Confident on gold, Nichols: $1500 in 2010 and $2000-$3000 longer term
Specialist gold analyst Jeff Nichols, is still bullish on gold despite the recent price correction and would not be surprised to see $1500 gold next year and higher levels to come.
Posted: Thursday , 24 Dec 2009
NEW YORK -
Gold has enjoyed a long and enviable climb, rising some 380 percent from a cyclical low near $255 an ounce in April 2001 to an all-time high just over $1,225 early this month. Nevertheless, the bull market in gold has a long way to go - both in magnitude and direction.
Looking ahead to 2010, don't be surprised to see gold trade at $1,500 or higher sometime during the New Year. And that's not all: I've been telling clients that the yellow metal's price will continue its long-term upswing for at least a few more years, very likely reaching $2,000 an ounce . . . and possibly hitting $3,000 or more before the gold price cycle begins its next long-term cyclical "bear" phase.
In the meanwhile it will likely be a difficult climb to the top - with continued high volatility and sharp reversals along the way, causing some observers to wonder if the market has already topped out.
The recent swift decline in the price of gold - from its early December high to last week's low briefly under $1,100 - is a case in point. I would argue that gold simply became "overbought," and ripe for a correction . . . having risen too far, too fast as short-term speculators pushed the metal higher and higher.
In all, over the last few weeks, its short-term peak to trough decline amounted to little more than 10 percent. With this, some are already celebrating the end of gold's nine-year bull market run. More will join the chorus of gold's naysayers if gold falls further in the next few weeks, as it well could on further short-term dollar strength, before the next step up in the metal's price.
But gold's naysayers are ignoring the solid fundamentals underpinning the yellow metal, fundamentals that will push the price much higher. We've reiterated these bull points week after week in these reports:
First and foremost, U.S. monetary and fiscal policies have been, and will likely remain extremely, expansionary and ultimately inflationary. With Federal debt now over $12 trillion and annual deficits projected at over $1.5 trillion for years to come, the Federal Reserve will be forced to buy more Treasury debt with newly printed money, eroding the dollar's purchasing power at home and abroad.
Other important "bull" points for gold, points we've reiterated over and over during the past year, are (1) strong continuing central bank demand for gold as more countries try to limit their exposure to a depreciating dollar and diversify their official reserve holdings; (2) growing investment demand as more investors - both individuals and institutions - view gold as a valuable asset class, portfolio diversifier, and insurance policy . . . and have greater access via gold exchange-traded funds and new investment channels in key world markets; and (3) the continuing long-term decline in world gold mine production for at least another five years.
WHAT ABOUT THE DOLLAR?
The December decline in gold has been a mirror image of the U.S. dollar exchange rate - but it's wrong to conclude that the greenback is strengthening. Rather, the decline in the euro and some other key currencies has simply accelerated. With reflationary monetary policies, low interest rates, and expanding government debt in virtually all of the major industrial nations, paper money nearly everywhere - not just in the United States - faces an eventual loss of purchasing power.
The downgrading of Greek government debt by rating agencies - and market fears that a number of other European countries (Spain, Portugal, Italy, and Ireland) may soon face a similar fate - has put downward pressure on the euro, as investors and currency traders seek a "safe haven" in the U.S. dollar.
But the dollar's safe-haven status is like a house of cards built on an eroding foundation without the necessary support of sound monetary and fiscal policies.
It seems dubious that the dollar's real and enduring worth is really benefitting from rising fear of sovereign defaults. In our view, the dollar's real worth - that is its purchasing power for goods and services - is mostly a function of U.S. monetary policy and the rate at which the Federal Reserve is creating new dollars. If anything, the rate of monetary creation remains too high, and the dollar's real worth is declining - as will be evidenced by inflation in the years ahead.
Ironically, just when a growing number of foreign central banks (in China, India, Russia, and elsewhere) are worried about their U.S. dollar exposure, some private-sector investors and traders, worried about their exposure to shaky sovereign debt, are seeking a safe haven in the dollar. How much smarter they would be to choose gold for real and enduring safety!
GAUGING FED POLICY
Also contributing to the dollar's recent "strength" has been growing statistical evidence that the U.S. economy is gaining traction . . . and more good news in the coming weeks could give the dollar a further lift.
After all, the Fed is waiting for sufficient evidence that the economic expansion is sustainable before considering a change in its interest rate policy. And, the markets are waiting for Fed Chairman Ben Bernanke to signal that interest rates will soon be edging higher. That news, whether in the next few weeks or still months away, will likely give the dollar a good kick higher to the detriment of gold.
The foreign exchange and gold markets will continue to react reflexively to any hint that the Fed will push interest rates higher sooner rather than later. What counts, though, are not changes in nominal interest rates - but changes in real "inflation-adjusted" interest rates.
As long as the rise in U.S. inflation outpaces each incremental increase in nominal interest rates - so that real interest rates remain near zero or in negative territory - monetary policy will be too accommodative and impotent to stem the rising tide of inflation.
As this becomes apparent, gold will recover from the short-term announcement effect of Fed interest rate policy and resume its long-term upward ascent.
Indeed, for some time to come, any news of Federal Reserve tightening and the likely reflexive decline in gold will offer buying opportunities for smart investors.