Why Jeffrey Nichols is Super Bullish on Gold

Gold prices have fluctuated quite a bit over the last several weeks, in part due to changes in the US dollar and the recent Federal Open Market Committee (FOMC) meeting. 
The yellow metal started the year off at $1,076.30 per ounce, and has since risen by 20.03 percent to $1,283.20. The June edition of FocusEconomics‘ Consensus Forecast Commodities report states that analysts project the gold price to average $1,221 an ounce in the latter quarter of 2016, but rising gradually to an average of $1,269 in the fourth quarter of 2017.
Jeffrey Nichols, senior economic advisor at Rosland Capital LLC, recently spoke with Investing News Network (INN) about:

• What’s driving the gold price
• What the gold market will look like over the coming years
• How the upcoming presidential election will impact the yellow metal, and
• How economic and demographic trends in  China and India will affect gold prices

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: After a pretty dismal year last year, the gold price is up about 18 percent so far in 2016 by far. What do you think is driving the goal price going up so much this year?
JN:  For one thing, it’s been undervalued and is now catching up to where it ought to be. In the long term, I’m super bullish about gold prices. I think prices are going to go very much higher by a multiple, really, of what they are now  in the next three to five years or so.  In the meantime, gold is being driven by expectations of the US monetary policy in particular and monetary policies, so the major foreign banks overseas, all of which are pressing the dollar a little bit and benefiting gold.  
With each piece of economic news, the market evaluates that news and it looks as though it’s going to restrain a bit from tightening activity. It’s perceived as bullish and bearish for the dollar.
I think the market is focusing on the wrong fundamentals at the moment. It ought to pay much more attention to the longer term supply demand factors, in particular the growth of demand and the movement of gold over the last few years into very strong hands. Investors won’t easily give up the gold that they bought in the last few years. Many of these are Asian buyers in China and other economies in the far east who have been buying substantial quantities of gold month in and month out over the recent several years, including some central banks-most notably, the People’s Bank of China.
In particular, what we anticipate is a downturn in US and global stock market and the attractiveness of equities and bonds in a sense taking the wind out of the gold market. It will come to an end, and when they’re not selling stocks, the buyers will continue to want gold, and prices will jump out in a very fast and surprisingly great gold market that will last for several years.
INN: Do you expect this to happen this year, or over the next couple of years? 
JN: I think this year. This year may be an up and down market following a more positive uptrend punctuated by periods of selloff.  At some point, I expect US and world stock markets to correct and really enter a bear market for equities over the next few years. And, at that point, stocks won’t look so attractive compared to gold. Many of the speculators, traders and banks and other financial mediaries will decide maybe they want to have some of the gold that they sold in the last few years, but it’s not going to come back to them except at very high prices.
Of course at some point, higher prices beget higher prices. As prices rise, it attracts more participation from investors who missed the boat, so to speak. That will happen at some point, maybe later this year, maybe not for another year or two. But that’s really what will propel gold to much greater heights and new record highs.
INN: Do you think the presidential election will affect the gold price in any way?
JN: I think the upcoming presidential election is likely to be a mild positive for gold. There is an increase in uncertainty about, first of all, the economic policy, and second of all, the US foreign policy as it may affect relations with China, Japan, Korea, etc.. So, that’s going to be a positive, and it already is a positive. Investors overseas are worried about what a Trump presidency might mean. While they’re not worried about a Clinton presidency in the same way, simply the change in leadership means there’s going to be a period of rising uncertainty for economic and political prospects in the country.
Another thing you might say about the election cycle is historically, or typically, the federal reserves refrains from many significant policy changes as we get within closer range of the election. As we move forward in time, that is going to be less willing to push up interest rates for fear that the outcome might affect the election results. The feds want to always be seen as neutral to politics.

My view on the economy in general is that we’re in a period of what I call secular stagnation in which the rate growth of the economy is below what history comparatively would suggest. We’ve been suffering from that over the last few years. That’s why the economy has been under-performing and why its weakness has been a surprise to many of the economists and investors. So, they might have thought the recovery was going to be more robust and it turned out not to be, because we’re still paying the price really for decades of excess and household balances are very much in excessive debt. That’s why we’re not seeing a recovery in consumer spending to the extent that many anticipated and we’re not going to see consumers go out and spend, or a regrowth in the economy. If they did then it would be an unhealthy thing for the economy in any event.
Secular stagnation is ruling the day and that’s why we haven’t seen any increase in the feds’ fund rate because the economy keeps surprising on the downside. Every time it looks a little more promising there are newly indicated economic weaknesses and whatever expectations there have been the feds would soon start raising interest rates, it gets knocked down by economic indicators showing that the economy isn’t so strong after all.
So to answer your question, yes, the election and the economic environment for awhile will push gold in a narrow trading camp. But at some point that suggests that gold will take off but the feds won’t be able to raise interest rates and it won’t be able to deal with the problems that are regulating employment, and a lot of negatives attached to the economy.

INN: You said that the economic and demographic trends in China and India will push gold prices higher. What kind of economic and demographic trends do you mean when you say that?
JN: The population growth in those two countries remains great. The populations are very large and they’re continuing to grow. Much of that growth is being reflected in expanding middle class households that have the wherewithal to invest in gold. And there’s historical, cultural and even religious vicinities to go in those two countries. As those populations grow, the aggregate demand for gold is certainly going to rise over the next three, to five, or seven years. That’s one of the reasons why I’m super bullish about the long-term outlook.
But, there isn’t enough gold around to satisfy all this demand except at much higher prices.
Gold, when it’s going right, [and is owned by] investors and consumers in the Asian markets, tends to be what I call ‘in strong hands.’ It’s owned by people who aren’t going to sell it back. They’re buying it for reasons other than the trading game—because in their country that’s what people do when they have more money. That seems like a fairly certain outcome for the gold market in the next decade and beyond. The growth in these countries is going to include a number of new households, and there will be more gold than in US households put together.
There will be two or three times more buyers in Asia over the next several years coming into the market, many for the first time, and many will be newly well off. It’s going to be a surprise at some point because it will be a more powerful impact on the price simply because it should be anticipated but it isn’t being anticipated.
INN: How high do you think the gold price will go?
JN: I don’t want to give you a number, but a multiple of where it is now, certainly. It will go to heights people believe are unimaginable and unattainable.
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.