Jeffrey Nichols of Rosland Capital recently spoke with the Investing News Network about the long term outlook for the gold price, and where most of its demand will come from.
The gold price has been hit pretty hard in recent weeks–dropping from $1,334.90 in September to $1,255.40 as of October 17–as a result of the Chinese holiday and continuing speculation of the Federal Reserve raising interest rates by the end of the year.
No doubt, the coming months will be volatile in the gold market.
However Jeffrey Nichols, senior economic advisor at Rosland Capital LLC, recently spoke with the Investing News Network (INN) and said we should expect a “significant pick-up in demand” for gold, particularly from China in the lead-up to the Chinese New Year in January and the upcoming festival season in India.
Those two countries, Nichols said, make up the two largest gold markets in the world and will “contribute to gold recovering and renaissance,” and said he doesn’t think the Feds will raise interest rates by the end of the year. Still, even if interest rates go up early in 2017, Nichols explained a quarter percentage increase “is not really going to be a significant negative for gold.”
In our interview, Nichols expands his thoughts on the correlation between the interest rates and the gold price, where he sees the gold price heading long term, and what investors should keep in mind when considering gold prospects.
Below is a transcript of our conversation. It has been edited for clarity and brevity. Read on to see what Nichols had to say.
INN: The gold price posted its largest decline over 15 months on expectations of an interest rate hike. Recently you said that “ the belief that a 25-basis point hike in the Fed funds rate, the key policy instrument of the central bank, would send gold prices sharply lower makes no sense”. Can you talk about that a little bit more?
JN: It’s really the real rate of interest that counts in terms of the effect of interest rates on the gold market. To some extent it’s not the gold market directly but the gold market through the US dollar. Higher interest rates typically mean a stronger dollar and a stronger dollar typically means weaker gold prices.
But I could see the dollar firming up even further that might be justified by a quarter percentage point increase in the interest rate because –almost by default, that is to say–the other major currencies don’t look so hot. They all have their own various problems that are weighing on them.
But it doesn’t show up really against the dollar as it should because what we’re seeing here is a weakness in all currencies which is favorable for gold. The dollar is artificially higher because foreign currencies against which the currency index is made up are all having their own problems.
INN: You said that you don’t like to make short term predictions about gold. Where do you see the gold price heading long term?
JN: Long term, I see unbelievable opportunities for investors in gold with prices rising much more over the next several years than virtually more than most analysts of the gold chain and most investors in the gold market would believe possible.
That is, the price is going to more than double, in my view, and probably even further than that. Largely because the cyclical increase that’s due after a long period of treading water.
But more importantly, China and India in the short term sense are much more significant in the long term sense as growing markets for gold. These two countries have rising populations and growing middle class that has a natural inclination to buy gold as investment and also as jewelry. Gold demand in those countries–both China and India–is fueled by even cultural and religious issues, so it’s clear to me that those economies will grow in the years ahead.
It’s been pointed out by others from the demographic point of view, that the number of people entering the middle class in these countries is more than the population of the United States.
So, the incremental middle class heads is more than the number of heads we have in the United States and that translates into a fantastic physical demand for gold in those two countries and that’s one of the reasons why I anticipate gold to do so much better than the years ahead.
But also we have the US economy to factor in and I think the imbalances in the US economy and in financial markets and capital markets are so extreme that to work themselves out, which is ultimately what has to happen. To works themselves out requires significant adjustments in the market and those are all favorable to support more gold demand in the years ahead.
INN:When you say significant adjustments in the market what kind of adjustments would have to be made?
JN: Well, for example the stock market. The stock market is at or near all-time highs in terms of the Dow Jones average, or the SMC or other popular indicators the stock market performed in. To think that the market remained overvalued. They’re overvalued by the price-to-earnings ratios.
Historically, price-to-earnings ratios are today at or above the market CE’s when we’ve had sharp, fair market adjustment. It’s a bubble situation really. That’s the key word to remember. The asset market, whether it’s real estate, stocks and bonds or markets of fine art and collectables are all out of wack.
Before the economy can really grow again you’ve got work out these imbalances. While those imbalances are being worked out, it’s a favorable environment for gold. The other asset markets are in a long-term decline, investors and speculators are going to ask for more gold.
Importantly, the gold market is very, very small. It’s literally tiny compared to these other asset markets compared to stocks and bonds and real estate for example. The size of the gold market is literally insignificant so that’s an increase in funds flowing from other asset markets into the gold markets.
INN: What approach have investors taken when thinking about gold price prospects?
JN: Well I typically recommend that the average investor holds five to10 percent of the investable asset in gold as a hedge against inflation, as insurance against the financial market instability and risk, and generally as a diversifier. That five to 10 percent should be considered an insurance policy that you hope doesn’t pay off because if it pays off it means that other markets and other investments are literally up the creek and if you want to be up the creek, it’s not a nice place to be as an investor.
For more insight from Nichols, check out Rosland Capital on LinkedIn and Twitter.
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Securities Disclosure: I, Jocelyn Aspa, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.