereign debt of Portugal, Spain and Italy. In the near term, another run on the euro could again send gold lower, possibly even below the psychologically important $1100 level.

SECOND -- U.S. Federal Debt: Rising anxiety over America's huge Federal debt (as evidenced by the mixed reception by foreign central banks and institutional investors to U.S. Treasury debt offerings in the past couple of months) is undermining faith in the U.S. dollar and calling into question its future purchasing power.

As concerns about the dollar mount, as central banks and foreign investors demand a rising risk premium on U.S. Treasury debt offerings, the effect of Europe's sovereign debt crisis and uncertainty about the future viability of the continent's common currency will have a diminishing effect on the dollar -- and gold will be free to reflect its inherent value.

THIRD -- Eastern Demand: Will strong physical demand from China, India, and other important Asian gold markets continue to underpin the price, set an effective floor beneath the market, and limit downside risks?

Physical demand from this region, particularly India and the Middle East, tends to be extremely price sensitive. Now it appears that price levels around $1090, which in the past would have choked off demand, are now viewed favorably and attract buying from both jewelers and investors. Now, however, the reverse is true: In recent weeks, particularly as gold dipped toward $1090 an ounce, increased buying from the region (China, India, Thailand, Vietnam, Indonesia, Hong Kong, Singapore, and the Arabian Gulf states), provided strong support and helped push the price back above $1100.

I have no doubt that over the long term, significant and substantial growth in gold demand from this region will have a very positive, ultimately overwhelming, affect on the dollar price of gold. Strong economic growth, huge populations in China and India, and the rise in personal incomes and wealth virtually guarantee an enormous expansion in the quantity of bullion consumed in these countries for jewelry, industrial applications, and investment.

We have repeatedly expressed this view over the past couple of years -- and now, it seems, others (including the World Gold Council) are joining the chorus of believers, so much so that some Western investors are buying gold in anticipation of stronger demand from the East.

FOURTH -- Western Investment: Will the recent pick up in Western investment demand continue?

Investors are returning to gold exchange-traded funds (ETFs) after several months of lackluster interest. Bullion held on behalf of the 12 gold ETFs we monitor, rose by 929,373 ounces in March, recording the first monthly gain since last November. In contrast, gold ETFs saw net sales of 825,501 ounces in the first two months of this year.

At the beginning of April total global ETF holdings were 57.75 million ounces -- just under their all-time high of 57.28 million ounces.

In addition, we hear that demand for gold bullion coins has also picked up in recent weeks, indicating that interest in gold from individual "retail" investors is also perking up.

While the question "Where next?" remains difficult to answer, we believe that gold will before long be moving higher, again reaching it's all-time high of $1227 by midyear . . . and scaling new heights during the second half of 2010.

And, as the above developments coalesce positively for gold, we are still confident in our forecast of $1500 gold by the year-end 2010, with gold reaching $2000 an ounce and possibly $3000 an ounce over the next few years.