Commodity Online
Gold has fallen from its Friday high of $1160 to $1130 levels on Monday, a decline of 2.5%. Prices have since recovered to $1140 levels, the $1130-40 price range is an attractive entry point for long-term investors, according to Jeffrey Nichols, renowned precious metals Economist and Senior Economic Advisor to Rosland Capital.

"There is good support under these levels from the main Asian markets – China and India – where current prices should engender price-sensitive buying. In addition, we are at a seasonally important time for the Indian market ahead of the propitious May wedding period. Bullion traders and jewelry manufacturers stepped up their buying earlier this month – and I expect we'll see still more buying at recent prices."

Contributing to the anxiety among gold investors was the added news that hedge-fund mogul, John Paulson, was mentioned (though uncharged) in the SEC documentation. Paulson's hedge funds have been substantial investors in gold, so much so that Paulson & Co. is the largest institutional holder of the SPDR Gold Trust, the largest gold exchange-traded fund (ETF). My back-of-the-envelope math puts Paulson's total SPDR gold ETF holdings at more than 95 tons.

Gold's recent strength in the week preceding the Friday sell-off reflected, in part, increased speculative long positions on Comex, the gold futures exchange in New York, and some increase in Western investment into the various gold exchange-traded funds. Speculative positions on futures markets are certainly not in strong hands – and Friday's news probably generated a good deal of knee-jerk selling by these players.

Jeffrey Nichols said that US government's official Consumer Price Index is flawed and underreports actual inflation. "Politicians in this country and around the world love inflation because it is a very effective invisible tax that allows a country to overspend, run large public-sector deficits, and accumulate debt that will eventually be repaid with debased and devalued currency."

What does all of this mean for gold and silver prices? To begin with, there will be an increase in U.S. consumer price inflation beginning sometime in the next few months -- and this is always a plus for precious metals. But a growing number of investors don't need to see official statistics to know that inflation is already a problem, they recognize it in their daily lives.

Understanding that inflation is being underreported provides some clues to where gold and silver could conceivably top out in a few years when precious metals reach the top of this price cycle. Adjusting their January 1980 cyclical peaks of $875 an ounce (for gold) and $50 an ounce (for silver) suggests that inflation-adjusted prices of these metals today would be around $2400 and $140, respectively.

But adjusting their previous peaks by a measure of inflation that disallows substitution and qualitative improvements implies that gold and silver prices today would be around $7600 and $440 just to keep up with actual inflation. "I'm not suggesting that precious metals will move to these stratospheric heights, but against this picture my forecast of gold reaching $2000 or possibly $3000 an ounce and silver reaching $60 or possibly much more seems not so unimaginable," Jeff Nichols added.

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