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Gold Price: "Never See $1000 Again"

Gold Prices are set to hit $1500 sooner, not later, says this senior advisor and analyst...

broke through a new record earlier last week and this, topping $1300 an ounce for the first time before rising still further, says Hard Assets Investor.

Psychologically, that $1300 level was important – it appears to have pumped more steam into the gold rally and transformed even the most dedicated gold bears into bulls. But the uptrend shows no signs of reversal anytime soon, says Jeffrey Nichols, senior economic adviser to Rosland Capital and the managing director of American Precious Metals Advisors.

A widely recognized expert in precious metals, Nichols has worked with everyone from mints to Gold Mining companies to develop financing and investor relations. Here he tells Hard Assets editor Lara Crigger about whether gold's nearing bubble territory, why food prices affect gold, and why $1500 gold by year end is just the beginning.

Hard Assets Investor: Gold just broke $1300 per ounce earlier this week, and you've publicly stated you believe it could go as high as $1500 per ounce by the end of the year. Why is $1300 such an important level? And why do you see $1500 in our near future?

Jeffrey Nichols: $1300 is an important level mostly for psychological reasons, because it's a round number. People love round numbers, particularly technically oriented traders. So that's one reason. The other is, it worked hard the last couple of months to finally break through. And now that it has, it seems to be establishing a new floor above or around $1300. So, from a technical point of view, it looks to me like it's gathering steam for another effort at moving higher from these levels.

I'm optimistic about the $1500 per ounce forecast by year end, which, incidentally, is the forecast that we've had for a year or longer. In the next couple of months, gold has a variety of factors going for it. First and most simply, seasonal demand.

HAI: Right. We're getting into the holiday season, all across the world.

Jeffrey Nichols: That's probably what pushed us over $1300. In the Western world, jewelry manufacturers start gearing up and building inventory for the Christmas season, so that brings Christmas forward for jewelry manufacturers and that's just now beginning to kick in.

But gold demand for jewelry and small investment items in India also has a very strong seasonal aspect to it. Some of it is because of festivals and the marriage season; some of it is because the beginning of September is harvest time for many of the farm communities in India.

This year, harvests will be quite good, because we've had, from the Indian point of view, a very good monsoon. Unfortunately, in Pakistan, the same storm caused all that havoc, but India got none of the problems, only the benefits. So agrarian income will be good this year, and some of that income naturally finds its way into gold.

One of the important things about Southeast Asian demand, in general, and Middle Eastern demand, is that it doesn't require economic crises to do well. What it requires is good growth in personal income. From India to China, to Malaysia, Thailand, Vietnam, the Philippines – all these countries are enjoying very strong economic growth. People in these regions Buy Gold for a variety of reasons, one of which is as a form of savings. So when incomes are strong, some portion will go into gold.

HAI: Now as gold moves higher, are we starting to near bubble territory?

Jeffrey Nichols: I don't think that at all. In fact, over the last couple of years, there have been several episodes where analysts and investors have either said we're in a gold bubble, or worried that soon we'd be in a bubble. I don't think that's the case.

First of all, participation in the gold market may be more than ever before, but it's still fairly limited in terms of Western investment demand. For investors in Europe and the US, their participation in gold is still relatively small scale compared to their holdings of stocks and bonds.

Also, we haven't seen a rush into gold. It's been orderly, and it's been for good reasons. Now, come back to me in three years or whenever we're nearing the top of the Gold Price cycle, and I might give you a different answer, because when you get to a top, you often get that type of action. In 1980, you could say we were in a bubble. All that activity and demand for gold compressed into a very small period of time. In the matter of literally a few days, gold just went through the roof.

HAI: Right. Now we often overlook the effect of the commodity markets on gold, but gold is a commodity, first and foremost, and what happens in those markets does make an impact. You've said we'll see higher food prices in the future; how do rising food prices impact the price of gold?

Jeffrey Nichols: Rising food prices are an element of overall inflation. When we go to the supermarket, we see tighter prices for foodstuffs across the board. It's not just one or two items that are out of whack. It's agricultural commodities in general, and we can literally see and feel that effect on our household budget. People don't see the consumer price index when they go shopping; there's no shelf that says Consumer Price Inflation.

But on the shelves are all sorts of things where prices are higher from week to week: cocoa prices, given poor harvests; coffee prices are very high. Beef prices are rising, not only because feed stocks are more expensive, but also because of changing dietary patterns in what was once the developing world.

One of the things I've always loved about being a gold analyst is the fact that so many things around the world – whether it's politics, economics, food prices, oil prices, currency markets, monetary policy in the US, monetary policy in Europe, developments in China and India – come to play in the gold market. And it makes it very interesting as an analyst.

HAI: When you invest in gold, you have to take a holistic sort of approach, right?

Jeffrey Nichols: Absolutely, and I think the mistake that many people make when they're looking at the gold market is the focus on one or two things, which tends to be US monetary policy and what's happening to the Dollar. That's very important, and that's playing a role in this whole bull market, at least over the last couple of years and for the next year or two, probably.

But it's not the only factor and many people talk about it as if it were. They're missing out on what's happening in China and India, what's happening with central banks, the stagnation in mine supply, the introduction and development and expansion of new gold investment products, or what I call the "Gold Investment infrastructure"...

HAI: Right. Gold ETFs opened up the space for new investors.

Jeffrey Nichols: That, in combination with other factors, has had a phenomenal influence on the price, and will continue to do so. ETFs have made gold investing easier and more accessible to more investors around the world, both individual investors and institutional investors. Many of the institutions now Buying Gold would not be in the market were it not for these new instruments.

And for other institutions, it's just made it easier. They don't have to deal with gold dealers who they're not familiar with, haven't done business with. They don't have to deal with understanding how the physical markets trade. They don't have to deal with transportation, storage and insurance issues. They Buy Gold and can sell gold just like they would sell any equity.

HAI: In some ways, I think the physical market is almost like the Wild West. There are certainly a lot of very reputable places to get your bullion, but there's a heck of a lot of places looking to screw you, too.

Jeffrey Nichols: There are. And it's difficult for somebody who's not in the industry to discern one from the other sometimes.

And it's not just that we have one or a few ETFs here in the United States. ETFs are springing up, and will continue to do so, in other important geographic markets. We have ETFs in India, Europe, Switzerland and the UK.

HAI: How does central bank buying factor into the Gold Price? Certainly we've seen massive uptake on their end recently, particularly in China.

Jeffrey Nichols: The central bank, I believe, continues to Buy Gold surreptitiously and does not report its regular purchases of gold. You read the newspapers and it says what central banks this year bought, but whatever the analyst says in the article, you can imagine that it's actually a good deal more, because of unreported purchases. And it's probably by more central banks than just the Chinese.

The Chinese announced in April of 2009 that in the prior six years, they had bought many hundreds of tons. And since then, there's been no increase in reported reserves. I can't possibly imagine that suddenly they just stopped buying. The impetus and rationale for buying was to diversify their official reserves and reduce dependency on the US Dollar, and both have grown in importance.

HAI: Right. Now gold production has begun to slow down, and mine activity is on the decline. Do you think we've hit "peak gold"?

Jeffrey Nichols: It's hard to say. I don't think we're going to see any big increase in gold mined supply at least for several years – probably five or 10 years, if we have a new wave of gold mine exploration and development. But it takes years and years to move from exploration to significant production.

There is exploration going on, and there is new mine development and new production from mines, some of which did not exist a few years ago. But it's merely offsetting the erosion in production and the depletion of existing mines.

A lot of South Africa is that way: South Africa went from the world's biggest producer of gold to way down on the list. And it's going to continue shrinking. Because in South Africa, you have not only a depletion of ore reserves and the need to go deeper and deeper, which makes it more expensive, but you also have labor issues. You have rising electricity and energy costs, and actually insufficient supplies of electricity for the mining industry. The country hasn't kept pace in developing power sources, so there are periodical electrical shortages and outages. Unions which have much greater power than ever before are demanding higher and higher wages and other benefits – maybe rightly so, but it makes every ounce of gold that much more expensive to mine.

HAI: Meaning miners will just go elsewhere instead.

Jeffrey Nichols: So I think at best, gold's primary supply – mining production – will plateau over the next few years. Maybe it will go up a little bit, but not enough to matter from a world market supply-and-demand point of view. But it's possible that we'll see big discoveries. It's possible that those big discoveries five or 10 or 15 years from now will result in significant increases in mine production, but not for many years.

But to say that we're never going to see big increases again I think is a mistake. For one thing, I expect much higher Gold Prices in the future. Not just $1500, but multiples of that. I think in the future the average of the notional long-term Gold Price is going to be much higher than anybody imagined. I don't think we're ever going to see gold below $1000 again.

And those higher Gold Prices will make gold mining more effective than it has been in the recent past years.

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