A Long-Term Bullish Case for Gold

06/19/2013 7:45 am EST

Focus: COMMODITIES

A recent bearish article on gold and silver has set Leonard Melman of Melman Minutes off, and here he explains why he believes the stampede will continue.

During a recent Melman Minute, I referred to an article authored by noted economist Nouriel Roubini, in which he presented arguments presumably supporting his contention that gold would continue declining, and would fall to $1,000 by 2015.

He listed six specific points, which were:

  • Gold is not always a winner, even during periods of economic crisis.
  • Gold performs best when there is a risk of high inflation, but "inflation today is low and likely heading lower."
  • Gold provides no income, making it less attractive compared to other investments.
  • Interest rates are set to rise, making gold less attractive.
  • Indebted governments are likely to sell portions of their gold holdings in times of future crises, making them likely to add a substantial amount to the net global supply.
  • "The argument that the US government will expropriate private wealth cannot be sustained."

Our brief topic-by-topic response to Roubini's comments as they relate to the period from now through 2015 is as follows:

In my experience, the response of gold to economic crises depends on the public perception of the crisis involved. If the public believes that the governmental and monetary authorities can handle matters and there is no reason to panic, then the precious metals are not likely to rise sharply.

However, if a crisis escalates to the point where high levels of genuine public fear develop—as I anticipate will occur during the coming two years—then it appears likely that this will become a positive factor for the precious metals.

Indeed, without high inflationary expectations, one of the precious metals' most important driving forces is missing. However, while inflationary expectations in the short term may indeed be low at this moment, I firmly believe that the combination of some economic growth combined with enormous recent monetary expansion will lead to rising inflationary expectations over the coming two years.

I agree with this statement, with the exception that if metals prices rise sharply and major producing mining companies see their profits rise, then dividend payouts may increase, providing those investors with rising levels of income. However, it is also true that most precious metals investors take positions in the precious metals for reasons other than current income.

It is my opinion that rising interest rates—if they are driven higher by rising inflationary expectations—are one of the most positive forces for gold and silver. This was the case during the 1969-1974 bull market, and again from 1976 to early 1980.

While it may be true that some governments could sell from their gold hoards during an economic crisis, I have found that public buying grows at a rate more than sufficient to absorb such new supplies.

And the very fact that central banks and governments are selling to raise funds can be interpreted as proof of the severity of an economic crisis, thereby becoming a force for higher—not lower—precious metals quotes. That was true during the famous IMF auctions of the mid-1970s, when virtually every announcement of an additional increment of IMF selling was met by rising, not falling, prices for gold and silver.

Frankly, I do not have a clear understanding of the point the good Professor is making, so I would prefer not to comment.

In general, I do not agree that these forces identified by Roubini constitute valid arguments to prove that gold and silver are headed lower. In fact, there appears to be ample historic evidence that they could indeed be important factors in the next great golden bull move upward.

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