Forget the short term – gold is for the long run

Gold’s recent poor performance has somewhat dampened the outpourings of the out and out gold bulls, but as a long term wealth protector then its prospects remain undiminished.

One of the noticeable effects of the downturn in the gold price over the past few years is that the longer it goes on, the quieter those pundits calling for say $10,000 gold inside a couple of years have become. It’s a bit of a new ballgame at the moment with the market hijacked by big sellers of paper gold seemingly designed to keep knocking the gold price downwards. As New York based gold analyst Jeff Nichols put it in a recent email, these transactions are being made “with nary an ounce of physical gold actually changing hands . . . but their impact on the yellow metal’s price is, nonetheless, devastating.”

Nichols goes on to note: “Interestingly, the sellers include some of the same financial firms that lately have been telling their clients and the rest of us that gold is heading lower – truly self-fulfilling prophecies!” 

The recognition is perhaps there that these paper gold sales are here to stay for at least the short term, and possibly the medium term – but gold still looks to be a good bet long term. However, with all the negativity out there at the moment we could see further falls in the price before prices start to rise again. How long this will take may be somewhat dependent on the motives of those making the paper gold sales – as we pointed out in an article here a couple of days ago.

See: Bullion banks “selling gold they don’t possess”. Squeeze alert!

By taking the GATA viewpoint that gold price suppression, aided and abetted by the bullion banks which are doing the actual dirty work, then in theory this ‘knock the gold price at all costs’ scenario could go on for some time yet. It seems to be going hand in hand with Quantitative Easing and if the U.S. Fed continues to duck tapering and goes on supporting the bond market, indirectly pumping more and more dollars into the economy and keeping real interest rates negative, and if GATA is right, then we could yet have many months more of gold take-downs every time its price seems to be recovering.

Grant Williams, writing in his latest ‘Things that make you go hmm..’ letter suggests that the reason Bernanke has not commenced tapering, despite flagging that he would, could mean the U.S. economy is perhaps less robust than many observers believe and this in itself might be reason enough to tacitly support gold price suppression to protect the greenback. It certainly has led to the Fed losing some of its credibility domestically and around the world. Given the markets had built perhaps a small amount of tapering into its expectations, then to postpone it at the eleventh hour seems to an outsider to be a strange decision. It suggests that the Fed is acknowledging to itself that QE is the kind of crack cocaine the markets have got hooked upon and to withdraw, even gradually to test the water, is beyond the market’s capability to withstand without dire consequences for the economy.

However, if GATA is wrong, and it is just the mega financial institutions using their enormous financial strength to drive the gold price down, why would they do this were it not to make humungous profits by buying gold at low prices – and then allowing it to rise again – as it surely would if these selling pressures were withdrawn? If this is the case it’s just a matter of time before this reversal comes about and the gold price surges. Indeed this could happen anyway even if the Fed is involved, but loses control and the bankers go their own way regardless.

Nichols, in his latest newsletter does pose the question on gold’s recovery of “If not now, when?” He, like some other close followers of the market, is now suggesting that perhaps we could have to wait three to five years with gold remaining very volatile over this period, before a significant uptrend occurs. He says in his email “As long as this game continues, gold remains vulnerable and possibly quite volatile . . . but it is becoming increasingly attractive to long-term investors with a significant rise in the price all the more likely over the next three-to-five years.” 

There is continuing demand in the East which will help allay price falls – even India, despite its heavy duty impositions on the yellow metal, or perhaps because of them, is seeing huge gold premiums – Reuters reports $100 or more – meaning that Indians are prepared to pay far more for their gold ahead of Festivals like Diwali than people in the West. They see its value as a protection against currency buying power decline.

But then the true gold analysts who have researched the yellow metal’s history will always tell you that gold is primarily for the long term. It should not be a speculative investment, but one designed to at least preserve purchasing power, and over time it will do so regardless of whatever governments and speculators throw at it. In fact, certainly in terms of staples like bread and milk, gold has done five or six times better than in just preserving purchasing power in the U.S. since the dollar was taken off its gold convertibility and the era of the U.S. dollar as a fiat currency commenced.

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