Commodity Online
Is there anything to worry about the recent gold sell off triggered by traders and short term speculators on futures and OTC markets? According to Jeff Nichols, Senior Economic Advisor to Rosland Capital and leading precious metals economist, there is nothing to worry. Price volatilities are excellent buying opportunities for long-term gold investors, he said in a commentary.

"We stand by our forecast that gold will regain its record high of $1,227 an ounce by midyear and will reach $1,500 by year end," he said.

The single-most important factor promising higher U.S. dollar-denominated gold prices are the inflationary U.S. monetary and fiscal policies -- with unprecedented provision of liquidity into the financial system, unprecedented low interest rates in nominal and real (inflation-adjusted) terms for an extended period, unprecedented Federal budget deficits and accumulated debt in absolute terms and as a percentage of GDP, and dysfunctional federal government that has been incapable of dealing effectively with these immense issues.

One clear sign of problems to come was the insufficient buying interest at the Treasury's most recent auction of bonds and notes. For the first time since the 1970s, foreign central banks and institutional investors, the traditional buyers and holders of U.S. government debt, were reluctant to continue financing USA's public-sector deficit at current rates.

Essentially, lenders are now demanding higher interest rates to compensate for higher inflation expectations and/or higher perceptions of sovereign risk on U.S. Treasury securities.



U.S. policy makers will soon face the choice of paying higher interest rates (which will chock off private-sector borrowing at home -- a disastrous scenario for the economy) or printing still more money to finance America's growing Federal debt. Either way, we will see greater inflation and higher interest rates.

Most economists -- especially those at The Fed, Treasury and White House -- see economic crocuses rising through the snow, signs of business activity and consumer spending after a cold winter.

Some believe this means the Fed will soon be in a position to begin withdrawing stimulus from the financial system and possibly even start raising key policy interest rates sooner rather than later.

In fact, fourth quarter GDP growth was largely due to inventory restocking and is not a harbinger of economic springtime. Moreover, any lift in consumer spending early this year will prove unsustainable in the face of a challenging job market, continuing home foreclosures, State and local budgetary shortfalls and a lack of confidence in Washington to solve our problems.

"In our view harbingers of an early revival will prove false -- and will cause the Fed to continue along its current inflationary path," Nichols said.

Americans -- both as a nation and as individual households -- have been spending too much, saving too little, and borrowing too cheaply from China (and elsewhere) for too long . . . and now it is time, whether we like it or not, to tighten our belts and pay the piper.

In the long run, paying the piper means higher inflation and currency devaluation as a means of reducing the value of our outstanding debt, with much pain and suffering along the way often falling upon those least responsible for creating these problems in the first place, Jeff Nichols said in his commentary

Post your comment  (0)

Connect:

Post to Twitter

Post to Facebook