U.S. gold economist, Jeffrey Nichols, seems more bullish than ever on the prospects for substantial upwards movement in the price of gold over the next few years considering the latest development in the markets, perhaps even more so than in his previous analyses. While Nichols has tended to be a gold bull in the past he has also been one of the more sober commentators amongst this genre so his developing views do require some attention.
He feels the root causes of the current economic crisis - and his now extremely bullish views on gold - have been decades of easy money, low interest rates, and a persistently expansionary monetary and fiscal policy by the United States. As he put it in a speech to the Latin Exploration 2009 Conference in Buenos Aires last week, As a result, Americans have been on a buying binge in the global marketplace, buying things we often don't really need with money we don't really have. And the rest of the world - especially China and the other Asian economic powerhouses - have been co-conspirators, lending us the money to satisfy our need for more things in order to promote economic growth and high employment in their own economies.
He likens the situation to a massive Ponzi scheme on a scale never before seen. Beginning late in President Reagan's second term with the appointment of Alan Greenspan as Chairman of the U.S. Federal Reserve and continuing with Ben Bernanke at the helm of America's central bank, the Fed has pursued an expansionary, low interest-rate policy that has placed growth above all else reckons Nichols. During these years, every economic or financial-market crisis was met with injections of liquidity into the banks and financial markets with interest rate cuts often to negative inflation-adjusted rates of return.
The stock market crash of 1987, the Gulf War beginning in 1990, the Mexican Peso Crisis in 1994, the Asian Currency Crisis in 1997, the Long-Term Capital Management bankruptcy in 1998, the Internet Dot-Com Bubble in 2000, and the U.S. Housing Bubble that ended in 2007:
Each crisis was met with more money and lower interest rates - a policy that came to be known as the Greenspan Put and more recently the Bernanke Put because it assured many of the most reckless risk-takers they would not lose a red cent.
We never would have had the last stock market boom carry valuations to such heights without easy money. We never would have had the U.S. housing boom without artificially low interest rates and without Fannie Mae and Freddie Mac promoting home ownership for everyone, whether or not they could really afford it.
We never would have had the mortgage-backed securities debacle without easy money and low interest rates. And, no one - especially foreign central banks - would have bought these and other sub-prime securities if they thought they could lose their shirts.
Rather than allowing periodic recessions and bear markets to purge the excesses of each prior boom or bubble, the Fed stimulated the economy with massive doses of new credit, more injections of liquidity, and lower interest rates. Neither the Fed nor the politicians in Washington wanted a recession - and hardly anyone complained when the Fed just printed more money. says Nichols.
Like all 'Ponzi Schemes', investors lose out at the end, although those in and out again in the early stages can make massive gains.
As to the current 'economic recovery', Nichols, like a number of other economic observers is sceptical to say the least. Although many are beginning to talk about economic recovery in the United States, those that are seeing green shoots are looking through rose-colored eyeglasses says Nichols . . . and there is significant risk of a double-dip recession with further contraction and a second down-leg yet to come. The economy is showing signs of life only because of massive injections of liquidity by the Fed and the various bailouts by the Treasury.
We have never says Nichols in the economic history of the United States seen a period of rapid growth in money and credit nor an extended period of negative real interest rates that has not been followed by a declining dollar exchange rate and a rising inflation rate at home.
Nichols also notes as bullish for the gold price a changing attitude towards gold by Central Banks, with even those which have been among the sellers now seemingly reluctant to sell any more, while countries like China and Russia are now increasing their portions of reserves held in gold - and still have a huge way to go to get anywhere near the percentages held by most western Central Banks.
Indeed those Central Banks which did sell large percentages of their gold holdings are looking pretty foolish - perhaps most of all the U.K. which sold half its reserves under the guidance of current Prime Minister, Gordon Brown (who has since managed to spin his way to a reputation for financial prudence), at the nadir of the price - now known by U.K. economists as 'Browns Bottom'.
There certainly seems to be a trend towards increased diversification of reserve assets away from what is seen as a dollar in decline, with gold probably being a major beneficiary.
The performance of the scrap market in this latest runup to $1,000 is also cause for positive thinking among the bulls with the responsiveness of the scrap market being much more subdued than the last time gold moved above this level.
Gold mine production is also seen as continuing to decline having seemingly peaked and with the main areas of production growth in countries like China and Russia which may well be buying up all their domestic production anyway, new supply to the market may be limited.
Another factor noted by Nichols is the introduction and growing popularity of gold exchange-traded funds which have changed the market in a very important way that is not yet well appreciated by many analysts and observers of the gold scene. By facilitating gold investment and ownership ETFs have brought significant numbers of new participants to the market - not just individuals but hedge funds, pensions, and other institutional investors.
Nichols concludes that thanks to extremely expansionary monetary policy - and with a little help from ETF investors, central banks, and new or evolving markets - like China and India - the gold price will continue to move ahead. He reckons $2,000 to $3,000 is on the cards in the next few years.