Gold entering period of rising prices as currencies depreciate

Despite some apparently poor fundamentals, gold could well be set for a further rise this year as investor sentiment remains strong.

SYDNEY - 

The price of gold has seen a fairly strong recovery over the past few days - in part because perhaps fears for the Euro have diminished, but almost certainly because also there is a degree of nervousness out there about virtually all currencies, with gold seen as providing some stability in a sea of quantitatively eased paper.  T here has also been some positive news too - there are signs that demand for gold bullion and gold jewellery is beginning to return in the traditional gold-buying areas - India in particular.  Demand is also seen as remaining high in China.  Gold mine production may be on the increase again, but only marginally so and not at a sufficiently level to change the overall supply/demand picture, and this following several years of continuing decline.

Negative factors are that gold mining company dehedging will diminish sharply, but to an extent this is offset by the perception that Central Bank sales will be very limited this year with perhaps the IMF's remaining 190+ tonnes  being the only significant sale this year from the official sector - although it is early days yet.  Should it turn out that the IMF gold is purchased by official entities then the subsequent boost to the gold price would almost certainly take it back to its high point of last year, and probably beyond.

Positive points perhaps out weigh negatives at the moment., although those who  follow fundamentals in the sector will point out that the gold price is being held where it is purely by investment interest, with other supply/demand analyses pointing to gold being in surplus.  But this is perhaps a situation which has now existed for several years and as long as the world's finances remain in a mess it seems likely that investor interest will continue as a safeguard against collapse elsewehere.

It is also interesting to note that, as Don Coxe has just pointed out in a presentation to the BMO Annual Metals and Minerals conference in Hollywood, Florida, that last year's high point in the gold price was achieved despite an enormous fall-off in physical demand from India and from the western jewellery sector - the former being put off by higher prices and the latter by the economic downturn.  This was accompanied by an increase in scrap supply for much the same reason.  That the gold price can survive during a period of such key fundamental negatives  - and in fact increase despite them - suggests a major underlying confidence in gold as a store of value, and this should continue as long as economic turmoil persists - which may be for some time yet.

Jeff Nichols, in the latest Mineweb Gold Weekly podcast -  to listen click here - points out that virtually all the world's major currencies have been substantially weakened by Quantitative Easing policies - he describes them all as  ‘sinking ships' and that all will effectively depreciate against gold, thus raising the price of gold in these currencies.  This doesn't necessarily mean that the gold investor will benefit hugely in terms of wealth enhancement, but would be protected in terms of wealth preservation.  Nichols sees $1500 gold ahead this year, but this is little more than a natural progression from its high point of last year as global currencies decline in their purchasing power.

Thus $1500 isn't a far-fetched pipe dream, but the result of a realistic progression as the value of one's own currency diminishes.  As Bill Bonner pointed out in a fascinating article in the Daily Reckoning a week ago, what gold can do is preserve wealth rather than make you a fortune.  This is what gold has managed to do over the ages.  It's not necessarily a get rich quick investment, although if the investment force is with it there will be times when it runs ahead of the trend and investors can make good short term gains ahead of a corresponding fall in currency values.

Nichols is perhaps a bit more positive than that, feeling that speculative selling has driven the price lower than is justified, and once this dries up the price is set to move upwards again and longer term is definitely bullish, looking for the $1500 this year and higher prices beyond, but the timescale is important here.  He may well be correct, but if the timescale for the dollar price increase is long it may still do little more than make up for the decline of the purchasing power of the greenback - which Nichols, and many other analysts, see as inevitable.

Economists are usually right - at some stage.  We are more likely than not entering a period where gold will continue to rise, but as we have said before it may still not make you rich, but protect your wealth from a drastic depreciation in currency and market values.

SUBSCRIBE to Mineweb.com's free daily newsletter now.

Disclaimer

MINEWEB is an interactive publication, with rolling deadlines through each day, commencing in the Sydney morning,  and concluding, 24 hours later,  in the Vancouver evening.  If you believe your side of an issue deserves inclusion, but has failed to meet one of our deadlines, you are invited to notify the Editor in Chief in Johannesburg, and we will include you in our editing and expanding on our stories. Email him at alechogg@gmail.com

Print story      Email story      Subscribe to free newsletter

Back