Specialist gold analyst, Jeffrey Nichols, has continually been ratcheting up the number of reasons he sees for being bullish on gold, however, as he told Mineweb on the sidelines of the New York Hard Assets Conference this week, some of these are really expansions of the multitude of factors he had already pointed out to his followers in previous analyses.
But Nichols’s reasoning is still worth mentioning as he has been very correct in his predictions for the direction of the gold price over the past few years, even if perhaps some of his price predictions have not quite been achieved – at least not yet. One needs to classify Nichols as a cautious gold bull – he is not one to make forecasts of enormous gold price increases in the short term, although he does feel the price has a fair way to go yet.
Let us look at his eleven reasons:
1. The U.S. Fed’s policy of an unprecedented level of money creation, coupled with zero (or effectively negative) interest rates
2. Difficulties in reaching agreement on the U.S. budget, coupled with enormous U.S. sovereign debt and eroding creditworthiness
3. The ongoing depreciation of the U.S. dollar which he sees no end to under the current economic regime.
4. Accelerating global inflation. This is being brought about by rising industrial and agricultural commodity prices globally.
5. Fear of sovereign debt defaults in Europe and doubts on the viability of the Euro as a continuing common currency amongst all its participants.
6. MENA unrest and the consequent threat to global oil supplies
7. Growing affluence in the developing world – particularly among nations like China and India whose citizens have a propensity towards gold accumulation as their personal wealth store and guard against inflation and unforeseen events.
8. The move by Central Banks to become buyers of gold rather than sellers.
9. The onset of vehicles like ETFs which make it easier for the investor to buy gold.
10. The increasing acceptance of gold as an investment class amongst major investing institutions.
11. Limited growth in global mine production of gold.
Overall in Nichols’ view these factors all come together to generate a growing gap between global supply and demand.
To these we might add ever rising mining costs – it is becoming increasingly expensive to mine gold, in particular outside the dollar area as the effects of a product which is paid for in depreciating dollars, while input costs continue to rise in local currencies, take their toll. Although many mining companies quote seemingly low cash costs, there is no standard definition of how these are calculated and they frequently do not incorporate some ongoing financial and capital costs. There are a fair number of mining companies out there who will find it difficult to remain profitable with gold below $1,000, while the cost of developing new mines becomes more and more costly as often now the tenor of the deposits becomes lower and lower and mines may need to be developed in areas of increasing political and geographical risk.
Nichols went on to expand on each of the eleven reasons for bullishness in the gold market mentioned above and ended with his predictions of where the gold price will likely run. He reckons gold’s fortunes remain very bright with all these supportive price drivers and looks for new all-time highs in the months ahead. He does stick his neck out on a specific price prediction and reckons gold has every chance of reaching $1700 by the year end, $2000 in 2012 and “possibly $3000 or even $5000″ before a time when he feels the cycle may eventually reverse later in the decade.
He also prefers physical metal to gold stocks as being a safer bet. While the upside potential in stocks may be higher he considers these as also carrying significant additional risk – although he does feel there is a place for these as part of a precious metals portfolio.