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loonie4buckson Dec 24, 2009 7:38am
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Gold bullish report on Financial 24
Gold bullish report on Financial 24Still bullish on gold - $1500 in 2010 and $2000-$3000 longer term
Gold has enjoyed a long and enviable climb, rising some 380 percentfrom a cyclical low near $255 an ounce in April 2001 to an all-timehigh just over $1,225 early this month. Nevertheless, the bull marketin gold has a long way to go - both in magnitude and direction. Lookingahead to 2010, don't be surprised to see gold trade at $1,500 or highersometime during the New Year. And that's not all: I've been tellingclients that the yellow metal's price will continue its long-termupswing for at least a few more years, very likely reaching $2,000 anounce .
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andpossibly hitting $3,000 or more before the gold price cycle begins itsnext long-term cyclical bear phase. CONTINUING VOLATILITYIn themeanwhile it will likely be a difficult climb to the top - withcontinued high volatility and sharp reversals along the way, causingsome observers to wonder if the market has already topped out. Therecent swift decline in the price of gold - from its early Decemberhigh to last week's low briefly under $1,100 - is a case in point. Iwould argue that gold simply became overbought, and ripe for acorrection .
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having risen too far, too fast asshort-term speculators pushed the metal higher and higher. In all, overthe last few weeks, its short-term peak to trough decline amounted tolittle more than 10 percent. With this, some are already celebratingthe end of gold's nine-year bull market run. More will join the chorusof gold's naysayers if gold falls further in the next few weeks, as itwell could on further short-term dollar strength, before the next stepup in the metal's price.
SOLID FUNDAMENTALSBut gold's naysayersare ignoring the solid fundamentals underpinning the yellow metal,fundamentals that will push the price much higher. We've reiteratedthese bull points week after week in these reports:First and foremost,U.S.
monetary and fiscal policies have been, and will likelyremain extremely, expansionary and ultimately inflationary. WithFederal debt now over $12 trillion and annual deficits projected atover $1.5 trillion for years to come, the Federal Reserve will beforced to buy more Treasury debt with newly printed money, eroding thedollar's purchasing power at home and abroad. Other important bullpoints for gold, points we've reiterated over and over during the pastyear, are (1) strong continuing central bank demand for gold as morecountries try to limit their exposure to a depreciating dollar anddiversify their official reserve holdings; (2) growing investmentdemand as more investors - both individuals and institutions - viewgold as a valuable asset class, portfolio diversifier, and insurancepolicy .
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and have greater access via goldexchange-traded funds and new investment channels in key world markets;and (3) the continuing long-term decline in world gold mine productionfor at least another five years. WHAT ABOUT THE DOLLAR?The Decemberdecline in gold has been a mirror image of the U.S.
dollarexchange rate - but it's wrong to conclude that the greenback isstrengthening. Rather, the decline in the € and some other keycurrencies has simply accelerated. With reflationary monetarypolicies, low interest rates, and expanding government debt invirtually all of the major industrial nations, paper money nearlyeverywhere - not just in the United States - faces an eventual loss ofpurchasing power. The downgrading of Greek government debt by ratingagencies - and market fears that a number of other European countries(Spain, Portugal, Italy, and Ireland) may soon face a similar fate -has put downward pressure on the euro, as investors and currencytraders seek a safe haven in the U.S.
dollar. But the dollar'ssafe-haven status is like a house of cards built on an erodingfoundation without the necessary support of sound monetary and fiscalpolicies. It seems dubious that the dollar's real and enduring worth isreally benefitting from rising fear of sovereign defaults. In ourview, the dollar's real worth - that is its purchasing power for goodsand services - is mostly a function of U.S.
monetary policy andthe rate at which the Federal Reserve is creating new dollars. Ifanything, the rate of monetary creation remains too high, and thedollar's real worth is declining - as will be evidenced by inflation inthe years ahead.Ironically, just when a growing number of foreigncentral banks (in China, India, Russia, and elsewhere) are worriedabout their U.S.
dollar exposure, some private-sector investorsand traders, worried about their exposure to shaky sovereign debt, areseeking a safe haven in the dollar. How much smarter they would be tochoose gold for real and enduring safety!GAUGING FED POLICYAlsocontributing to the dollar's recent strength has been growingstatistical evidence that the U.S.
economy is gaining traction .
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andmore good news in the coming weeks could give the dollar a furtherlift. After all, the Fed is waiting for sufficient evidence that theeconomic expansion is sustainable before considering a change in itsinterest rate policy. And, the markets are waiting for Fed ChairmanBen Bernanke to signal that interest rates will soon be edginghigher. That news, whether in the next few weeks or still monthsaway, will likely give the dollar a good kick higher to the detrimentof gold. The foreign exchange and gold markets will continue to reactreflexively to any hint that the Fed will push interest rates highersooner rather than later. What counts, though, are not changes innominal interest rates - but changes in real inflation-adjustedinterest rates.As long as the rise in U.S.
inflation outpaces eachincremental increase in nominal interest rates - so that real interestrates remain near zero or in negative territory - monetary policy willbe too accommodative and impotent to stem the rising tide ofinflation.As this becomes apparent, gold will recover from theshort-term announcement effect of Fed interest rate policy and resumeits long-term upward ascent. Indeed, for some time to come, any news ofFederal Reserve tightening and the likely reflexive decline in goldwill offer buying opportunities for smart investors. Jeffrey Nichols isSenior Economic Advisor to Rosland Capital and Managing Director ofAmerican Precious Metals Advisors- see www.roslandcapital.com andwww.NicholsOnGold.com
gold trade