NEW YORK (Commodity Online): Gold prices have fallen sharply from all-time high of $1265 on June 21st on reassessment of US economic prospects by some gold traders and investors, and an abatement in perceived European sovereign risk, accoridng to Jeffrey Nichols, Senior Economic Advisor to Rosland Capital. However, he has maintained a bullish view on gold on loss of confidence in dollar and inflation.
The economic news in recent weeks (particularly indicators of retail sales, consumer demand, business inventories, home prices and residential construction) has prompted rising expectations of an intensified U.S. economic downturn -- the so-called double dip -- and with it, rising concern about U.S. consumer price deflation.
Meanwhile, across the Atlantic, a successful refunding of some Greek government debt brought a collective sigh of relief from world financial markets and the rush from Euros into safe-haven assets, namely the U.S. dollar and gold has, for now, reversed.
None of this has, in any way, reduced our long-term bullish view of gold-price prospects.
In fact, as we have averred in recent weeks, the recent sell-off -- and any further short-term price decline that may occur in the next few days or weeks -- simply makes gold that much more attractive to long-term investors.
Unlike mainstream economic forecasts -- and indirect opposition to the public predictions of Fed Chairman Bernanke, Treasury Secretary Geithner, and the Obama Administration's economic minions -- we have long expected another U.S. business-cycle downturn followed by years of sub-par economic growth for the U.S. economy.
And, unlike most mainstream economic forecasts, we see accelerating inflation -- NOT deflation -- on the road ahead.
Inflation is the flipside to the monetization of Federal government debt, rapid money growth, and a loss of confidence in fiat money. As the supply of U.S. dollars continues to grow more rapidly than the demand for money, each dollar becomes worth less (or some would say worthless) and the general price level rises.
Not only is the demand for dollars growing less rapidly at home due to sub-par business activity, high unemployment, a rising savings rate, and a loss of confidence in the economy and those in the economic driver's seat ... but the demand for dollars from America's chief financiers, especially foreign central banks and in particular the People's Bank of China, is also slowing and this, along with a weakening U.S. economy, will push the Fed into a still-more expansionary and inflationary mode.
Deflationists and inflation doves say that we needn't worry about inflation -- because with so much slack -- idle capacity and unemployment -- in the economy, there's plenty of room for rising economic activity and money supply growth without inflation, Jeff Nichols said.
What they have forgotten is that throughout thousands of years of recorded economic history most periods of persistently high inflation have occurred not when the economy was growing vigorously but when the economy was sluggish or sinking ... and confidence in money was eroding.
Today, we are witnessing a loss of confidence in the dollar both at home and even more so abroad, that is capable of driving inflation higher even in the absence of high rates of capacity utilization and low rates of unemployment. This loss of confidence has already contributed to the rise in gold prices over the past few years ... and will continue to drive gold still much higher in the years to come, Jeff Nichols said.