‘Ultimately easy money means higher inflation’ – leading to bullishness on the gold price.

HILTON TARRANT: It's a warm welcome to Jeff Nichols, MD of American Precious Metals Advisors. Jeff, we've seen your latest opinion about the price of gold bullion. You are still extremely, extremely optimistic about the outlook for gold, calling a $2000, $3000 range. Why are you so bullish?

JEFFREY NICHOLS: Well, first let me say that this is a long-term forecast, and we expect gold to be moving up irregularly over the next few years. But the main reason for the bullish forecast is a number of points. No 1, we expect inflation in the United States and indeed in the major economies at some point to tick up, reflecting the very expansionary monetary policy that we currently have in place. I think if you look at the recent jump in gold this morning and overnight, it owes a lot to the statement by the Fed over the last couple of days that it was going to maintain its easy monetary stance with low interest rates and its policy of quantitative easing remaining in place for some time. And of course this means easy money and ultimately easy money means higher inflation. That's No 1.
    But what makes it especially interesting is the fact that we now have these new ETFs, exchange-traded funds, which have brought hundreds of thousands of new investors into the gold market in a way that we've never seen before ... gold investments in a very important way and ETFs now already account for approximately 53m ounces of gold having been taken off the market. And that's quite significant and we expect that to continue over the next few years.

HILTON TARRANT: Jeff, how important is the impact of jewellery, especially looking at the Indian market? We know that market is very price-sensitive, but still significant.

JEFFREY NICHOLS: Yes, and jewellery is one of the reasons why gold is not now already stronger in price. First, in the US and Western Europe and major industrialised nations jewellery demand has been hit hard by the worldwide recession, and the difficult financial straits that so many households now find themselves in. No only is the man down, but we are seeing, which is really very new, a lot of secondary supply, old scrap coming back to the market from individuals and households that have old gold jewellery and are pressed for cash, and are trying to convert some of their jewellery into liquid cash. So there's been an infrastructure that has risen rather quickly. If you go into downtown London and New York you'll see many shops with signs in the window that say: "We buy old gold".

HILTON TARRANT: Well, Jeff, we have seen gold quite range-bound between almost the $890 level and the $990 level for most of this year - a very narrow band compared to other metals. Do you foresee a breakout, and what would cause a breakout?

JEFFREY NICHOLS: Well, I think we'll see a breakout before year end. Importantly the fourth quarter is typically a season of a positive time for gold - I think partly because the jewellery sector is gearing up for Christmas and jewellery demand tends to begin rising at that point. Also the seasonality of Indian demand is positive beginning in the autumn, and those two factors will make a big difference. But I think also the market has adjusted to the newer price level and the price points at which new supply comes into the market from secondary scrap or short-term investor selling is moving up and we'll see gold pop in the fourth quarter, probably over $1000/oz. Maybe it won't quite hold, but when it comes back down it will settle at a still higher low point than we've seen in the last couple of ups and downs.

HILTON TARRANT: Jeff Nichols is MD of American Precious Metals Advisors.

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