Much higher gold prices ahead but upwards path will not be smooth

Precious metals analyst Jeff Nichols explains why he expects gold prices to continue onwards and upwards as long as monetary easing continues. He warns, however, to beware of blips along the way because the rise in prices will not be a smooth one.

Author: Lawrence Williams
Posted: Tuesday , 16 Oct 2012

"Gold's failure last week to sustain gains over $1790 an ounce triggered profit-taking by frustrated longs and technically inspired selling by institutional traders and speculators in "paper gold" derivative markets, so much so that the yellow metal briefly traded under $1730 on Monday." so says Jeff Nichols in his latest gold price analysis, but he goes on to say:

"As gold tumbled in recent days, short-term market psychology has, not surprisingly, turned increasingly gloomy - suggesting gold could possibly go lower before staging an inevitable recovery and renewed assault at the $1800 level.

"Nevertheless, we believe gold will move significantly higher by year-end or early 2013, possibly recording a new all-time high in the next three to four months - thereby rewarding those intrepid investors holding on to or augmenting their gold positions despite the short-term vagaries of the gold market."

Nichols, Managing Director of American Precious Metals Advisors and Senior Economic Advisor to Rosland Capital has been consistently bullish on precious metals right through gold's climb over the past 11 years, and is not changing his position yet, but is probably not one of the metal's perma-bulls perhaps falling among the less over-optimistic of the principal gold analysts, and so far his analyses have been pretty accurate, although at the beginning of the year he was one of those looking for gold to exceed $2,000 in 2012 (as even many highly conservative bank analysts were predicting at the time) - which perhaps seems increasingly unlikely at present, although gold can always surprise both on the upside and downside.

Nichols has, however, been consistent in pointing out that any continuing upwards path for the yellow metal will be patterned by occasional reactions downwards - perhaps by as much as 20%. Even the strongest of bull markets do not rise without setbacks in their upwards path occurring from time to time and the latest developments in the movement of the gold price are no exception. They don't necessarily mean that the metal's bull run is over - just that it is pausing for breath and consolidating.

Nichols is very much a believer that the path of the gold price is inexorably linked to the state of the global economy, a view with which the writer wholeheartedly agrees.

"We have long argued that bearish economic news is bullish for gold because a persistently under-performing economy pressures central banks to maintain or increase their stimulative policy initiatives" writes Nichols. "We've certainly had more than a fair share of bad economic news, not just here in the United States but also across Europe and the Emerging Economies (that were until recently thought to be immune from the global slowdown). As a result, we have been served another big dose of monetary accommodation, not just by the Fed at its September FOMC policy-setting meeting, but also in recent weeks by the European Central Bank, the Bank of England, the Bank of Japan, and even the People's Bank of China. These actions may bring some modest relief but they also portend rising inflation and currency debasement - with long-term bullish implications for gold."

As a number of gold analysts have pointed out there is a very consistent and direct correlation between the gold price and the increase in money supply. Thus as global money supply continues to rise as Central Banks carry on effectively printing more and more, the long term gold price should carry on broadly rising with the money supply.

As Nichols notes: "As we are now witnessing, spending, whether by governments or households, cannot continue without access to credit. So, we must ask ourselves realistically, who will continue to lend to already bankrupt borrowers?"

He answers his own question thus: "Only each nation's central bank. That's exactly what increasingly rapid monetary expansion (aka quantitative easing) is all about - but its eventual result will be rising inflation, currency debasement, and much higher gold prices."

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