En route to Cape Town - As we prepare for this year’s Mining Indaba in Cape Town in South Africa (tough destination but someone’s got to go!) in a country which for years dominated global gold production but which is now rapidly slipping down the list of the world’s producers, it’s a good time to take stock of the gold market and what’s been happening in it. This time, rather than putting forth my own views I’m drawing on Jeff Nichols’ latest observations for Rosland Capital in the U.S.
As regular readers may have gathered, I consider Nichols’ views as perhaps the most similar to my own of all the gold pundits out there, although he is perhaps marginally more bullish than I.
Nichols feels that gold is edging closer to an upside breakout having built a good base of support in the $1650-$1690 range and he’s convinced that sooner, rather than later, the price will push back through $1700 and create a new floor at that level.
He also feels that one of the bullish indicators is what he sees as “the spate of downward revisions to the price forecasts proffered by many of the major banking firms, dealers, trading houses, and other institutional participants in the gold scene.”
One has to admit that there does seem to be a bit of a herd instinct among these forecasters – they seem to look at short term trends and base their medium and long term forecasts on them and them alone.
At the beginning of last year they were almost unanimous in predicting a $2,000 gold price by the year end – on the basis of Nichols’ observations surely a bearish signal. This year the forecasts are all being trimmed back and in classic contrarian style perhaps we can expect fireworks in the gold price, although this assumes that some of the strange selling activity on COMEX runs its course.
Indeed Nichols is pretty circumspect on the reasons for this, not being prepared, like many of the strongest of the gold bulls, to attribute any sinister motives to what appear to be regular take-downs in the price each time gold appears to be about to take off again.
He describes these, although not in his latest published commentary, as being institutional speculators and trading desks at the big banks and hedge funds making good money trading the range based on technical trading models and the latest bit of news -- economic or political -- out of Washington. It’s just that the pattern and timing of the take downs does, to the writer, suggest something rather more concerted than this.
But, back to the indicators. Nichols feels that the man-in-the-street, particularly in the Middle East and Asia, tends to be a far better judge of where the price is actually going, and notes that buying of bullion by individual investors has continued to grow and the gold ETFs, despite some big unloading by some funds, are still running at near-record levels. Add to this continued central bank buying and he sees the gold moving from weak hands into strong ones which, assuming the buying continues, will ultimately lead to a supply squeeze.
“As a result” Nichols notes in an email, “unbeknownst to most gold analysts and traders, the physical market is becoming increasingly tight with bullion going one way to the Asian markets (as evidenced by the high bar premiums in China) and to a number of central banks. Put another way, gold is moving into strong hands -- and recent buyers, be they the "man in the street" across Asia or the reserve managers at central banks -- are unlikely to sell anytime soon, even at much higher prices.”
The latest possible game-changer, as Nichols sees it, is the forthcoming launch of two gold ETFs in Shanghai for the Chinese investment market. While the individual in China may still prefer to hold physical metal, he sees the proposed ETF launch, which has already been approved by the government, as providing yet another opportunity to invest in gold via ETFs, and the Chinese “man in the street”, who has had a huge effect already on the rise in the gold price over recent years, could become even more important to the world gold price going forward.
Jeffrey Nichols, Managing Director of American Precious Metals Advisors and Senior Economic Advisor to Rosland Capital, has been a leading precious metals economist for over 25 years.