Hope Still Springs Eternal, Next Installment

Jeffrey Nichols, in an article posted at Moneyweb, is predicting $1,500+ gold for some time this year. His reasoning is as follows: due to the credit crunch, the severe recession, and central bank response to both, stagflation is baked in the cake. He believes that the U.S. dollar's position as the #1 safe-haven asset is irrational, and will end:

At some point, sooner or later, the European Central Bank, for all its talk of monetary restraint, will be forced to circumvent the prohibition barring purchase of member-country public debt. Like the Fed in the United States, the ECB will be forced to monetize the public-sector deficits of its most fiscally profligate members.

Here in the United States, private rating agencies are warning that America’s own “triple A” rating on Federal debt is at risk. Meanwhile, states ranging from California to New York are in shoddier shape fiscally than Greece . . . and, it remains to be seen, how Washington policymakers will bail out individual states that, by law, may not run budget deficits.

Just imagine how much worse America’s fiscal dilemma will be as U.S. interest rates (and, hence, U.S. Treasury borrowing costs) begin to rise, either from a tightening of monetary policy or, more likely, as rising inflation expectations are reflected in higher nominal interest rates....

As we have said repeatedly, today’s perception of the greenback as a “safe haven” preferable to gold, the “ultimate” safe haven, makes no sense. At some point, sooner or later, gold will disassociate itself from the dollar’s exchange rate against the euro and other industrial-country currencies - and begin appreciating against all of these currencies.

He also cites Asian demand for physical gold, which not only is price-sensitive but also is income-sensitive. Continued growth in China will add to demand increases because of increased buying power.

In addition, he holds out the possibility of the People's Bank of China buying the 190-or-so tons of IMF gold still on sale. He believes Chinese officials are holding back for reasons of face, because they'd rather buy at a lower average price than India's. "Should prices dip below $1,045 China might make a fast deal acquire gold directly from the IMF. Although, this would be an “off-market” transaction, the announcement effect alone would likely give the gold price a good kick up."


His reasons make some sense, but it would be a tall order for gold to increase more than 43% from last week's low of $1,045...assuming that Feb 4th's interday low proves to be the low of the year. Stellar years like '09 tend to be followed by consolidation periods; we're in one now, which looks likely to last for some time.