Gold buying has intensified on the late-June/early July sell offs and capitalising on this fall were the Asian investors, jewelry manufacturers and possibly a few central banks, according to Jeffrey Nichols, Senior Economic Advisor to Rosland Capital.
Dealers and investors in India, China, Thailand and Indonesia were active in buying, Nichols said in his market commentary.
He said that U.S. and European investors would be wise to follow their lead. And, if gold prices continue to retreat, the opportunity to buy at a bargain is only that much more compelling.
The market is witnessing the typical and now familiar geographic divergence that has characterized previous big gold-price corrections in recent years once again: Institutional traders and speculators selling gold futures and over-the-counter forwards, followed by a pick up in price-sensitive physical demand in key Asian and Middle Eastern markets.
Importantly, this selling is from market participants looking to make a quick buck shorting gold or taking profits on earlier gains. Meanwhile, much of the pick up in price-sensitive demand across the globe is from long-term investors and savers who have a lasting affinity and allegiance to the yellow metal, many of whom are unlikely to sell any time soon.
For the most part, the sellers are large-scale traders at Wall Street investment companies, banks, hedge funds, etc., who at one moment or another may be dumping or loading up on euros, or oil, or any other financial or commodity derivative.
Late last week, for a variety of reasons, a few decided to sell gold in favor of the euro, or the dollar or equities. Some press reports pinned the sell-off in gold on an abatement of perceived sovereign risk. Others spoke of disappointing economic indicators and increasing concern that the United States and Europe are heading into renewed recession -- the dreaded double dip. And a few may have simply sold ahead of the July 4th holiday, anticipating seasonal weakness over the summer months.
Whatever the case, selling by some triggered selling by others, selling that continued this week as the U.S. gold market opened for business on Tuesday morning after the long holiday weekend.
Regardless of current or prospective price weakness, there are good, solid reasons to expect gold prices will be much higher by the end of 2010...and still-higher in 2011 and beyond, Jeff Nichols said in his commentary. Some of these are:
1.Inflationary U.S. monetary and fiscal policies -- past, present, and future -- along with the coming second dip in the U.S. business cycle that will force the Fed to yet greater volumes of quantitative easing and monetary creation.
2.Europe's intractable sovereign debt crisis -- which has greatly undermined the euro's appeal as an official reserve asset and competitor to both the dollar and gold -- and is pushing the European Central Bank to pursue inflationary monetary policies much like the U.S.
3.Continuing moderate, self-sustaining, rates of economic growth in the gold-friendly newly industrialized or emerging economies - especially, and most importantly, in India and China. Rising incomes will support gold demand in these two countries sufficient to drive gold prices higher this year and beyond.
4.Rising net buying by the official sector, principally the central banks of a number of newly industrialized or emerging nations that wish to diversify reserve assets and avoid dollar-related risks.
5.Similarly, rising private-sector investment demand -- reflecting fear of inflation, currency depreciation, and a loss of confidence in Western governments to deal effectively with today's economic challenges.