Whether measured from its all-time high of $1,432.50 recorded on Dec. 7 or its year-end closing price of $1,420.75, gold’s decline to the $1,340 area in January is no more than a minor correction in its 10-year-long bull market.
Indeed, with gold’s fundamental price drivers all remaining supportive, I expect another strong advance over months ahead — with gold rising to $1,700 an ounce or higher by year-end 2011. Longer term, I wouldn’t be at all surprised to see it at $2,000 and even $3,000.
Here are the key “bull points” for gold in brief:
➤ Stimulative U.S. monetary policies, irresponsible U.S. fiscal policies and an uncertain outlook for the U.S. dollar.
Despite some hopeful economic indicators here and there, persistent recession-like business conditions — especially the weak housing sector and high unemployment — give the Federal Reserve no alternative to its continuing accommodative and ultimately inflationary policies.
➤ Worries about the financial health of some of the euro-zone economies and the viability of Europe’s common currency.
A growing disparity between the stronger “core” economies and the weaker “peripheral” economies will continue to threaten the viability of Europe’s common currency, the euro, with capital flight and speculative money flowing into both the dollar and gold — contributing to the metal’s expected appreciation and masking the dollar’s weakness.
➤ Higher industrial and agricultural commodity prices and rising inflation expectations will promote investment and speculative demand for gold as an inflation hedge.
Global commodity inflation is already on the rise with higher prices for food, oil and raw materials already up sharply during the past year. Despite economic slack in the United States and Europe, rising demand in the fast-growing emerging nations is creating shortages and higher prices everywhere — and this is now beginning to show up in U.S. and European consumer price inflation.
➤ Increasing central bank interest in gold as an official reserve asset.
China and Russia will continue to buy significant quantities of gold from their domestic mine production. Meanwhile, some of the rich oil-producing nations will follow Saudi Arabia’s recent lead, buying gold in the open market, and the list of other countries adding to official gold reserves will continue to grow.
➤ Strong jewelry and investment demand across much of Asia.
Reflecting growth in personal incomes and household wealth, the development of local markets, and the introduction of new gold investment vehicles will support rising demand even at much higher prices.
➤ Growing participation from both retail and institutional investors in the United States and other mature industrial nations.
Gold is increasingly perceived by Western investors as a legitimate investment class — and the rise of gold exchange-traded funds in recent years is making it easier than ever before for investors to participate.
➤ Gold output from new mines in China, Russia and elsewhere around the world has not been sufficient to replace the drop in supply from old mines in South Africa, North America and Australia.
Although the past decade’s contraction in annual mine supply may have run its course, growth in world mine output will remain subdued and insufficient to satisfy the continuing strong growth in global gold demand.
Even if higher prices prompt more gold exploration and mine development, it takes many years for major discoveries to result in significant new supply. Because of the long lags between discovery and actual production, we know with certainty that any growth in mine supply will be limited for the next few years.
Jeffrey Nichols is a recognized expert on the economics of precious metals markets. He is managing director of American Precious Metals Advisors (www.NicholsOnGold.com) and also serves as senior economic advisor to Rosland Capital LLC (www.RoslandCapital.com), a retail dealer of precious metals investments and numismatic coins.