NEW YORK - Gold has been somewhat of a disappointment to many analysts and investors who, as of a few months ago, were still anticipating higher prices again this year. But the year is not over, nor is gold's long-term secular bull market.
With eleven years of advancing prices already chalked up on the scoreboard, the long-term secular upswing has five-to-ten years of life still ahead - and maybe more. Along the way, expect continuing volatility, periods of consolidation, and occasional corrections, corrections sometimes so severe that some will prematurely and incorrectly call the game over.
We are now in one of those periods of consolidation when the market takes a breather and adjusts internally, preparing for the next major move. So far this year, the yellow metal has traded well beneath its all-time high of $1,924 an ounce recorded this past September 6 and well above its subsequent low near $1,520 in late December.
Instead of forging new ground, the price in recent months has been merely treading water, seemingly stuck in a trading range between $1,620 and $1,696, awaiting some external news or internal market development to push the price beyond these temporary technical barriers.
Although I believe the odds of an upside breakout are significantly greater than the probability of a breakdown, I caution that a fall back to $1,520 - or even lower - is certainly possible before gold resumes its long-term ascent.
While physical demand from the key Asian markets - China and India - and from the official sector (that is from central banks) may fuel gold's long-term secular advance, it is developments in the macroeconomic and world financial sphere that are most likely to influence gold in the days, weeks, and months immediately ahead.
U.S. ECONOMIC NEWS AND EXPECTATIONS OF FED POLICY
Good news for the U.S. economy - news that diminishes expectations of further U.S. central bank monetary accommodation - hurts gold at least among institutional traders and speculators on Wall Street and at financial institutions around the world. This has been the group that has been most responsible for last September's swift correction and the subsequent ups and downs in the metal's price.
As I have written frequently in the past, these players betting in futures and other derivative markets collectively may have great sway - but only for so long. Ultimately, it is the physical market - real world supply and demand - that determines the long-term price trend. And, developments in the physical world have been and will continue to be propitious for the yellow metal.
Perhaps the most important reason gold has not been able to move higher in recent months - despite relatively firm physical demand - has been signs of an early springtime for the U.S. economy, particularly the improving employment, output, and consumption statistics. As a result, talk of another round of quantitative easing (QE3) has diminished - and the short-term speculators trading paper gold, having earlier this year preferred the short side of the market have in recent weeks begun to lose interest.
Despite the political imperative to dress up the economic statistics ahead of the November elections, I think the economic news will likely be disappointing to those envisioning a rosy scenario. The positive signs of recovery result not from any fundamental improvement or return to health in the American economy but from faulty seasonal adjustments affected by the unusually mild winter and early spring across much of the United States as well as the unusual economic performance itself in the past several years that have overpowered seasonal influences.
It remains unfathomable to me just how the United States economy can sustain a healthy recovery accompanied by falling unemployment broadly defined and rising consumer spending in the face of election-year uncertainties, a depressed housing sector with foreclosures continuing apace, cutbacks in state and local government spending and more public-sector layoffs ahead, and a heavy burden of private and public-sector debt.
What America needs for long-term health is more saving by households and government - not more spending by consumers and a dysfunctional federal government unable to control its addictive spending habits.
In the meanwhile, odds favor additional monetary accommodation, if not before the November elections, then soon thereafter . . . and as financial markets take note of the still anemic economy and rising probability of Fed easing, gold will respond with a major move to the upside.
EUROPE'S FESTERING SOVEREIGN-RISK CRISIS
The crisis still festering - and likely to worsen - in Europe is a long-term positive for gold although, as in the recent past, the short-term consequences could be quite the opposite.
The European Central Bank (the ECB), along with other European national banks, remains under great pressure to provide financial market liquidity and keep a lid on interest rates. This is not an easy task with institutional investors unwilling to accept more sovereign debt unless the perceived risks are offset by higher rates of return.
Unfortunately, higher interest rates push borrowing countries - like Spain, which has been much in the news lately - into untenable fiscal deficits and strengthen the case for default among their citizenry.
Default by one or another country on its sovereign debt would probably initiate a wave of defaults among the fiscally weaker European economies - and could trigger a "Lehman-like" moment as major banks and other financial institutions holding European debt suddenly find themselves insolvent and in need of government bailouts once again.
In any event, further ECB monetary creation will debase the euro and most other European currencies - eventually producing higher rates of inflation, not just in Europe but globally, while encouraging central banks around the world to hold more gold in lieu of euro-denominated assets.
Unfortunately for gold investors, the euro-crisis may have just the opposite effect on gold prices in the short run as flight capital seeking a safe harbor in turbulent seas gives the greenback a false appearance of strength not only against the euro but against gold itself.
But, ultimately, as inflation accelerates and lenders - particularly emerging nation central banks and other institutional investors around the world - lose faith in the dollar as a store of value, gold will win out.
Jeffrey Nichols is Managing Director of American Precious Metals Advisors www.nicholsongold.com and Senior Economic Advisor to Rosland Capital - www.roslandcapital.com