Bullish building blocks remain

12 factors support gold prices
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Published : 12/28/11
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The recent weakness in the price of gold does not diminish my confidence that it is headed much, much higher in the next few years. Gold’s bullish building blocks remain as solid as ever — and bouts of price weakness should be no detriment to smart investors. I view these occasional price corrections as opportunities for scale-down buying.

Gold’s still-bright future rests on a firm foundation of 12 bullish building blocks:

➤ The first bullish building block is past and prospective Federal Reserve monetary policy, characterized by low or negative real rates of interest and unprecedented central bank monetary creation.

➤ Second, the U.S. federal government budget impasse, rising U.S. sovereign debt and eroding U.S. creditworthiness.

➤ Third, the expected future depreciation of the U.S. dollar in world currency markets and the continuing decline in the dollar’s purchasing power for American consumers.

➤ Fourth, the growing insolvency of some European nations — sooner or later leading to the disintegration of Europe’s Monetary Union, as we know it, and the eventual abandonment of Europe’s common currency, the euro, by at least some of the EU member countries.

➤ Fifth, the expected acceleration of global inflation — fueled by excessive monetary creation, world population growth, upward pressure on oil prices and changing diets in the emerging economy nations, all of which is contributing to persistently high and rising agricultural and industrial commodity prices from one country to the next.

➤ Sixth, increasing political instability in the Middle East and North Africa as authoritarian regimes are overthrown but sectarian divisions in some countries prevent orderly transitions to democracy with implications for world oil supplies and prices. And then there’s the wild card, Iran.

➤ Seventh, the growing affluence of the “emerging-economy nations” and the associated growth in both jewelry and private investment and savings demand for gold.

➤ Eighth, this rising affluence is also prompting emerging-economy central banks to diversify their official reserves through the acquisition of gold.

➤ Ninth, the development and popularity of new gold investment vehicles and channels of distribution that facilitate physical gold investment by both retail and institutional investors.

➤ Tenth, the legitimation of gold as an investment class and rising investor participation, together reflecting a growing appreciation of the benefits of including physical gold in a well-diversified portfolio, and the entry of new, large-scale, professional investors.

➤ Eleventh, the “stickiness” of much of the recent private sector and central bank gold demand. The migration of gold to “strong hands” is shrinking the available “free float” in the world gold market, and it means that less metal will be available to gold-hungry buyers, except at increasingly higher prices.

➤ And, twelfth, world gold-mine production, although growing, will not keep pace with the expected growth in global gold demand. Even a rash of new mine discoveries would take five to 10 years — or more — to contribute significantly to supply.

Together these dozen bullish building blocks are responsible for the growing gap between supply and aggregate demand — a gap that will be closed only by high and rising prices in the years ahead.

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. Follow Jeff Nichols on Twitter @ NicholsOnGold.

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