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In contrast
to the closing months of 2011, gold has begun the new year on a more positive
note. Whatever the metal’s short-term prospects — indeed
even if gold takes another dive — we believe 2012 will be another
stellar year for gold investors.
Gold topped
out at an all-time high just over $1,924 an ounce in early September - a
whopping gain of some $600 or about 50 percent from last January’s low
point. But as investors know all too well, gold prices can be quite
volatile - with big upswings often followed by big downswings, albeit around
a rising long-term trend. Such has been the experience of the past four
months with gold shedding roughly 30 percent from its all-time high to its
recent late-year low point of $1,522. But, let’s not forget, even
allowing for this deep price correction, gold still closed the past year with
just about the best annual gain of any asset class!
Looking
ahead, 2012 could well turn out looking much like the past year for gold -
with sizable gains, possibly as much as 50 percent (or more) from the recent
lows, but also with occasional big declines that may lead many observers of
the gold scene to mistakenly declare an end to the yellow metal’s bull
market. Just as gold bears have been wrong over and over again in the
past decade, so will they continue to be wrong in 2012.
The story of
gold in recent years has been a tale of institutional traders and speculators
- including hedge funds, commodity funds, and the trading desks at the big
banks and financial firms - producing great two-way volatility as they rushed
into gold (as we saw last summer) and then, not just unwinding long
positions, but shorting the metal in a big way (as we saw this past fall).
Driving these
institutional players, in addition to momentum and technical trading
indicators, has been the flight from the euro into U.S. dollar assets - and
the appearance of dollar strength pushing gold lower, particularly at times
of massive euro capital flight.
Importantly,
much of this negative activity has taken place in gold derivative markets -
but, all the while, long-term physical demand has remained fairly robust.
Buying from
the Asian gold-market giants - China and India - for both jewelry and
investment has continued to remain firm in spite of higher prices that years ago
might have discouraged continued accumulation.
Having just
returned from two weeks in China and meetings with many players in the
country’s gold market, I can tell you that gold demand remains strong
despite the recent slowdown in economic activity, thanks to personal income
growth albeit at a slower pass, rising wealth among those most likely to buy
gold, and also inflation fears. Moreover, higher gold prices, rather
than discouraging demand, have attracted new investors to the market.
Meanwhile,
global net central bank gold buying has not just continued but has
accelerated as reserve managers look for opportunities to shed U.S. dollars
— and euros too — in favor of something that has a longer track
record as a reliable store of value.
Central bank
reserve managers, ever sensitive to buying without disrupting the market,
have used episodes of price weakness to step up their buying. This
behavior now reduces downside risk while it is also helping set the stage for
a surprising sizable snap-back in the metal’s price.
What few gold
pundits realize is that the amount of physical gold available in the world
gold market - the “free float” - is shrinking, thanks not only to
Chinese and other Asian buyers, many of whom are unlikely to sell, but also
due to renewed interest and accumulation of gold by a growing number of
central banks. For central banks, the holding period may be measured in
decades if not longer. As a consequence, future demand will have a much
more high-powered affect on the price of gold - and this is one of the
reasons we expect much higher prices in the years ahead.
Short-term
trading in derivative markets may, at times, produce a great deal of
gold-price volatility — and can trigger significant price corrections
— but, in my book, it does not affect the long-term price trend.
What governs the price of gold over the long term are the market’s
real-world supply and demand fundamentals - and these have been decidedly
bullish and are becoming even more so. Hence, my long-standing
long-term forecast of higher gold prices over the next several years.
Jeffrey Nichols
NicholsonGold.com
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