One of the problems facing the potential gold investor who may see the longer term future of the precious metal as being decidedly positive, is when to actually step in and buy bullion, bullion related securities or gold stocks.  Respected New York gold analyst, Jeff Nichols, feels that the time may well be now.

Nichols recommends holding a proportion (perhaps 5-10%) of one’s investment portfolio in physical gold, thus providing a variety of benefits – portfolio appreciation, diversification, reduced portfolio volatility, risk reduction, inflation protection, and more.  Given that Nichols describes himself as not being a ‘gold-bug’ he does reckon to be ‘super-bullish’ on gold’s longer term prospects.

His views on gold’s likely future appreciation are largely predicated on the growing incomes and expanding middle class sector in China and India, the world’s two largest consumers of gold – and which recent research suggests may, between them, be accounting for the consumption of virtually all the world’s newly mined gold output.

While short term geopolitical factors may contribute to ebbs and flows in the gold price, Nichols reckons that basic fundamentals provide the key to gold price growth in the longer term with the ever increasing consumption in the Asian and Middle eastern economies in particular, while new mined output remains pretty flat and shows little signs of any significant growth in the years ahead.  But perhaps even more importantly Nichols comments that the weak performance in the gold price over the past two to three years has been largely due to perceived short term returns in the general equities markets being far superior to those likely to be achieved in gold.  As this momentum gathered it was seen in particular with the huge outflows from the gold ETFs last year while the overall stock market went from strength to strength.

But this may all be due for a change!  There seems to be an increasing feeling within the investment community that the equities market may well be at or near a peak.  In the U.S. in particular, stock prices have tended to advance at a faster rate than can be justified by corporate earnings growth – and indeed, contrary to many experts’ claims, the return to growth in the general economy has fallen far short of government forecasts.  And in the Eurozone too a return to economic growth has not really been seen and unemployment remains unacceptably high.

Nichols feel that the general equities market is heading for a change in relative performance. Indeed, he reckons the various measures of stock-market valuation, such as the S&P 500 price-to-earnings ratio, are at or above levels that have signalled past Wall Street reversals.  And, similarly, after achieving record highs earlier this year, the two-month decline in NYSE margin debt may also be signalling an equity market correction – or worse!

And, outflows from the gold ETFs also seem to have run their course – recently, for example,  we have been seeing some inflows.  Last year some 880 tonnes of gold were disinvested from the world’s major gold ETFs, which not surprisingly, given that this is equivalent to around 30% of global gold output, is seen as a major contributor to gold’s dismal performance during the period.  While there is some evidence of a decline in China’s vast appetite for gold this year as against last year’s record, gold consumption there remains robust and the difference with 2013 has been significantly more than countered by the turnaround in the gold ETFs.

With U.S. economic growth failing to impress there also seems to be the likelihood that the U.S. Fed will continue to run an accommodative economic policy (low interest rates and some QE continuation) for the foreseeable future, and probably for longer than the markets had been expecting.  An end to the Fed’s accommodative policies had been seen as a negative for gold given its big rise during the initial stages of QE – but, in truth, gold had been rising strongly before the term Quantitative Easing had even been coined so the twoslightly  are not necessarily complementary factors in the gold price equation.

However – in a perhaps sarcastic note – Nichols comments that he views the gold market in a distinctly positive light even should he be wrong on the vulnerabilities of the general equities markets.  “Even if we’re wrong,” he says, “and somehow world stock and bond markets continue moving higher for years to come, and the U.S. and other major economies return to health with sustainable growth, and somehow the Fed pulls a rabbit out of a hat engineering a return to normative monetary policies – even if we’re wrong, gold will still appreciate smartly over the years to come on the strength of Asian demand with China and India leading the way as voracious gold consumers.”

He goes on to point out the huge difference in gold investment patterns between East and West.  In the West, most big investors are looking for short term gains and thus flit between what are seen as the latest ‘hot’ investment options.  In the East, gold tends to be held for the long term and seldom comes back into the marketplace except in times of severe financial stress.

What the ongoing movement of gold from West to East suggests, given that Eastern demand may well equate to, or exceed, newly mined gold production, is the likelihood of consequent gold bullion shortages developing in the West with a corresponding rise in values wholly on supply/demand patterns.  Thus, Nichols concludes, “Watch out for higher prices ahead”.

What we might add to Nichols’ views is that the rise and fall of activity in the gold market is very much down to sentiment.  Back in 2010 to 2012 the general feeling in the investment sector appeared to be that gold was set on an ever-upwards path and the price rose accordingly.  Even bank analysts seemed to concur at the time.  But come the market peak, and subsequent price decline, views changed, tthe gold bears crowed, the media changed its views, bank analysts all started predicting further downturns ahead and the gold market totally lost its glister.

Now, this downturn phase could possibly be coming to an end, although most bank analysts seem to remain bearish.  However, these ranks may be beginning to break.  Are we seeing the necessary change in perception for gold which would put prices back on the upwards path again?  It’s probably too early to tell yet, but we have been seeing a definite shift is sentiment vis-a-vis gold this year from outright bearish to cautious.  It’s not yet reached the optimistic or truly bullish stage, but we could well be on the cusp of a sea change and the tide could start flowing for gold again as Nichols suggests.  The next few months could well be setting the direction of the precious metal for the future.

To find out more about Nichols’ thoughts on gold, go to www.nicholsongold.com