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Gold prices driven “insanely lower” – Nichols

Friday’s near 5% drop in the gold price is described as ‘insane’ by one of the more rational analysts within the pro-gold fraternity while another warns against schadenfreude among non-gold investors.

In a brief note to Mineweb Friday evening, U.S. specialist precious metals analyst, Jeff Nichols, made the comment that the gold price was driven ‘insanely lower’ that day.  In his view the sales were not of physical metal but by technical and computer-driven me3 trading mainly in futures, forward, and options markets, rather than by any change in fundamentals or in the states of the U.S. and global economies.  He commented further that the data on U.S. retail sales and consumer prices released that day should, under normal circumstances have been bullish for gold with inflation indicators subdued and showing a weaker than expected U.S. economy.

Meanwhile Sharps Pixley in London reported that Merrill Lynch was said to have made a massive sale of 4 million ounces of gold at COMEX opening, while other pro-gold commentators targeted Goldman Sachs for blame, which a day earlier had suggested that investors should sell gold short and downgraded its gold price predictions – the comment being that the investment bank was trying to drive down prices to frighten weak gold holders out of the market and then buy gold back at much lower prices and reap in the profits when gold does recover its lustre.

On the face of things gold’s fundamentals look as strong as at any time in the past year or two.  Only now is the full impact of the drastic measures taken to prop up two Cypriot banks beginning to strike home on the general population there. ‘Temporary’ currency controls are proving devastating for the economy and employment and denials or not, the feeling that Cyprus would prove to be a template for similar bailout (or bail-in)action to rescue other European banking systems are already resulting in some major withdrawals of capital for investment in seemingly safer jurisdictions or physical assets.  It doesn’t take too much of a cynic to suggest that the latest driving down of the gold price is, in effect, an effort to try and avoid a run on precious metals investment by those seeking alternative options for their wealth.

To an extent, though, currently pro-gold commentators like Nichols are also trying to defend their positions in the face of what seems to be a relentless attack on the yellow metal.  Others on the other side of the fence, like Nouriel Roubini, cannot but help themselves in taking pleasure in the discomfort of the gold bulls, although one suspects the pro-gold element will have the last laugh – but may have to eat humble pie for the time being.

As Nichols notes further in his comments to Mineweb, “After this week’s debacle, we should see some bounce back in the days ahead — but short term the market remains vulnerable to more insanity.  Who said markets are always rational? Indeed, the stars remain favorable for gold and rational analysis suggests that prices will go significantly higher over the next few years.”

He reckons that , in particular is sinking into ever deeper recessions, while imposed austerity policies are leading to ever rising unemployment, particularly among the under 25s,  that he feels will likely provoke social unrest and political extremism in one country or another. This, he reckons, along with rising expectations of a Eurozone breakup, should prompt more safe-haven demand and higher prices for gold.

Looking outside the purely European scenario, Nichols feels that even if the American and European (and Japanese) economic problems suddenly disappear, gold prices are still likely to rise higher on the back of emerging-economy central bank demand and ever-rising private-sector buying in China. 

He comments that most analysts have failed to recognize the unique nature of this growing Chinese and central bank demand: Gold buying by central banks and by the rapidly growing wealthier Chinese middle classes will be moving into much firmer hands.  Little of this metal is likely to come back to the market anytime soon, he avers,  . . . or even at much higher prices. As a result, the available supply or “free float” of physical metal is shrinking and future demand will have a much more dramatic price effect in years to come. 

Writing yesterday, Ross Norman of Sharps Pixley, who is perhaps a non-committed follower of precious metals, being neither systemically bullish or bearish on gold, also commented that, in his view, the latest gold price downward movement certainly didn’t mean that gold’s bull market was necessarily at an end yet.  Indeed he warned against any element of schadenfreude in the minds of those who had eschewed gold for investment in the general stock market, currently being buoyed by monetary stimulation programmes on both sides of the Atlantic.

 
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