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Gold Price…Pregnant With Possibility

March 27, 2016

Despite gold's recent selloff, I feel increasingly comfortable with our short-term (one-year) and our long-term (five-to-seven year) forecast of the future price of gold.

Indeed, by this time next year, gold's price could be challenging or even surpassing the yellow metal's all-time high of $1,924 an ounce reached in September 2011.

And, looking further out, by the end of the current decade, gold could double ($4,000) or even triple ($6,000) its previous all-time high.

This bullish forecast does not depend upon some global economic crisis, financial-market meltdown, or geopolitical black swan.

I expect that the U.S. and other major economies will continue to perform poorly, muddling through for several years to come with sluggish business conditions forcing the Fed and other leading central banks to pursue reflationary monetary policies and lower-than-normal interest rates - a bullish long-term mix for gold that promises stagflation and much higher prices for gold later in the decade.

But even if the U.S. and global economies perform better than expected, gold should still do well, reflecting sound gold market fundamentals with the prospective "freely available supply" of physical gold insufficient to satisfy prospective global demand for gold.

Freely available supply includes not only current mine production and metal recovered from old jewelry scrap but, most importantly, the net resale of bullion and small bars by current holders. At the same time, prospective global demand for gold includes both fashion and investment-grade jewelry of all sorts plus coins, small bars, and bullion bought by investors.

One feature of gold's bear market over the past four years has been a massive shift in gold ownership from West to East, from the older industrialized nations to the rising Asian economies, from paper gold and ETFs to physical bars, bullion coins, and investment-grade jewelry, from traders and speculators to long-term investors and hoarders - importantly from "weak" hands to "strong" hands.

In addition, wealthy retail investors in the United States, Europe, and elsewhere have also been big buyers of bullion coins and small bars... and, importantly, share a long-term affinity to the yellow metal.

At the crux of my bullish long-term forecast is the observation that large quantities of gold have migrated from Western investors (hedge funds, institutional speculators, bullion banks, etc.) who have no lasting allegiance to the yellow metal... to Greater China, India, a few central banks, and wealthy retail investors around the world - most of whom will never resell metal back into the market, except at sky-high price levels.

Over the past four years, gold prices have suffered as institutional speculators, hedge funds, bullion banks, and the like sold their underperforming gold positions and plowed their money into over-performing equity markets. The return on equities seemed just too rich to ignore, especially with gold prices under pressure and interest rates near zero.

Now it appears the inverse relationship between world equity markets and the price of gold is shifting gears. From moment to moment and day to day, gold prices are still moving in opposition to equities - only now gold is increasingly tending higher when equities are selling off.

Returning to the near-term forecast, the technical picture looks increasingly supportive, with buyers ready to accumulate both physical metal and paper proxies just under the market. Importantly for the technical traders, momentum is shifting direction with gold scoring higher lows and higher highs - suggesting that we are now in sustainable bull market territory.


Courtesy of American Precious Metals Advisors

Jeffrey Nichols is Managing Director of American Precious Metals Advisors and Senior Economic Advisor to Rosland Capital.  He has been a leading 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.

Gold is used in following industries: Jewelry, Financial, Electronics, Computers, Dentistry, Medicine, Awards, Aerospace and Glassmaking.
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