By Jeffrey Nichols
Regardless of the near-term prospects for gold, the long-term fundamentals promise substantial appreciation later this year and beyond. We remain firm in our conviction that gold prices will touch or surpass $1,500 in 2010 - and continue to move higher in subsequent years.

Opportunity knocks
Gold at recent price levels offer investors and savers without a “core” position in the physical metal an opportunity to buy insurance against the very real possibility of future stock and bond market declines, accelerating inflation and a shrinking dollar, and turmoil in U.S. and world financial markets.

In contrast to what most “mainstream” economists believed only a few weeks ago, the industrial world economy is not improving. Instead, new cracks in the foundation are appearing. Moreover, as we have discussed in recent reports, the U.S. and other industrial economies will soon be heading into a “double dip” with declining business activity, declining consumer spending, declining employment, and declining equity markets.

This is a recipe for stagflation - a prolonged multi-year period of low growth with high inflation. And, as we saw in the decade of the 1970s, the coming stagflation will again be accompanied by a sustained and significant appreciation in the price of gold and its sister metals, silver and the PGMs, to levels that most cannot yet imagine.

All in the same ship — syncing together
Just look at the sovereign bankruptcies now spreading across Europe: Does anyone really think that countries like Greece, Portugal, Spain, and others can possibly repay their public-sector debts on schedule without a dole from the European Central Bank?! Even the most well-intentioned policies - raising taxes and cutting expenditures to lower government deficits - are doomed to fail because they would only push these economies into deeper recessions while provoking public unrest from unemployed workers and the politically powerful labor unions.

At some point, sooner or later, the European Central Bank, for all its talk of monetary restraint, will be forced to circumvent the prohibition barring purchase of member-country public debt. Like the Fed in the United States, the ECB will be forced to monetize the public-sector deficits of its most fiscally profligate members.

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Here in the United States, private rating agencies are warning that America’s own “triple A” rating on Federal debt is at risk. Meanwhile, states ranging from California to New York are in shoddier shape fiscally than Greece . . . and, it remains to be seen, how Washington policymakers will bail out individual states that, by law, may not run budget deficits.

Just imagine how much worse America’s fiscal dilemma will be as U.S. interest rates (and, hence, U.S. Treasury borrowing costs) begin to rise, either from a tightening of monetary policy or, more likely, as rising inflation expectations are reflected in higher nominal interest rates.

In today’s jittery world financial environment - with large-scale currency traders and speculators betting one way or another - the yellow metal is not immune from further price erosion. Certainly, if gold declines further in the next few days or weeks, we would be “scale-down” buyers.

As we have said repeatedly, today’s perception of the greenback as a “safe haven” preferable to gold, the “ultimate” safe haven, makes no sense. At some point, sooner or later, gold will disassociate itself from the dollar’s exchange rate against the euro and other industrial-country currencies - and begin appreciating against all of these currencies.

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