Despite seeing gold remain around $1,400/oz for the last couple of weeks, the precious metal should soon break out of its range and begin a charge towards $1,500/oz and beyond. Gold is currently in a natural consolidation phase after having gone though a big upward movement, which will ultimately lead to a breakout as pressure mounts. Whether or not we see $1,500/oz within a month or after New Year’s Eve is irrelevant. The fundamental forces compelling gold’s upward movement on both a short and long term horizon look good, and $2,000 gold prices are expected within a year or two from now.
Short Term Fundamentals
First there are the problems taking place in Europe’s peripheral economies. As the economic situation continues to deteriorate, so to does the general level of confidence concerning the integrity of the union. Such factors will only increase the likelihood of the ECB having to implement a new round of Quantitative Easing, a course of action that will only further depreciate the value of the Euro. Now add the fact that the United States is already embarking on a fresh round of QE and it should be clear that neither the US dollar nor the Euro is an attractive place to have your money at this time. It would be nice if there were some signs of economic recovery on the horizon, but economic data continues to disappoint primarily in the form of persistently high unemployment, ensuring continued quantitative easing and currency devaluation.
Second is the fact that all major economies around the world are striving to make their currencies more competitive in order to strengthen economic activity though increased exports abroad. One way to achieve a weaker currency is to drag economic issues out longer than necessary. For example, European officials will be slow to implement a plan of action addressing the peripheral economy debt problems because official understand that the longer they wait, the weaker the Euro gets, and the more competitive their exports become. There are most certainly negative effects when you delay fixing a problem like this, primarily in the form of increased borrowing costs, but cheaper exports should make up the difference and Europe's struggling peripheral economies can bypass international capital markets and go straight to the EU for cheaper loans if necessary. This is one of the many strategies being employed by governments around the world as they engage in the so called “currency wars.” Such actions also provide a good reason to purchase gold coins or gold bullion as a hedge against the devaluation of paper currencies.
Longer Term Outlook
Demand for gold in countries like China, India, and Southeast Asian remains very strong despite record price levels. For example, China, a country with a population of 1.3 billion, imported nearly 5 times more gold in 2010 than it did in 2009, and its government only recently began encouraging its citizens to own gold. If you add the fact that world gold production continues to lag behind demand, the argument for higher gold prices becomes that much easier to make.
The bottom line is that if world governments continue to pump out more money, the value of fiat currencies will continue to depreciate. If an economic recovery takes shape and quantitative easing is no longer necessary, demand from rapidly growing emerging economies and world populations will pick up the slack. There are roughly 100 million new people entering the middle class every year, and they, just like anyone else on this planet, are going to be more eager than ever to get their hands on precious metals like gold coins and gold jewelry.
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About Kristopher Schellhas
Kristopher Schellhas is a former professional futures trader at the Chicago Board of Trade and the current Senior Market Analyst at Precious Metals Brokerage Group. He earned his BA in Foreign Affairs from Miami of Ohio University.