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INDIA
SPEECH
 Gold
Market
Situation
&
Outlook
 Speech
to
the
Sixth
Annual
India
International
Gold
Convention
 Goa,
India
–
September
5th,
2009
 by

 Jeffrey
Nichols,
Managing
Director
 American
Precious
Metals
Advisors
 
 Thank
you,
Mr.


Chairman
for
your
kind
introduction
.
.
.
and
many
thanks
also
 to
the
conference
organizers
for
inviting
me
to
participate
in
this
prestigious
 gathering.
 It
is
a
great
honor
to
be
here
today,
not
only
to
share
my
views
–
but
to
learn
 from
you,
and
make
many
new
friends
in
the
Indian
Gold
Community.


 A
few
weeks
ago,
in
preparation
for
today’s
presentation,
I
asked
the
 conference
organizer
what
I
should
talk
about.

He
said,
I
should
talk
about
15
 minutes
in
the
morning
.
.
.
and
about
10
minutes
in
the
afternoon.


 Only
then
did
he
say:
“In
the
morning
talk
about
global
supply
and
demand.

In
 the
afternoon
talk
about
the
price
outlook.”
 Price
First
 To
many
gold‐market
analysts,
it
may
appear
to
be
an
artificial
distinction
to
 separate
a
discussion
about
supply/demand
fundamentals
and
the
price
 outlook
with
a
luncheon
break.
 Traditional
economic
theory
says
the
price
of
a
commodity
is
a
function
of
 supply
and
demand.

But
I’d
like
to
suggest
an
alternative
point
of
view:
 In
the
world
of
gold,
price
come
first
.
.
.
and
changes
in
the
supply/demand
 fundamentals
follow.
 In
other
words,
the
supply
and
demand
for
gold
–
as
measurable
quantities
–
 are
more
a
function
of
the
yellow
metal’s
price,
rather
than
the
other
way
 around.


 
 1


Meanwhile,
the
price
itself
is
a
reflection
of
the
collective
psyche
of
the
 marketplace
and
its
millions
of
participants
worldwide.

Simply
put,
an
ounce
 of
gold
is
worth
exactly
what
people
think
it
should
be
worth
–
and
the
 supply/demand
fundamentals
adjust
themselves
to
this
price
level.


 I’m
married
to
a
psychiatrist.

If
I
want
to
know
the
future
price
of
gold,
I
ask
 her!
 I’m
an
economist.

If
she
wants
to
know
what
the
price
means
for
supply
and
 demand,
she
asks
me!
 Gold
is
a
rare
and
unusual
commodity
because
it
is
first
and
foremost
a
 financial
and
monetary
asset
whether
it
is
held
in
bars
and
coins
by
Western
 investors
and
central
banks,
or
jewelry
by
Indian
housewives
and
individual
 investors
and
savers
across
Asia
and
the
Middle
East.


 Consider
the
share
price
of
any
company
that
trades
on
the
New
York
Stock
 Exchange
or
here
in
Mumbai
or
anywhere
else
for
that
matter.

The
number
of
 shares
outstanding
for
most
public
companies
may
be
fixed
for
years
.
.
.
but
 the
share
price
goes
up
or
down
based
solely
on
what
the
collective
wisdom
of
 the
market
deems
fair
and
appropriate.


 Although
for
gold,
the
number
of
ounces
may
not
be
quite
so
fixed,
changes
in
 supply,
that
is
to
say
new
supply
from
mine
production,
are
very
small
relative
 to
the
entire
stock
of
gold
outstanding.


 Above­Ground
Stocks
 The
entire
above‐ground
stock
of
gold
is
estimated
to
be
roughly
165,000
tons
 .
.
.
and
this
stock
grows
predictably
from
new
mine
production
by
some
 2,300
to
2,400
tons
a
year.


 Prospective
changes
in
annual
mine
output,
at
least
for
the
next
few
years,
are
 also
fairly
predictable
.
.
.
and
are
already
reflected
in
today’s
gold
price.


 If
not
the
growth
of
new
supply,
what
is
it
that
sets
the
price
of
gold?


 It
is
changes
in
the
willingness
and
desire
of
existing
and
prospective
gold
 holders
–
individual
and
institutional
investors,
owners
of
gold
jewelry
and
 other
items,
and
central
banks
and
other
official‐sector
institutions
–
that
set
 the
price.




2


And,
though
it’s
not
quite
this
simple,
it
is
changes
in
the
price
that
cause
 changes
in
the
various
sectors
of
supply
and
demand
–
not
the
other
way
 around!
 The
main
categories
of
supply
and
demand
are
mine
production,
old
scrap
 arising
from
the
recycling
of
jewelry
and
other
gold‐bearing
items,
jewelry
 fabrication,
net
official‐sector
transactions,
and
net
investment
by
individuals
 and
institutions
in
bars
and
coins.


 Mine
Production
in
Decline
 Mine
production
peaked
in
2001
at
2,645
tons,
an
all‐time
high,
and
has
been
 falling
gradually
ever
since
–
a
downtrend
that
is
expected
to
continue
at
least
 for
the
next
few
years.

This
year
we
expect
new
mine
supply
of
some
2,370
 tons
and
two
years
hence,
in
2011,
it
will
likely
have
dwindled
to
the
 neighborhood
of
2,275
tons.


 Over
the
long
term
–
looking
out
five
to
10
years
or
longer
–
mine
output
is
a
 reflection
of
price
versus
the
rapidly
rising
cost
of
production
and
the
 increasing
difficulty
and
expense
in
finding
new
deposits
large
enough
to
 offset
the
loss
of
production
from
the
ongoing
depletion
and
exhaustion
of
 existing
mines.


 In
addition,
increasingly
stringent
environmental
regulations
are
adding
to
 costs
and
unfriendly
government
attitudes
toward
mining
or
foreign
 ownership
in
some
countries
are
discouraging
exploration
and
development.


 It
should
also
be
mentioned
that
the
stock‐market
crash
and
continuing
global
 credit
crisis
has
slowed
funding
and
retarded
gold‐mine
development
in
many
 countries.
 However,
one
explanation
to
the
on‐going
decline
in
worldwide
mine
 production
is
that
prices
in
the
past
couple
of
decades
simply
have
not
been
 high
enough
to
encourage
exploration
and
mine
development
sufficient
to
 replace
the
dwindling
economic
reserves
in
the
historic
“big
four”
gold
 producing
countries
–
South
Africa,
the
United
States,
Canada,
and
Australia.


 Interestingly,
the
locus
of
world
gold‐mine
production
is
shifting
from
the
“big
 four”
to
the
emerging
market
nations.

China,
Peru,
Russia,
and
Indonesia
 together
accounted
for
20
percent
of
total
world
mine
supply
ten
years
ago.

 Today,
their
share
is
now
35
percent
–
and
their
share
of
worldwide
mine
 production
will
continue
to
increase
for
years
to
come.
 
 3


China
became
the
world’s
number
one
gold‐producing
country
in
2007
–
due
 not
only
to
the
rapid
pace
of
mine
development
and
the
continuing
 rationalization
of
the
industry
.
.
.
but
also
due
to
the
collapse
of
South
African
 gold
production
as
that
country’s
mines
have
been
rapidly
depleted
and
the
 difficulties
of
operating
at
deeper
depths
have
restricted
mining.


 Although
there
is
much
exploration
and
mine
development
activity
in
all
of
 these
countries
–
and
more
can
be
expected
as
prices
rise
and
access
to
 financing
improves
–
it
will
not
be
sufficient
to
reverse
the
downtrend
in
 global
gold‐mine
production
for
at
least
the
next
five
years
–
and
likely
longer.


 Even
if
big
price
increases
occur
in
the
next
year
or
two
sufficient
to
provoke
a
 rush
of
exploration
and
mine
development,
for
projects
large
enough
to
make
 a
big
difference,
it
usually
takes
five
to
ten
years
or
longer
to
move
from
 exploration
and
development
to
large‐scale
production.


 The
Rise
of
Secondary
Supply
 Unlike
“primary”
output
from
mines,
“secondary”
supply
–
the
recycling
of
old
 scrap
–
mostly
from
jewelry
–
reacts
quickly
to
changes
in
the
price
of
gold
 beyond
certain
levels
that
are
seen
by
holders
as
attractive
“selling”
points.


 Last
year,
as
prices
rose
through
the
$800,
$900,
and
$1,000
levels,
holders
of
 old
gold
jewelry
and
other
items
–
here
in
India
and
elsewhere
in
Asia,
as
well
 as
in
the
Middle
East,
in
the
United
States,
Europe,
and
virtually
everywhere
–
 made
a
collective
judgment
that
the
price
was
too
high.

As
a
result,
scrap
 supplies
exploded,
so
much
so
that
there
was
a
flood
of
metal
into
the
market,
 making
the
higher
price
levels
unsustainable.


 Scrap
recycling,
which
on
average
runs
about
1000
tons
a
year
climbed
to
 double
that
rate
in
the
fourth
quarter
of
2008
and
the
first
quarter
of
2009.


 In
the
past
couple
of
years,
the
rise
in
jewelry
scrap
has
also
been
a
reflection
 of
economic
hardship,
high
unemployment,
a
desperate
need
for
cash
by
some
 holders
of
gold
jewelry,
and
the
collapse
of
equity
and
real
estate
values.


 Here
in
India,
as
you
know,
high‐karat
“investment‐grade”
jewelry
is
bought
 and
held
as
much
as
an
investment
and
savings
medium
as
it
is
as
an
 adornment.

Indeed,
as
a
result
of
your
country’s
strong
cultural
affinity
to
 gold,
in
many
years,
India
has
been
the
world’s
largest
and
most
important
 gold‐consuming
market.




4


But
late
last
year
and
early
this
year,
India
instead
became
a
major
source
of
 supply,
as
many
holders
of
gold
jewelry
sold
their
old
bangles,
chains,
and
the
 like
back
to
the
market
–
responding
to
the
historic
high
rupee‐denominated
 gold
prices.




 Around
the
world,
even
in
the
United
States
and
Europe
where
jewelry
is
 typically
low
karatage
(and
hardly
worth
its
weight
in
gold),
people
have
 scavenged
their
dresser
drawers
for
old
bracelets
and
the
like
to
sell
for
 immediate
cash.


 This
desire
to
recycle
and
cash
in
has
been
facilitated
by
the
rapid
expansion
 of
a
scrap‐collecting
infrastructure
with
traditional
jewelry
retailers,
shopping
 center
kiosks,
and
itinerant
scrap
buyers
vying
for
the
business
and
making
it
 easy
for
people
to
sell
their
old
gold
items.


 The
Fall
of
Jewelry

 Let’s
turn
from
old
scrap
–
where
jewelry
is
a
source
of
supply
–
to
jewelry
 fabrication,
which
until
recent
years
has
been
a
steady
and
reliable
source
of
 gold
demand.


 Gold
jewelry
fabrication
demand
reached
an
all‐time
in
1997
at
3,342
tons
–
 and,
since
then,
has
been
trending
downward.

This
year,
I
expect
worldwide
 jewelry
fabrication
demand
will
total
little
more
than
2,100
tons.


 Much
of
the
decline
in
jewelry
offtake
has
occurred
since
2001
and
reflects
the
 substantial
rise
in
gold
prices
–
both
in
U.S.
dollar
terms
and
in
local
 currencies
for
many
important
geographic
jewelry
markets.



 With
the
continuing
credit
crisis
and
global
recession,
demand
has
also
been
 hit
hard
by
the
collapse
in
retail
sales,
especially
in
the
United
States
and
 Europe.

In
addition,
and
of
importance
to
the
near‐term
outlook,
the
steep
 decline
in
fabrication
has
been
exaggerated
by
the
running
down
of
 inventories
on
hand
at
manufacturers,
distributors,
and
retailers.


 Again,
it
is
important
to
distinguish
between
the
West,
where
jewelry
is
 bought
as
consumer
or
luxury
items
and
the
East
where,
as
in
India,
jewelry
 has
important
investment,
savings,
and
cultural
characteristics.


 I
look
forward
to
learning
more
from
my
Indian
colleagues
at
this
conference
 about
the
prospects
for
jewelry
consumption
in
your
local
market.




5


In
general,
I
expect
a
modest
recovery
in
worldwide
jewelry
demand,
 reflecting
the
improving
economic
environment
in
some
of
the
developing
 markets
–
especially
India
and
China
–
and
supported
also
by
some
rebuilding
 of
inventories
.
.
.
but
this
recovery
will
be
muted
by
the
expected
rise
in
the
 metal’s
price
over
the
next
few
years.


 Official
Sector
Gold
Policy
 Let’s
turn
our
attention
to
the
official
sector.

As
many
of
you
know,
central
 banks
and
the
IMF
have
been
a
hot
topic
in
the
world
of
gold
this
past
year.


 I
believe
we
are
now
at
a
key
turning
point
in
the
modern
history
of
gold
as
an
 official
reserve
asset.

Central
banks
attitudes
with
respect
to
gold
are
 becoming
increasingly
positive.

After
years
of
persistent
net
sales
by
central
 banks
in
the
aggregate,
the
official
sector
may
soon
become
a
net
purchaser
of
 gold
from
the
market.



 In
fact,
if
we
include
sovereign
wealth
funds
–
which
are
non‐central
bank
 government‐owned
investment
institutions
–
the
official
sector
may
already
 be
a
net
buyer
of
gold.
 On
average,
the
central
banks
of
the
world
hold
about
10
percent
of
their
 international
reserves
in
gold
.
.
.
but
there
is
great
disparity
from
country
to
 country
and
region
to
region.
 The
major
Euro‐zone
nations
together
hold
about
55
percent
of
their
assets
in
 gold.

In
contrast,
the
Asian
nations
as
a
group
(including
India)
hold
only
 about
two
percent
of
their
reserves
in
gold.

China
has
about
one
and
a
half
 percent
of
its
reserve
assets
in
gold
and
Russia
holds
about
four
percent
in
 gold.


 For
the
past
three
decades
beginning
in
the
mid‐1970s,
gold
has
been
under
 the
threat
of
massive
sales
by
the
world’s
gold‐rich
central
banks
and
by
the
 International
Monetary
Fund
as
well.

In
fact,
the
official
sector
has
been
a
net
 seller
of
gold
each
and
every
year
since
1989.


 At
times,
official
sales
–
and
the
threat
of
more
to
come
–
have
contributed
to
 negative
sentiment
in
the
marketplace
with
the
price
typically
falling
 whenever
one
or
another
central
bank
announced
a
sales
program.




6


This
was
seen
most
dramatically
in
1999
when,
much
to
its
recent
 embarrassment,
the
Bank
of
England
sold
over
half
its
official
gold
reserves
at
 an
average
price
of
about
$275
an
ounce!



 Other
European
central
banks
–
among
them
Switzerland,
France,
Italy,
Spain,
 Portugal,
and
the
Netherlands
–
followed
Britain,
together
selling
about
3900
 tons
in
total
over
the
next
10
years.


 Realizing
that
their
gold
sales
were
having
a
considerable
disruptive
affect
on
 the
market
and
the
metal’s
price,
the
European
central
banks
announced
in
 September
1999
their
agreement
to
limit
future
gold
sales
to
no
more
than
 400
tons
per
year
over
the
next
five‐year
period.


 This
first
Central
Bank
Gold
Agreement
(also
known
as
the
Washington
 Agreement)
was
followed
by
the
second
Central
Bank
Gold
Agreement,
which
 limited
sales
by
the
European
signatory
nations
to
500
tons
per
year
for
 another
five
years.


 Just
a
few
weeks
ago,
the
European
Central
Bank
and
18
other
central
banks
 announced
a
third
Central
Bank
Gold
Agreement
that
caps
the
group’s
 aggregate
sales
now
again
at
400
tons
per
year
for
another
five
years.


 All
of
this
may
prove
to
be
irrelevant
because
the
European
central
banks
 have
not
been
inclined
to
sell
much
gold
this
past
year
–
and
my
guess
is
that
 they
will
not
sell
much
at
all
during
the
next
few
years.


 For
one
thing,
the
pattern
of
sales
in
recent
years
suggests
that
those
central
 banks
most
eager
to
sell
have
already
done
so.

For
another,
many
central
 bankers
are
bullish
on
the
metal
and
don’t
want
to
sell
an
appreciating
asset.


 Moreover,
central
banks
that
have
sold
large
quantities
of
gold
in
the
past
 decade
look
foolish
indeed
as
the
metal’s
price
has
moved
higher
and
the
 value
of
their
U.S.
dollar
reserves
has
declined.


 European
central
bank
sales
in
this
final
year
of
the
second
Central
Bank
Gold
 Agreement,
ending
in
just
about
three
weeks,
will
probably
total
no
more
than
 150
or
160
tons
versus
the
500
tons
allowed.


 I
believe
the
decline
in
gold
sales
by
the
European
central
banks
reflects
a
 renewed
respect
for
the
yellow
metal
as
a
reserve
asset
and
reliable
store
of
 value.




7


The
European
Central
Bank,
in
announcing
the
latest
Agreement
said,
“Gold
 remains
an
important
element
of
the
global
monetary
system.”


 The
Swiss
National
Bank,
a
signatory
to
the
Agreement,
added
that
it
“has
no
 plans
for
any
further
gold
sales
in
the
foreseeable
future.”


 Germany
and
Italy,
the
two
biggest
holders
of
official
gold
after
the
United
 States
and
the
IMF,
have
both
implied
they
have
no
intention
to
reduce
their
 gold
reserves.

 And,
perhaps
a
harbinger
of
things
to
come,
the
European
Central
Bank
also
 reported
recently
that
one
of
its
members
(and
a
signatory
of
the
Central
Bank
 Gold
Agreement)
recently
purchased
gold,
going
against
the
trend
of
the
past
 decade.


 The
International
Monetary
Fund
has
also
made
news
with
its
plans
to
sell
 403.3
tons
of
gold
to
support
lending
to
the
poorest
countries.

IMF
 membership
is
expected
to
approve
these
prospective
sales
before
its
annual
 meeting
this
October.


 IMF
strategists
have
suggested
sales
might
occur
gradually
over
two
or
three
 years.

Others
believe
all
403
tons
may
be
sold
“off
the
market”
directly
to
one
 or
a
few
central
banks
–
with
China,
Russia,
India,
Brazil,
or
the
Gulf
states
 mentioned
as
possible
buyers.


 Importantly,
the
new
Central
Bank
Gold
Agreement
incorporates
these
sales
 by
the
IMF,
even
though
the
Fund
is
not
a
signatory.


 More
specifically,
the
Agreement
“recognize(s)
the
intention
of
the
IMF
.
.
.
and
 noted
that
such
sales
can
be
accommodated
within
the
(Agreement)
ceiling.”

 In
other
words,
total
sales
by
the
European
central
banks
and
the
IMF
cannot
 exceed
400
tons
per
year
or
2000
tons
over
the
five‐year
term
of
the
 Agreement.


 To
a
large
extent,
gold
sales
by
the
IMF
are
already
anticipated
and
factored
 into
the
current
price.

However,
direct
sales
–
off
the
market
–
to
one
or
more
 central
banks
would
be
confirmation
that
central
bank
attitudes
are
shifting
in
 favor
of
gold
and
would
likely
have
a
positive
affect
on
the
metal’s
price.


 The
big
news
of
the
past
year
has
been
announcements
from
both
China
and
 Russia
that
they
have
been
buying
gold
from
their
domestic
mine
production
–


8


importantly
demonstrating
that
large
central
banks
can
gradually
buy
gold
 without
disrupting
the
market.


 The
past
April,
China
told
the
world
it
had
purchased
454
tons
since
2003,
 bringing
its
total
official
holdings
to
1,054
tons
–
still
less
than
two
percent
of
 its
total
official
reserves.



 I
believe
China
continues
to
buy
gold
from
domestic
production
at
a
rate
of
at
 least
75
tons
a
year
–
but
gold
purchases
this
year
have
not
yet
been
 transferred
to
the
central
bank
and
have
not
yet
been
reported
as
official
 reserves.


 [Looking
ahead,
as
China’s
domestic
mine
production
rises
from
year
to
year,
 its
official
purchases
may
very
well
increase
at
a
similar
percentage
rate.]
 Russia,
like
China,
has
also
been
buying
gold
for
official
reserves
from
its
own
 domestic
mine
production,
which
this
year
should
total
close
to
190
tons.

 Prime
Minister
Putin
has
said
that
Russia
should
hold
10
percent
of
its
official
 reserves
in
gold
bullion
versus
the
four
percent
that
it
held
at
midyear.

Some
 reports
suggest
the
country
has
added
some
40
to
50
tons
to
its
official
 reserves
so
far
this
year
while
other
reports
put
purchases
this
year
at
90
to
 100
tons.


 Last
year,
speaking
at
a
gold
conference
in
Shanghai,
I
told
the
Chinese
they
 should
be
adding
to
their
official
reserve
gold
holdings.

Today,
I
say
the
same
 to
the
Reserve
Bank
of
India,
with
only
four
percent
of
its
official
assets
now
in
 gold.

To
the
extent
that
you
can
buy
gold
without
disrupting
the
world
 market,
do
so.


 I
look
forward
to
returning
to
the
speaker’s
rostrum
this
afternoon
to
discuss
 investment
and
the
future
price
of
gold.


 
 AFTERNOON
PRESENTATION
–
PRICE
OUTLOOK:
 
 The
Expansion
of
Investment
 While
changes
in
gold’s
commodity
fundamentals
are
important
–
particularly
 to
those
of
us
in
the
trade
–
it
is
developments
in
the
investment
arena
that
 will
have
the
greatest
impact
on
the
evolution
of
the
market
and
on
the
 metal’s
price.


 
 9


Before
discussing
the
macroeconomic
environment
and
its
implications
for
 the
future
price
of
gold,
let’s
focus
briefly
on
one
very
important
institutional
 development:




 The
introduction
and
growing
popularity
of
exchange‐traded
funds
(ETFs)
 have
changed
the
gold
market
in
a
very
important
structural
and
fundamental
 way
that
is
not
yet
well
appreciated
or
understood
by
many
observers
of
the
 gold
scene.


 Gold
ETFs
are
gold‐backed
stock‐market
securities
representing
ownership
in
 a
trust
designed
to
track
the
ups
and
downs
of
the
metal’s
price.

Despite
some
 rumors
to
the
contrary,
gold
ETFs
are
backed
100
percent
by
physical
bullion
 held
in
depositories
on
behalf
of
ETF
investors.


 Importantly,
gold
ETFs
are
bought,
sold,
and
trade
just
like
equities
on
a
stock
 exchange
–
yet
they
avoid
the
tax,
storage,
and
other
difficulties
associated
 with
owning
physical
gold.


 By
facilitating
gold
investment
and
ownership
they
have,
without
a
doubt,
 brought
significant
numbers
of
new
participants
to
the
market
–
not
just
 individuals
but
hedge
funds,
pension
funds,
and
other
institutional
investors.


 So
much
so
that
bullion
held
in
depositories
on
behalf
of
ETF
investors
totaled
 more
than
1,667
tons
in
late
August,
more
than
the
central
banks
of
either
 Switzerland
or
China.

 However,
the
rapid
growth
of
gold
exchange‐traded
funds
is
a
two‐edged
 sword
for
gold,
increasing
volatility
both
up
and
down.

Remember,
ETF
 investors
can
just
as
easily
exit
the
market,
selling
their
gold
as
quickly
as
they
 might
sell
any
equity
–
and
some
day
many
ETF
investors
probably
will!


 It’s
the
Economy
 As
I
discussed
earlier
today,
the
future
price
of
gold
–
at
least
over
the
long
 term
–
has
little
to
do
with
mine
production,
or
secondary
supply,
or
any
of
 the
other
“commodity”
fundamentals
of
gold
supply
and
demand.
 Remember,
gold
is
first
and
foremost
a
financial
or
monetary
asset
held
as
a
 savings
medium,
store
of
value,
and
investment.


 As
such,
over
the
long
term,
its
price
is
determined
by
the
real
(or
inflation‐ adjusted)
rate
of
return
on
other
competing
financial
assets
versus
the
 
 10


expected
rate
of
return
on
gold
itself
–
where
the
expected
return
is
simply
 the
market’s
own
collective
forecast
of
its
future
price.


 Real
interest
rates
are
also
a
precursor
of
the
U.S.
dollar’s
performance
on
 world
currency
markets
and
future
inflation
at
home
–
since
low
or
negative
 real
rates
indicate
a
reflationary
monetary
policy
and
high
real
interest
rates
 indicate
a
restrictive
monetary
policy
.
.
.
and
it
is
monetary
policy
and
money‐ supply
growth
that
ultimately
affects
gold,
inflation,
and
the
dollar.
 The
historical
data
show
that
the
U.S.
dollar
gold
price
is
inversely
related
to
 the
real
(or
inflation
adjusted)
rate
of
return
on
U.S.
Treasury
securities.
 Not
surprisingly,
the
current
bull
market
for
gold
that
began
in
2001
(with
 gold
near
$255
an
ounce)
has,
for
the
most
part,
been
a
period
of
negative
or
 low
real
interest
rates.


 In
fact,
in
the
years
of
market‐determined
gold
prices
(since
August
1971
 when
President
Nixon
closed
the
gold
window)
each
and
every
time
the
real
 inflation‐adjusted
three‐month
U.S.
Treasury
bill
rate
fell
below
zero
into
 negative
territory,
the
U.S.
dollar
gold
price
rose
over
the
subsequent
12‐ month
period.


 The
great
bull
market
for
gold
in
the
late
1970s
culminating
in
the
1980
high
 near
$875
an
ounce
was
a
period
of
negative
real
interest
rates
in
the
United
 States.

And,
gold’s
run
up
in
late
2007
and
early
2008
–
an
advance
that
saw
 the
price
rise
briefly
over
$1,030
an
ounce
–
was
again
a
period
of
negative
 real
interest
rates.


 Today,
real
“inflation‐adjusted”
interest
rates
across
a
range
of
maturities
are
 again
negative
.
.
.
so,
if
history
is
a
guide,
we
can
expect
the
price
of
gold
to
 trend
higher
over
the
next
year.


 Although
many
economists,
politicians,
investors,
and
news
reporters
are
 beginning
to
talk
about
economic
recovery
in
the
United
States,
those
that
are
 seeing
“green
shoots”
in
my
view
are
looking
through
“rose‐colored”
 eyeglasses
.
.
.
and
there
is
significant
risk
of
a
“double‐dip”
recession
with
 further
contraction
and
a
second
down‐leg
yet
to
come.


 Sure,
Wall
Street
has
enjoyed
a
good
run
as
corporate
America
cut
expenses
 by
laying
off
millions
of
workers
.
.
.
but
small
businesses,
which
are
the
 backbone
of
the
American
economy
are
dying
.
.
.
and
recover
is
agonizingly


11


slow
in
terms
household
income,
unemployment,
and
other
measures
of
 wellbeing.


 With
banks
afraid
to
lend,
businesses
can’t
borrow,
and
it
is
impossible
for
the
 U.S.
economy
to
resume
a
healthy,
durable
expansion.

Meanwhile,
regional
 banks
are
still
failing
under
the
weight
of
bad
commercial
loans
and
 household
mortgages.

And
another
wave
of
real‐estate
insolvencies
and
 worthless
loan
portfolios
is
coming
from
the
commercial
real‐estate
sector.


 Indeed,
much
of
the
recent
uptick
in
economic
activity
reflects
the
 government
stimulus
programs,
such
as
the
just‐expired
“cash‐for‐clunkers”
 program
that
gave
the
U.S.
auto
industry
a
temporary
boost.

While
some
of
 these
programs
help
businesses
and
households
in
the
short
run,
they
are
all
 adding
to
the
Federal
budget
deficit
and
will
complicate
the
Federal
Reserve’s
 monetary
policy
dilemma.



 As
a
result,
the
Fed
will
remain
under
pressure
to
maintain
a
stimulative
 monetary
policy
with
low
real
interest
rates
for
some
time
to
come
–
perhaps
 years:

Bad
news
for
the
dollar
and
inflation
but
music
to
the
ears
of
gold
bulls.


 The
Future
Price
of
Gold
 As
my
clients
know,
I
am
“extremely
optimistic”
on
the
gold‐price
outlook
—
 but,
unlike
many
other
bullish
analysts,
I
believe
the
metal’s
ascent
will
take
 several
years
to
reach
its
next
long‐term
cyclical
peak.


 
 In
the
meantime,
and
partly
because
of
the
activity
of
ETF
investors,
we
can
 expect
high
volatility
and
a
difficult
climb,
fraught
with
sharp
reversals
along
 the
way
that
will,
at
times,
cause
some
observers
to
wonder
if
the
market
has
 already
topped
out.


 
 Ultimately,
gold
will
most
likely
climb
into
the
US$2000
to
$3000
range
–
but
 it
could
go
even
higher
given
the
right
confluence
of
economic
and
political
 developments
.
.
.
or
if
a
late‐cycle
mania
produces
a
final
hyperbolic
bubble
 before
the
gold‐price
cycle
moves
into
its
next
bear‐market
phase.

 
 Ladies
and
Gentleman,
thank
you
again
for
your
attention
this
afternoon.

 Now,
I
am
looking
forward
to
meeting
many
of
you
personally
.
.
.
and
hearing
 your
thoughts
about
the
future
of
gold.


 
 
 12