New York gold guru Jeff Nichols comments, in his latest note for Rosland Capital, that gold continues to disappoint with recent efforts to move higher thwarted by what he, perhaps generously, calls stepped-up speculative selling, coupled with softer physical demand leading to recent bouts of price weakness. However on the contrary side, the latest sales figures for gold coins from the U.S. Mint suggest that demand from individuals looking to hold physical bullion in the form of gold and silver coins is close to record levels. Gold and silver ETF sales also remain extremely strong so it is hard for a neutral observer to understand the recent bouts of price weakness without perhaps attributing more malign forces at work than just speculative sellers.

But falls despite huge selling volumes as we saw earlier last week, designed to trigger computer stop loss selling thus taking the price down further, seemed at least initially to be having only a limited effect. True gold and silver prices dropped very sharply, but picked up again quickly, before more sales on Friday brought the price down again. One market observer at least felt that perhaps the big sellers allowed the market to drift back up before hitting it again in a move to try and drive weak holders out of the market altogether. However Nichols reckons that stepped up demand on dips from Central Banks, sovereign wealth funds and gold friendly hedge funds limits the downside risk, and if this is indeed the case the big short position holders out there are playing a dangerous game.

But, looking ahead, Nichols now feels that it is less likely that gold will get back to its all-time high near $1925 by year end or early 2013 – although not impossible, but it would now take around a 12% rally to take it back to those levels which would be a steep rise to take place – certainly in the short time remaining until the end of the year. 

However coming back to Nichols’ latest assessment of the state of the market, he notes that gold ETF purchases have been a consistently good leading indicator of where the gold price is headed and that so far this year some 250 tons of gold has been purchased by the ETFs on behalf of holders and that overall more than 2,600 tons of gold is now held by these funds. To put that into perspective that is more than any single country’s official gold reserves other than those of the U.S. and Germany.

Nichols reckons that the amount of gold flowing into ETFs may well be a consequence of the accommodative monetary policies being followed by a number of Central Banks – in particular those of the U.S. and EC and he feels that these are likely to continue given there seems so far to be little inflationary impact (at least in official calculations) which, if it starts to become apparent might lead to tighter policies being brought back. But for the meantime he sees continuing ‘Quantitative Easing’ ahead and warns that this may even increase (QE4 and perhaps QE5!) given unemployment in many parts of the world is far higher than is seen as acceptable and the immediate global financial outlook remains very depressed.

In the U.S. itself, although the ‘fiscal cliff’ might yet be averted there is still the likelihood of some combination of tax hikes and spending cuts ahead if Democrats and Republicans can reach some form of compromise – its unlikely that either side will give up its position in total. This could well worsen the overall economic position short term and lead to further recessionary trends in the economy, continuing high unemployment etc. which could again lead to  more easing ahead. In short a bit of a downwards spiral given QE so far has had little discernible effect in stimulating any kind of serious growth, but just leads to further huge increases in sovereign debt. Bad news for the economy ultimately tends to be good for gold.

While there will likely yet be some sharp fluctuations in the gold price – as we have seen in the past week, there will be those traders who live by such short term movements – indeed will contribute to them, but for longer term holders Nichols sees the future as extremely positive.  “Whether you bought physical gold at $1,500 an ounce or $1,700 or even $1,924 you will see good, if not great, returns as gold continues its long-term upward trend – an upward trend that is likely to persist at least for another few years.”  he says.

Jeff Nichols is Managing Director of American Precious Metals Advisors and senior Economic Advisor to Rosland Capital.

iPad Version: Picture – Wiener Philharmoniker gold coins are pictured at the Ginza Tanaka store in Tokyo: REUTERS/Yuriko Nakao