Jeffrey Nichols – Senior Economic Advisor to Rosland Capital
Managing Director, American Precious Metals Advisors

In case you hadn’t noticed, gold prices have been surging to new all-time highs. At one point today (Thursday, August 18^th) the yellow metal touched a record $1,830 an ounce.

Whether gold continues to skyrocket, settles into a new trading range around recent levels, or plummets as high prices discourage buyers and encourage profit-takers is anyone’s guess.

At some point, however, we will see a correction, perhaps a sizeable one. After all, even strong bull markets never move up in straight lines. I would not be surprised to see gold stumble – falling back $100, $200, or even $300 – before prices begin working their way higher once again.

My advice to gold investors is to use sell-offs, when they occur, as opportunities for scale-down buying. And, those who are underweighted or own no metal should gradually acquire physical metal with their focus on long-term portfolio protection rather than short-term profits.

Adding to my short-term caution has been some price-related relaxation of physical demand and the appearance of increased quantities of gold scrap returning to the market, especially from India and other price-sensitive national markets.

I’m confident gold’s long-term uptrend will continue in the months and years ahead, ultimately reaching a multiple of today’s record level.

Seasonal Demand

In any event, gold will soon begin to benefit from increased seasonal demand, demand that should support the yellow metal’s price right through New Year’s Day. There are three distinct sources of seasonal demand: (1) Western jewelers step up fabrication demand ahead of Christmas gift-giving late in the year; (2) Indian dealers begin stocking up ahead of the late summer and autumn festivals and wedding season; and (3) in December and January, the approaching Chinese lunar new year triggers another sharp rise in gold demand.

For sure, irrespective of the season, Asian demand – principally from China and India – for physical metal will continue to underpin these markets and limit downside risks.

So too will bargain hunting by a number of central banks eager to raise their official gold holdings without disrupting the world gold market by increasing upward price volatility.

Bullish Economic Forces to Continue

There is no reason to believe that the forces and factors pushing gold higher – in the past weeks, months, and years – are simply going to disappear anytime soon. I’ve been talking about many of these for years . . . and, I expect I’ll still be talking about these same pro-gold forces for years to come.

The recent rush of gold buying is, in large part, a rational response to rising uncertainty, anxiety, and fear that the U.S. and European economies are stumbling badly . . . and world financial markets are increasingly vulnerable to an epileptic seizure, or worse.

In recent days, signs of renewed recession on both sides of the Atlantic and Europe’s worsening sovereign-debt crisis are raising expectations that the Federal Reserve and European Central Bank (ECB) will both be compelled to pursue evermore stimulative monetary policies beginning with a new round of quantitative easing in the United States and stepped-up ECB purchases of sovereign debt and/or interest-rate cuts in Europe.

These policies – and the implications for future inflation and monetary debasement – are like steroids for the gold market, causing investors and central-bank reserve managers to seek the protection of gold.

In any event, whatever happens in the U.S. and European economies, it is hard to imagine a realistic scenario that won’t push gold prices significantly higher.

Central Bank Acquisition: More Important Than You Think

Importantly, contributing to gold’s recent swift rise has been the growing interest and stepped-up acquisition of gold by the official sector.

This was underscored by the Central Bank of Venezuela’s recent announcement that it was repatriating much of its official gold reserves from foreign custody. Statistics from the Bank for International Settlements (the BIS) suggest that a number of other countries have, in the past year, repatriated gold rather than store it in the custody of the Bank of England, the New York Federal Reserve Bank, or in the vaults of other central banks.

While these are not purchases of gold affecting the world market supply/demand balance, the trend toward repatriation illustrates the special role gold plays as an asset of last resort among central bank reserve managers.

Increasingly, central banks are buying gold: South Korea announced a couple of weeks ago that it had purchased 25 tons over the past two months, almost tripling its central bank gold holdings. Thailand’s central bank, too, has been an important buyer, recently adding nearly 18 tons to its official gold stocks. Even the Banco de Mexico bought 100 tons earlier this year, joining China, Russia, India, and Saudi Arabia – all of which bought large quantities in recent years. Russia continues to buy gold regularly from its domestic production – and, we think, China does likewise though it chooses not to report its purchases.

News of central bank gold repatriation – and, even more so, outright purchases – is likely to encourage more central banks underweighted in gold to begin or continue buying. Even more so than many private investors, central bankers are apt to be purchasers for the long haul, holding gold as a diversifier and insurance policy against what they perceive to be the growing risk of U.S. dollar depreciation and debasement.

I expect the rising trend in central bank interest and accumulation of gold will be an important force in the market for many years to come. In the meantime, bargain hunting by a number of central banks eager to raise their official gold holdings without disrupting the world gold market will help limit downside risk.

Contrary to some commentators who say “gold’s extraordinary run is nearly over” or “the gold-price bubble will soon pop,” I believe the yellow metal’s price has far to go, perhaps to the end of the decade or even longer, before the great gold bull market comes to its ultimate cyclical end.

Right now, there are plenty of rock-solid fundamentals that suggest the gold market is healthy with plenty of room to move higher. Moreover, the world economic and geopolitical environment remains very supportive – and seems likely to remain pro-gold for years to come.

My forecast of $1700 gold by year-end 2011 first reported in the January 4^th Rosland Gold Commentary now seems within easy reach. And this is just the beginning of gold’s next great move up, a move that will carry the metal to $2000 an ounce, possibly by the end of next year, with prices heading still-higher – to $3000 and possibly $5000 or more in the mid-to-late years of this decade.

Opportunities Ahead

We expect continuing two-way price volatility and periodic sharp corrections, corrections that some will mistake as the end of the bull market – but you should consider these opportunities to acquire additional metal at bargain-basement prices.

With gold recently at new historic heights, there is certainly some risk of a short-term price correction – especially if the U.S. Treasury debt ceiling and Federal budget crisis is resolved expeditiously with the promise of long-term deficit reduction. Positive news on the debt and deficit front could trigger a swift – but temporary – gold-price retreat.

Seasonal Demand

In any event, gold will soon begin to benefit from increased seasonal demand, demand that should support the yellow metal’s price right through New Year’s Day. There are three distinct sources of seasonal demand: (1) Western jewelers step up fabrication demand ahead of Christmas gift-giving late in the year; (2) Indian dealers begin stocking up ahead of the late summer and autumn festivals and wedding season; and (3) in December and January, the approaching Chinese lunar new year triggers another sharp rise in gold demand.

For sure, irrespective of the season, Asian demand – principally from China and India – for physical metal will continue to underpin these markets and limit downside risks.

So too will bargain hunting by a number of central banks eager to raise their official gold holdings without disrupting the world gold market by increasing upward price volatility.

Safe-Haven Buying

European Central Bank president Jean-Claude Trichet a few weeks ago raised the alarm level on Europe’s debt crisis to “red,” warning that the crisis is nowhere close to being resolved.” Indeed, I believe the sovereign-debt crisis will continue to worsen.

First, the more restrictive fiscal policies being forced on the periphery nations (Portugal, Ireland, Italy, Greece, and Spain) will push their economies deeper into recession and increase, rather than decrease, government deficits and borrowing needs for years to come.

Second, as credit ratings decline for the peripheral countries, the rising cost of refinancing maturing debt make it all that much more difficult to keep their heads above water.

The peripheral countries desperately need a devalued currency to bring their economies into balance. But meanwhile, Europeans will continue to abandon the euro, Europe’s single currency, for “safe havens” including gold and, ironically, the U.S. dollar.

Higher Inflation Ahead

The U.S. economy is still mired in recession, or worse. Recent statistics show real GDP virtually stalled in the first half of the year. Unemployment remains stuck over 9 percent. The huge inventory of foreclosed homes held by banks continues to weigh heavily on home prices.

So far, most Washington politicos and Wall Street bankers are in denial, refusing to see the worsening signs of renewed recession. Instead, they are arguing for restrictive budget-balancing economic policies that will exacerbate the developing downturn.

Having ended its program of quantitative easing at the end of June as scheduled, the Federal Reserve, in my view, will soon be forced by the worsening economic environment to resume monetary stimulus in one form or another – and this will be a big plus for gold.

Ultimately, the only politically acceptable means for America to dig itself out of its unbearable burden of excess debt is to pursue a policy of higher inflation that will deflate the ratio of outstanding debt to nominal gross domestic product (GDP) to historically acceptable and manageable levels. This is what we did in the 1970s, a decade of stagflation, and we’re already doing it again.

Whatever happens in the U.S. and European economies, it is hard to imagine a realistic scenario that won’t push gold prices significantly higher in the months and years ahead.

Jeffrey Nichols, Senior Economic Advisor to Rosland Capital (www.roslandcapital.com), had the following comments on the current gold market situation and outlook:

Gold’s recent performance has certainly been a major disappointment to the many analysts and investors who have been anticipating another stellar year for the yellow metal. But the year is hardly over, nor is gold’s long-term bull market. I believe we may yet see a reversal of gold’s fortunes and new all-time highs, if not this year than certainly in 2013. Moreover, the now decade-long advance in the metal’s price could last another five-to-ten years given the global economic challenges that lie ahead.

For now, gold’s short-term prospects remain uncertain. So far this year, gold has traded at well beneath its all-time high of $1,924 recorded last September. It’s subsequent low near $1,520 an ounce registered in late December now, in recent days, again seems to be a vulnerable support level. As we have previously cautioned, a fall back to $1,520 – or even lower – is certainly possible before gold resumes its long-term ascent.

Gold’s reversal from last September’s record high and its continuing anemic performance reflect an Olympian tug of war between short-term institutional traders and speculators operating in derivative markets trading paper proxies for gold . . . and physical markets where long-term investors, jewelry consumers, and central banks have continued to accumulate a growing quasi-permanent stock of metal.

It is in the physical realm – the real world of supply and demand for gold bullion – where the long-term average price of gold is set. And here the fundamentals are decidedly bullish. In fact, thanks to continued central bank buying, rising Chinese private-sector demand, and limited mine supply availability, the fundamentals are becoming increasing bullish despite the current episode of price weakness.

You’d think gold prices would, by now, be flying at much higher altitudes what with Europe sinking deeper into recession, bank runs spreading from Greece to Spain, Portugal, and Italy, Greece increasingly likely to secede from the Eurozone, and the European Union coming apart at the seams. Instead, the flight from the euro has favored the U.S. dollar – and the appearance of a stronger U.S. dollar has contributed to a short-term bet against gold by institutional traders and speculators. But the greenback is merely the best-looking horse on its way to the glue factory and its strength is merely a reflection of the euro’s decline. It is not supported by a healthy American economy and sound U.S. monetary and fiscal policies.

The key short-term players are a small number of banks, hedge funds, and other financial firms who operate with the benefit of leverage and sometimes little cash down and trade not in real gold but in futures, options, and more opaque over-the-counter markets. What motivates these traders is the necessity to make short-term trading profits.

For a good part of last year, as a group, they were on the long side of the gold market, contributing to gold’s stellar advance last summer. But as they demonstrated later last year, they have no lasting or long-term commitment to gold as an inflation hedge, portfolio diversifier, or insurance policy against economic or political risk.

More recently, it has been these short-term players operating on the short side of the market who have held sway . . . and held back the price advance that is surely coming. At some point, perhaps when the Greek economy and financial markets seize up, or the country launches its own currency, or the black plague of lost confidence spreads to other vulnerable, overly indebted nations, gold will return to vogue and these traders and speculators will again favor the yellow metal as an opportunity to profit.

Alternatively, the European Central Bank could come to the rescue, issue a euro-denominated “mutualized” debt instrument – a European version of U.S Treasuries – and provide sufficient refinancing to Greece and the other heavily indebted countries that, for now, they avoid a more disastrous outcome. The cost, however, would be borne by much higher inflation across the continent and a deep long-lasting devaluation of the euro. This time, however, not only might the U.S. dollar look stronger as the euro weakens – but gold would likely shine for reasons I have explained in past Rosland Capital Gold Commentaries.

To arrange an interview with Jeffrey Nichols or Rosland Capital’s CEO Marin Aleksov, please contact Carrie Simons at Triple 7 Public Relations (310.571.8217 | carrie@triple7pr.com).

About Rosland Capital

Rosland Capital LLC is a leading precious metal asset firm based in Santa Monica, California that buys, sells, and trades all the popular forms of gold, silver, platinum, palladium and other precious metals. Founded in 2008, Rosland Capital strives to educate the public on the benefits of investing in gold bullion, numismatic gold coins, silver, platinum, palladium, and other precious metals. Learn more by hearing from our customers.

About Jeffrey Nichols

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. His clients have included central banks, mining companies, national mints, investment funds, trading firms, jewelry manufacturers and others with an interest in precious metals markets.

Jeffrey Nichols, Senior Economic Advisor to Rosland Capital

Managing Director of American Precious Metals Advisors

HIGHLIGHTS:

• U.S. dollar strength will be short lived

• Official GDP and inflation statistics present overly rosy picture

• Gold’s long-term drivers remain bullish

It’s now nearly two months since gold registered an all-time high of $1,227 an ounce, following a five-month run during which the metal rose more than $300 an ounce.

Gold’s strength last year reflected a number of factors: (1) record worldwide private investment demand; (2) net official purchases (after two decades of net selling) as some central banks sought insurance against further devaluation of their dollar-denominated assets; and (3) at times, a weaker U.S. dollar.

Since then, mostly reflecting a temporary “strengthening” U.S. dollar, the yellow metal eased off a bit, falling as low as $1,075 last week – a correction of some 12 percent – before recovering smartly at the beginning of February..

The catalyst to dollar strength – measured against the euro, Europe’s common currency, or a basket of key currencies – has been heightened fear of sovereign default. Most recently, fears that Greece will be unable to meet its public debt obligations has pushed the euro to its lowest point in six months and the dollar to its highest level in five months against a basket of currencies.

It baffles me that so many foreign-exchange traders and institutional investors around the world think of the dollar as a “safe haven.” Just look at the facts:

A proposed a $3.8 trillion budget for fiscal 2011 projects the Federal deficit will balloon to a record $1.6 trillion following last year’s $1.4 trillion deficit – and there is not much hope of bringing the deficit down to acceptable levels in the next few years, particularly with a persistently weak economy, persistently high unemployment, falling tax revenues, and, eventually, rising interest rates that will push the Treasury’s borrowing costs much, much higher.

Meanwhile, the Federal Reserve continues, as it must, to buy Treasury and federal housing agency debt and to hold its key Fed funds policy rate near zero.

Our dysfunctional government lacks the ability to deal with America’s economic problems and the public lacks the stomach or the wallet to take the painful remedies necessary to put America back on the right track.

It will soon become clear that our economy is performing much worse than headlines lead us to believe.

Last week, the Commerce Department reported GDP grew by 5.7 percent in the fourth quarter of 2009. Not mentioned widely in the press, 60 percent of this gain was inventory-related . . . but not even an increase in actual business inventories, just a slower pace of inventory depletion that doesn’t add to industrial activity, real growth, or higher employment.

Instead, domestic consumption and real business investment, that together indicate the pulse of the economy, rose by merely 1.8 percent. And, much of this has been fuelled by government money and Federal stimulus.

The “official” unemployment rate is at 10 percent and likely to be reported higher in the next month or two. Counting part-timers looking for full-time employment and those too discouraged to continue looking, the “actual” unemployment rate is probably close to 20 percent.

Those of us still employed are increasingly anxious that we may soon join our unemployed neighbors while our personal net worth has fallen sharply with home prices and the stock market. As a result, the savings rate is rising – and Americans are spending less. This is not a picture that suggests personal consumption, which typically accounts for two-thirds of GDP, will be sufficient to trigger a virtuous circle of spending, business activity, employment, increased tax revenues, and a naturally decreasing Federal budget deficit.

Monetary and fiscal policy – typified by quantitative easing and a rapidly expanding monetary base, along with various “stimulus” programs that do little to improve our national infrastructure or international competitiveness – are inflationary and will debase our currency’s purchasing power regardless of the exchange rate with the euro or other key currencies.

In fact, it only takes a trip to the grocery store to realize that inflation is much higher than the monthly consumer and producer price data suggest. Recent month-to-month data has been skewed downward by faulty seasonal adjustments, but on a year-over-year basis, the December consumer price index rose by 2.7 percent and the producer price index rose by 4.4 percent. And, even these numbers underestimate actual inflation due to the depressed imputed rental cost of housing and other adjustments to the data.

Economists at the Fed and within the Administration base their policy judgments on the core rate of inflation, which excludes food and energy. Because these are just the two sectors where inflation is most likely to manifest, policy will inadvertently have an inherent inflationary bias.

Policymakers are also missing the coming inflationary impulse from abroad via the continuing raise in commodity prices. China, India, and other emerging economies that are leading the world recovery are committed to industrial and infrastructure development, and have rapidly growing middle classes demanding improved diets, more automobiles, better highways, bigger homes with dependable electricity and household appliances. The likely outcome is rising global demand and much higher prices for key commodities.

Against this economic backdrop – especially the inability of America to deal effectively with our economic problems, more of the same from economic policymakers, and the inevitable rise in U.S. inflation rates – it is only a matter of time before the dollar’s appeal diminishes and gold regains its status as the ultimate safe haven.

Jeffrey Nichols, Senior Economic Advisor to Rosland Capital (www.roslandcapital.com), had the following comments on the current gold market situation and outlook:

Disappointing news for the U.S. economy is good news for gold investors. Recent economic data show an economy that is “stuck in the mud,” to quote Fed Chairman Ben Bernanke. And, in response to signs of a slowing economy, the U.S. central bank is, sooner or later, likely to embark on another round of monetary easing.

In fact, the recent gold-price rally that took the yellow metal back over the psychologically important $1,600 an ounce level reflects rising market expectations that the Fed will announce further economic stimulus following the July 31-August 1 Federal Open Market Committee policy-setting meeting.

Aggressive action by the Fed – in the form of another round of quantitative easing (QE3) or a reduction in the interest rate paid to banks on reserves deposited with the central bank – could give gold another quick boost and trigger the resumption of a durable bull-market advance.

On the other hand, if the Fed fails to adopt aggressive monetary stimulus at next week’s FOMC meeting gold could quickly sink back under $1,600 an ounce. This is a less-likely outcome . . . but it would offer investors another opportunity to buy at lower prices in advance of the next big move up.

In any event, it is fairly likely that the economy will remain stuck in the mud – or, worse yet, slump into an outright recession. With Congress suffering from arterial sclerosis, the economy seems likely to lurch towards a “fiscal cliff” with tax increases and spending cuts leaving the Fed as the last line of defense against a catastrophic economic collapse.

Whether or not the Fed initiates further stimulus in the days ahead, we face an extended period of economic stagnation and recession-like business conditions . . . and an extended period of increasingly stimulative monetary policies that will drive gold prices significantly higher.

Higher gold prices are not just a monetary phenomenon or wholly dependent on U.S. economic prospects. In addition, there are a number of other factors and forces that will contribute to higher gold prices in the years ahead. We’ve discussed these at length in past reports and will have more to say in the future. Briefly, these include:

• Continuing long-term growth in jewelry and investment demand from both China and India as well as from other gold-friendly Asian countries – even if economic growth slows in these economies . . . and despite short-term resistance to higher prices as we have seen lately in India.

• Rising participation and gold ownership by retail and institutional investors in the United States and Europe as more savers and investors recognize the legitimacy and benefits of gold.

• Continuing official-sector gold purchases from central banks underweighted in gold (particularly China and Russia), uncomfortable with their excessive U.S. dollar exposure, and no longer comfortable accumulating euro-denominated reserves.

• Further monetary stimulus from the European Central Bank as recessionary business conditions worsen – and the likely exit from the Eurozone of one or more periphery nations that are socially and politically unable to endure the consequences of austere fiscal policies.

To arrange an interview with Jeffrey Nichols or Rosland Capital’s CEO Marin Aleksov, please contact Carrie Simons at Triple 7 Public Relations (310.571.8217 | carrie@triple7pr.com).

About Rosland Capital

Rosland Capital LLC is a leading precious metal asset firm based in Santa Monica, California that buys, sells, and trades all the popular forms of gold, silver, platinum, palladium and other precious metals. Founded in 2008, Rosland Capital strives to educate the public on the benefits of investing in gold bullion, numismatic gold coins, silver, platinum, palladium, and other precious metals. Find out what our customers have to say.

About Jeffrey Nichols

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. His clients have included central banks, mining companies, national mints, investment funds, trading firms, jewelry manufacturers and others with an interest in precious metals markets.

Jeffrey Nichols, Senior Economic Advisor to Rosland Capital (www.roslandcapital.com), had the following comments on the current gold market situation and outlook:

Gold shed more than $50 an ounce in a blink following last Wednesday’s news from the Federal Reserve that America’s central bank would not, at least not now, initiate another round of quantitative easing, opting instead for more muted monetary stimulus by extending its “Operation Twist” through year-end.

Operation Twist, in which the Fed sells short-term U.S. Treasury securities from its portfolio and simultaneously purchases longer-dated Treasury notes and bonds, is intended to stimulate the economy by lowering medium- and long-term interest rates without actually speeding up growth in the money supply. In contrast, quantitative easing (QE for short) expands the Fed’s holdings of Treasury securities – what some call expanding the Fed’s balance sheet – thereby creating new money and prompting a stepped up pace in monetary growth . . . and ultimately more inflation.

The recent correction in gold and silver prices has some precious metals pundits already writing obituaries for these metals. Last week, gold in New York was off more than three percent, falling from a recent high near $1,627 to $1,570 – just about giving up all of this year’s gains and, worse yet, down some 18 percent from its all-time high last September. Meanwhile, silver fell by more than six percent from $28.75 an ounce to $26.90 – and at week’s end silver was off some 3.4 percent for the year to date and more than 45 percent from its April 2011 peak.

This backtracking in gold and silver does not signal a new bearish phase for precious metals prices. At worst, it calls for more patience from investors and savers holding these metals as they await the next major move up in a still very much intact bull market. More importantly, the current weakness in gold and silver prices simply gives smart investors and fearful savers more time to buy the protection and financial insurance offered by these metals.

The timing of more monetary stimulus from the Fed – and the next major upward move in gold and silver prices – depends either on the economic news here in America (with bad news raising the chances of more quantitative easing sooner rather than later) or an impending financial disaster in Europe.

I expect continued weakness in the U.S. economy, especially an unacceptable low rate of new jobs creation, to prompt another round of quantitative easing (QE3) by the Fed later this year (possibly as soon as the August Federal Reserve policy-setting meeting) or in early 2013 – that is, if events in Europe don’t first call for coordinated monetary stimulus from central banks on both sides of the Atlantic and around the world.

Despite yet another round of funding for Europe’s sickest economies and banks – and regardless of whatever decisions are taken at the upcoming European summit later this week – the Eurozone will continue to unravel. There’s just no way that citizens of the peripheral economies will continue to accept austerity, collapsing economies, rising joblessness, and deteriorating living conditions for years to come.

Sooner or later, I expect default by one or another sovereign borrower or the failure of one or another major European bank (what some are calling a “Lehman” moment recalling America’s 1998 banking crisis) will trigger an unprecedented flood of new money from the Fed, the European Central Bank, and other central banks in Europe and Asia – assuring that gold and silver once again shine brightly.

To arrange an interview with Jeffrey Nichols or Rosland Capital’s CEO Marin Aleksov, please contact Carrie Simons at Triple 7 Public Relations (310.571.8217 | carrie@triple7pr.com).

About Rosland Capital

Rosland Capital LLC is a leading precious metal asset firm based in Santa Monica, California that buys, sells, and trades all the popular forms of gold, silver, platinum, palladium and other precious metals. Founded in 2008, Rosland Capital strives to educate the public on the benefits of investing in gold bullion, numismatic gold coins, silver, platinum, palladium, and other precious metals. For more, read our customer reviews.

About Jeffrey Nichols

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. His clients have included central banks, mining companies, national mints, investment funds, trading firms, jewelry manufacturers and others with an interest in precious metals markets.

Jeffrey Nichols, Senior Economic Advisor to Rosland Capital

Managing Director, American Precious Metals Advisors

Gold is coming to life again – and looks poised to move higher in the weeks and months ahead. Having fallen precipitously from its all-time high just over $1,923 an ounce in early September to a recent low near $1,540 in early October, a peak-to-trough correction of some 20 percent, gold has been, of late, range-bound, trading between $1,640 and $1,680.

Having moved to the top of this range and even slightly higher, I sense gold is just now resuming its long march upward, a march that could, before long, carry the price to the $1,850 region and perhaps even to its historic peak of $1,923 by the end of the year.

The Safe-Haven Paradox

Ironically, Europe’s continuing sovereign debt crisis – a situation that should promote fear-driven demand for gold – has, in recent weeks, weighed most heavily on the yellow metal’s price. In addition, a sharp reversal in speculative positions on futures exchanges and other derivative markets has contributed to gold’s two-month consolidation.

Ordinarily, investors and analysts might expect Europe’s impending economic and political disaster to send gold prices rocketing skyward – but this has not yet been the case. Instead, it triggered “safe haven” demand for the U.S. dollar and boosted the greenback’s exchange rate against the euro to gold’s detriment.

With flight capital and hot money going into the U.S. dollar as a safe haven from Europe’s woes, dollar-denominated hard assets like gold and other commodities have been under pressure, in large measure due to the behavior of institutional traders and speculators, many of whom have reduced their “long” positions or “shorted” gold in derivative “paper” markets.

Gold’s Fortunes Set to Improve

I have no doubts that the recent downward pressure on the gold price arising from the U.S. dollar’s “apparent” strength – and I stress “apparent” – will prove to be temporary. Indeed, in recent days, with demand suddenly surging for investment-size bars and gold exchange-traded funds, it looks like safe-haven gold demand may finally be picking up even as the flow of funds into the dollar continues. “

In any event, gold’s fortunes are set to improve in the weeks ahead: If Europe’s debt crisis subsides, the dollar will no longer benefit from its safe-haven role. If it continues to worsen, investors particularly in Europe are likely to accelerate their rush into physical gold, buying bullion coins, small bars, and ETFs, as they did in mid-2010. But, either way, as traditional physical demand continues to grow, especially in Asia and from central banks in that region and elsewhere, gold is increasingly going into stronger hands that are less likely to sell even at much higher prices.

Short-term trading in derivative markets may, at times, produce a great deal of gold-price volatility but, in my book, it does not affect the long-term price trend. What governs the price of gold over the long term are the market’s real-world supply and demand fundamentals – and these have been decidedly bullish . . . and are becoming even more so. Hence, my long-standing long-term forecast of higher gold prices over the next several years.

Robust Physical Demand

While speculative pressures have pushed gold lower, physical demand has remained quite firm – not just from European’s seeking a safe haven – but, even more so, from Asian markets, particularly India and China, where investors and consumers are taking more gold for reasons that have little to do with the world political and economic situation.

India, for example, is now celebrating (this year beginning on Wednesday, October 26^th) the Diwali “festival of lights.” Considered an auspicious time to buy gold – investment-grade jewelry, small bars, and coins – Indians are showing no reluctance to acquire gold at what are historically very high rupee-denominated prices.

Our friends in the Indian bullion community expect continued strong physical demand in the months and years ahead – reflecting growth in personal income, particularly in the agrarian and rural communities that traditional buy and hoard gold, as well as worrisome domestic inflationary pressures. Not to be understated, India’s central bank purchase of 200 tons of gold in 2009 was an official endorsement of the metal’s role as a reliable store of value and savings asset that many private households are now following.

Chinese gold demand is also robust, due to income growth, rising wealth, and also inflation fears. Higher gold prices, rather than discouraging demand, have attracted new investors to the market. And, the central government has been pro-active in promoting investor access to gold by encouraging the development of physical and futures exchanges and retail gold distribution through banks and other retail outlets across the country.

Sticky Gold

Not counting official purchases by the People’s Bank of China, Chinese consumers and investors are now the world’s biggest end-market for gold. And, this is long-term “sticky” demand, much of which is unlikely to come back to the market anytime soon, perhaps not in our lifetimes, even as the metal rises to a multiple of today’s price.

In addition to solid private-sector physical demand, the official sector has been an increasingly important buyer. Russia and China have been most prominent, buying fairly regularly and stepping up acquisitions whenever the price dips as it has in the past couple of months. The list of central banks buying gold this year includes South Korea, Mexico, Kazakhstan, Thailand, Bolivia, and Colombia.

With both the U.S. dollar and the euro looking tarnished and risky to central bank reserve managers, official-sector gold acquisitions have likely increased in recent weeks at lower price levels where purchases could be made discretely without any noticeable affect on gold-price volatility. And, this too, is sticky gold that is unlikely to return to the market any time soon.

What few gold pundits realize is that the amount of physical gold available in the world gold market – the “free float” – is shrinking, thanks not only to Chinese and other Asian buyers, but also due to renewed interest and accumulation of gold by a growing number of central banks. For central banks, the holding period may be measured in decades if not longer. As a consequence, future demand will have a much more high-powered affect on the price of gold – and this is one of the reasons we expect much higher prices in the years ahead.

Jeffrey Nichols, Senior Economic Advisor to Rosland Capital (www.roslandcapital.com), had the following comments on gold investment:

I believe most investors and savers should hold five-to-ten percent of their investible assets and personal savings in physical gold . . . and for some high-net-worth investors a greater percentage allocation to gold may be appropriate.

Physical gold serves at least four important investment objectives:

●First, it provides a form of financial insurance should unforeseen economic or political events diminish the value or liquidity of your ordinary equity, fixed income, or real estate assets. This alone is sufficient reason to allocate five-to-ten percent of one’s investments and savings to physical gold. And, just like life insurance, your home-owners insurance, your health insurance, and your auto insurance you’re happiest never collecting.

●Second, gold is the preeminent inflation hedge, offering protection against excessive monetary creation, future inflation at home, and U.S. dollar devaluation in world currency markets.

●Third, it is a unique portfolio diversifier. Even though the price of gold may be, at times, quite volatile, because its price movements tend to be uncorrelated with the ups and downs in other asset prices, it reduces the volatility and price risk in one’s overall investment portfolio. In other words, a portfolio including gold is over time less volatile than the same portfolio excluding gold.

●Fourth, gold’s supply/demand fundamentals – especially expected growth in both jewelry and investment demand from China and India as well as increasing central-bank reserve accumulation – suggest its price will move sharply higher in the next three-to-five years – and is likely to continue outperforming most other investments, much as it has over the past decade.

Many investors confuse gold with gold-mining equities, gold exchange-traded funds (ETFs) and other “paper” gold investment products. But when I recommend holding five-to-ten percent of one’s overall investments and savings in gold, I’m talking about physical gold – bullion bars and bullion coins – that you can actually hold and store on your own or with a safe-deposit facility of your own choosing.

And, I’m talking about long-term holdings of physical gold – holding that you might sell as a last resort. If you wish to actively trade gold, speculate in short-term price movements, or bet on gold-mining shares, go right ahead – but understand that these positions should be in addition to – not instead of – your “core” five-to-ten percent.

One of the main reasons to own gold, physical gold, is risk reduction – to reduce or avoid the risks that threaten ordinary investments and savings including equities, bonds, mutual funds, gold ETFs, and foreign currencies.

Gold-mining equities, unlike physical gold, do not lower risk but actually subject the investor to a myriad of risks not associated with ownership of the physical metal. These include:

●Management risk – the risk that company executives and directors will make poor decisions and mismanage the companies business. This includes diversification away from gold to other mineral mining or

●Stock-market risk – the risk that a swift decline in equity prices (such as the “Flash Crash” of May 2010) will drag gold-mining shares lower along with everything else.

●Exchange risk – the risk that stock exchanges close or trading is suspended due to terrorism, natural catastrophe, computer hacking, or government mandate.

●Political or country risk – the risk of nationalization of mining assets (as occurred in recent years in Venezuela and is now threatened in South Africa, Mongolia, and some South American countries) or the imposition of hostile government regulations, including environmental regulations, that increase costs and slow development of new and existing mines.

●Tax risk – the risk that mines may be subject to excessive or punitive taxation as illustrated by the recent Obama budget proposals calling for a five-percent royalty on revenues from all domestic U.S. mining activities

●Cost inflation – although gold is an inflation hedge, mining companies are subject to rising costs for energy, labor, steel, chemicals, and other inputs.

Historically, some investors have preferred gold-mining equities to the real thing, simply because they offered leveraged exposure to the gold price. When gold prices went up, gold-share prices generally went up more.

But in recent years, gold-mining equities have significantly underperformed. When gold prices rose, gold-mining equities rose less . . . and when gold prices have retreated, the mining stocks fell even more.

While mining companies have underperformed bullion, the exploration companies, developers, and junior mining companies have fared even worse. Investors in these companies are not really investing in exposure to the gold price at all but are betting on the chance of an economic discovery or significant mine expansion. While there are certainly some exceptions, these are the companies that Mark Twain was referring to when he said “A gold mine is a hole in the ground with a liar standing next to it.”

There are good reasons to believe that gold stocks will continue to underperform the metal itself:

●First, the popularity of gold exchange-traded funds (now with some 80 million ounces in gold holdings worldwide, up from virtually nothing five years ago) has attracted funds that might have previously gone into the mining stocks. I expect the ETFs will continue to successfully compete with and continue to attract investor capital that might, in earlier years, have gone into the shares.

●Second, much of the growth in gold investment has occurred in China, India, and other countries where there is no popular tradition or experience with gold-mining equity investments. This has further skewed – and will continue to skew – demand in favor of physical gold.

●Third, reserve depletion – the existing mining companies are running out of gold reserves or are only able to replace mined-out reserves with new reserves that are at greater depth, are more challenging geographically or metallurgically, and are therefore much more expensive to mine and refine.

●Fourth, many gold-oriented investors do not think highly of many mining-company managements and do not want the additional risks (see above) threatening gold-mining shares.

Despite the popularity of gold ETFs, it is important for investors to understand that they do not serve as an alternative to physical investment and ownership of the actual metal.

Investing in an ETF is not the same thing as owning the physical metal. With ETFs you do not actually own the physical metal . . . and unless you are a large institutional investor you cannot take delivery of the physical metal.

Moreover, if it is important to you, gold exchange-traded funds do not provide the anonymity that accompanies purchase and ownership of physical bullion bars and coins.

In addition, there are risks inherent in ETF ownership that are not shared by bullion bars and coins held under your personal control. For one thing, as equities traded on public stock exchanges, ETFs are subject to exchange risk and their liquidity is dependent on the exchange operating without interruption. For another, ETFs are dependent on transfer agents, depositories, and custodians all functioning honestly and as expected.

To arrange an interview with Jeffrey Nichols or Rosland Capital’s CEO Marin Aleksov, please contact Carrie Simons at Triple 7 Public Relations (310.571.8217 | carrie@triple7pr.com).

About Rosland Capital

Rosland Capital LLC is a leading precious metal asset firm based in Santa Monica, California that buys, sells, and trades all the popular forms of gold, silver, platinum, palladium and other precious metals. Founded in 2008, Rosland Capital strives to educate the public on the benefits of investing in gold bullion, numismatic gold coins, silver, platinum, palladium, and other precious metals. For more information check out our customer reviews.

About Jeffrey Nichols

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. His clients have included central banks, mining companies, national mints, investment funds, trading firms, jewelry manufacturers and others with an interest in precious metals markets.

In his interview with Mike Norman of Hard Assets Investor, Rosland Capital’s Jeffrey Nichols says buy low sell high means now Is the time to get into gold.

Full transcript from Hard Assets Investor.