GOLD ANALYSIS

Gold's upward path will be volatile but direction and magnitude are assured - Nichols

As investors get used to current gold prices so increased demand from India and China likely to see prices rise significantly higher

Author: Geoff Candy
Posted: Wednesday , 11 Aug 2010

GRONINGEN - 

Although gold prices have slipped during the Northern Hemisphere summer, expectations are for a much stronger last quarter.

And, much of the reason for this is the difference between the type of person who has recently been selling the metal and those whose buying pushed up the price to its highs in June.

Speaking on Mineweb.com's Gold Weekly podcast, Jeff Nichols, MD of American Precious Metals Advisors, explains "The buyers have largely been buyers of physical products, small buyers, bullion coins and also to some extent, gold ETFs which are a form of physical gold investment as well.  Much of this investment is sticky - it doesn't tend to get sold any time soon.  It's long term holders, who have an affinity and interest in holding gold as a hedge an insurance policy and the like.

"The sellers on the other hand,""he says, have largely been institutional traders and speculators. 

Nichols adds that this reticence on the part of the longer-term investor to release his or her gold holdings as prices have gone higher has to do with the  stepwise manner in which prices have risen because it has given the market an opportunity to adjust to new and higher price levels.

"This is significant," he says, "because we haven't seen strong physical selling in these sell offs.  At these price levels, near $1,200 an ounce, a year or two ago we would have seen massive scrap coming from India and coming from other countries including Western Europe and the United States - scrap as investors and other holders of gold decided to take profits but now they've adjusted to these higher price levels and this metal is not coming out.  It may come out $100 higher or $200 higher and give the market another pause, but for the moment markets seem to have accepted the newer price level."

Where to from here?

With a solid base, Nichols i svery positive about the long term, in particular because of the changing nature of China and India's engagement to the market.

"These are both countries with an historical and cultural affinity to gold, and gold serves as a traditional form of savings as an investment across the population - even the poorer members of the rural community tend to buy gold in both of these countries when they have the opportunity and the cash to do so," he says.

Adding, "With rising income, with growing economies, with larger and larger middle classes in both countries, we can anticipate strong growth and gold consumption, both for jewellery and investment in these two countries, sufficient to move prices higher everything being equal - and when I say higher, I mean considerably higher over the years ahead.

This is especially true he says as both countries look to grow the level of participation in the gold market among their respective citizens.

"Importantly they're also looking at introducing Yuan-denominated derivative products and down the road we can probably expect to see the introduction of a gold ETF on the Shanghai Stock Exchange.  As you know ETFs have been a very positive factor for gold in the western world and it will also be a very big factor in China because it will make gold investment so much easier for investors than it has been in the past... India is also looking at increasing participation by more banks and financial institutions, making gold trade internationally easier and all of this is going to boost demand in India just as it will boost demand in China and this is very propitious for the outlook. 

Prices

"We're predicting or expecting that gold prices will in the next few years, hit $2,000 followed by $3,000 and possibly higher," Nichols says.

Before adding, "These are all fundamentals that are going to be operating for several years, pushing gold higher and higher but the market will remain volatile with big corrections like we've seen the past weeks and periods of consolidation.  So how fast we move up remains a question but the direction and the magnitude are assured.