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Gold
prices have fallen sharply in recent weeks from their all-time high over
$1265 on June 21st in New York. By mid-July, gold was briefly below
$1180 — a drop of some seven percent.
Faint-hearted
gold investors need to remember that bull markets never move straight
up. When they do, it’s called a “bubble” . . . and
bubbles do burst.
Instead,
this market is moving up — and will continue to move up — in a
stepwise pattern with occasional high volatility and big corrections on the
road to much, much higher prices in the months and years to come.
For
the most part, this summer’s gold-price weakness reflects two recent
developments: First, the reassessment of U.S. economic prospects by
some gold traders and investors . . . and, second, an abatement in perceived
European sovereign risk.
The
economic news in recent weeks (particularly indicators of retail sales,
consumer confidence, business inventories, housing starts, home prices,
residential construction, etc.) is prompting rising expectations of an
intensified U.S. economic downturn — the so-called “double
dip” — and with it we are seeing renewed and growing concern
about U.S. consumer price deflation.
Meanwhile,
across the Atlantic, a successful refunding of some Greek government debt
brought a collective sigh of relief from world financial markets . . . and
the rush from Euros into safe-haven assets, namely the U.S. dollar and gold
has, for now, abated.
None
of this has, in any way, reduced our long-term bullish view of gold-price
prospects.
In
fact, the recent sell-off — and any further short-term price decline
that may occur in the next few days or weeks — simply makes gold that
much more attractive to long-term investors.
Double
Dip to Stagflation
Unlike
mainstream economic forecasts — and indirect opposition to the public
predictions of Fed Chairman Bernanke, Treasury Secretary Geithner, and the
Obama Administration’s economic minions — we have long expected
(and discussed on this NicholsOnGold website) another U.S. business-cycle
downturn followed by years of sub-par economic growth for the U.S. economy.
As
readers know, we’ve long held the view that the U.S. economy would sink
back into recession or, at best, a long period of sluggish growth
insufficient to produce any meaningful gains in employment.
Longer
term, we see years of “stagflation” for the United States and
European economies — with sub-par economic growth, unacceptably high
unemployment, and a troubling rise in inflation led by higher prices for many
commodities, much like we saw in the 1970s.
For
more on our U.S. economic forecast, see our recent post “Gold and the Double Dip.”
More
Inflation Ahead
And,
unlike most mainstream economic forecasts, we see accelerating inflation
— NOT deflation — on the road ahead.
Inflation
is the flipside to the monetization of Federal government debt, rapid money
growth, and a loss of confidence in fiat money. As the supply of U.S.
dollars continues to grow more rapidly than the demand for money, each dollar
becomes worth less (or some would say “worthless”) and the
general price level rises.
Not
only is the demand for dollars growing less rapidly at home due to sub-par
business activity, high unemployment, a rising savings rate, and a loss of
confidence in the economy and those in the economic driver’s seat . . .
but the demand for dollars from America’s chief financiers, especially
foreign central banks and in particular the People’s Bank of China, is
also slowing — and this, along with a weakening U.S. economy, will push
the Fed into a still-more expansionary and inflationary mode.
Deflationists
and inflation doves say that we needn’t worry about inflation —
because with so much slack — idle capacity and unemployment — in
the economy, there’s plenty of room for rising economic activity and
money supply growth without inflation.
What
they have forgotten is that throughout thousands of years of recorded
economic history most periods of persistently high inflation have occurred
not when the economy was growing vigorously but when the economy was sluggish
or sinking . . . and confidence in money was eroding.
Today,
we are witnessing a loss of confidence in the dollar both at home and even
more so abroad, that is capable of driving inflation higher even in the
absence of high rates of capacity utilization and low rates of
unemployment. This loss of confidence has already contributed to the
rise in gold prices over the past few years . . . and will continue to drive
gold still much higher in the years to come.
Back
to Europe
Returning
to the causes of the current gold-price correction, we also think the
abatement in perceived European sovereign risk has nearly run its course.
Rejoicing that Greece completed its latest sovereign debt refinancing without
a hitch will soon be replaced with new worries as other countries come to the
financing trough and find the markets less accommodating.
It
went without much notice last week when Portugal was again downgraded by one
of the debt-rating agencies. And it went with even less notice this
past weekend when Hungary’s talks with the IMF and the European Union
over financial aid and debt reduction broke down in disagreement.
Europe’s
sovereign debt crisis will soon heat up as other countries are downgraded by
the rating agencies, as German remains recalcitrance to bail out the more
profligate euro-zone nations, and even more unwilling to help other European
Union members that retain their own currencies, like Hungary and Poland,
bridge their sovereign financing requirements.
Indeed,
Germany is calling on other European nations to tighten their own fiscal
seatbelts by cutting spending and raising taxes. This is a roadmap to
slower economic growth if not outright recession — and is likely to
lead to a worsening of the sovereign debt crisis, continuing downgrades by
the ratings agencies, and further capital flight into gold by Europeans and
others seeking protection from increasing difficult times for Europe’s
economy and common currency.
Jeffrey Nichols
NicholsonGold.com
Managing Director, American Precious Metals Advisors
Senior Economic Advisor, Rosland Capital
Jeffrey Nichols,
Managing Director of American Precious Metals Advisors, has been a leading
gold and precious metals economist for over 25 years. His clients have
included central banks, mining companies, national mints, investment funds,
trading firms, jewelry manufacturers and others with an interest in precious
metals markets. Please check his website and register to his free newsletter
by clicking here.
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