Paper gold bears losing grip on price

New York (Dec 4)  After Monday's white knuckle ride when gold's highs and lows were nearly $80 an ounce apart, relative calm has now returned to the market with the price consolidating above $1,200 an ounce level on Thursday.

Gold's gains since hitting four-year lows early November now top 5% and is made more remarkable by the fact that the advance has come despite a rampant dollar, rising bond yields, record-setting equity prices in the US and a tumbling oil price.

The physical gold market is also being pulled in all directions with Monday's no vote in the Swiss gold referendum eliminating the possibility of a 1,500 – 1,800 tonne buyer entering the market, offset by the lifting of gold import curbs in India which should easily make the Asian nation the top consumer of the metal once again.

Be cognizant of the fickle 'short-sightedness' of today’s gold bears

With so much noise and conflicting arguments in the gold market it's refreshing to find a sober assessment of the situation that cuts through the clutter.

 Legendary precious metals expert Jeffrey Nichols of American Precious Metals Advisors provides just that. In his latest missive titled Any day now, Nichols says that while near-term prospects remain uncertain "with the continuing possibility of sizeable price moves in either – or even both – directions," stronger long-term forces are now shaping the gold market.

Nichols describes the – frequently opposing – dynamics of the paper and physical gold market and believes "a sustainable long-term upswing [may be] already underway:

Over the past couple of years the gold price has been driven lower by negative sentiment among a very small number of market participants, principally the bullion banks, hedge and commodity-focused funds, and other institutional speculators trading amongst themselves mostly futures, options, and other “paper” gold products not only on regulated exchanges but also on over-the-counter or dealer-to-dealer markets.

Much of these holdings will never come back to the market

At the same time, a very much larger group of gold-market participants – numbering in the millions – have been acquiring huge quantities of physical gold . . . and continue to do so even as bearish speculators drive the metal’s price lower. This group includes retail buyers of coins, small bars, and investment-grade jewelry in India, China, and even Western markets. It includes Swiss gnomes and Arabian sheikhs, sovereign wealth funds and super-rich family offices, and a number of central banks that are under-weighted in gold and, at the same time, distrustful of the U.S. dollar

What’s more, clients should be cognizant of the fickle “short-sightedness” of today’s gold bears: They may be here today, pushing prices lower . . . but they will be gone tomorrow, when it looks like price momentum and their technical trading models have shifted gears from “reverse” to “drive.”

Importantly, the accumulation of physical metal by the gold bulls is very long-term in nature and much of these holdings will never come back to the market. This suggests that as the gold market shifts direction, there exists the possibility of surprisingly strong upward pressure on the metal’s price.

Nichols ends by saying he continues to hold the view that as expectations for the US economy and future interest rate moves by the Federal Reserve once again begin to deteriorate and shift, the "sentiment toward gold will improve – and the paper traders will again be running prices higher."