Gold Price Consolidates Below $1,600

GOLD PRICE NEWS – The gold price traded at $1,591 per ounce Wednesday, near unchanged from yesterday’s close.  The price of gold held steady while stock prices rallied following a successful government bond auction in Italy.  Italian ten-year bond yields fell back below 7% to 6.77% amid strong demand for 9 billion euros of six-month bills.  Commodity prices were mixed this morning with agricultural products trading higher and energy prices moving broadly lower.

On Tuesday, the gold price dropped $15.26, or 1.0%, to $1,593.60 per ounce as the yellow metal began the last week of 2011 on a sour note.  The spot price of gold initially held near $1,600 per ounce, but extended its losses after the U.S. Conference Board Consumer Confidence reading for December came in at an 8-month high of 64.5.  The encouraging report marked the latest in a series of better than expected economic data points that have contributed to weakness in the gold price over the past month.

The SPDR Gold Trust (GLD), the world’s largest gold ETF and proxy for the price of gold, finished lower by $1.40 at $154.91 per share.  Silver fared slightly worse, as it fell by $0.38, or 1.3%, to $28.70 per ounce.

Gold shares slid alongside the gold price as well yesterday, with the AMEX Gold Bugs Index (HUI) retreating 1.5% to 503.95.  Three of the sector’s largest decliners were Eldorado Gold (EGO), IAMGOLD (IAG), and Kinross Gold (KGC).  EGO closed down by 5.5% at $13.53 per share, IAG by 1.9% at $15.92 per share, and KGC by 1.9% at $11.56 per share.  In contrast to the gold sector, the broader equity markets – including the Dow Industrial Average (DJIA) and S&P 500 Index – finished near unchanged.  Market volatility rose however, as the CBOE Volatility Index (VIX) climbed 5.7% to 21.91.

With Tuesday’s sell-off, the gold price extended its loss in December to 8.7% and cut its year-to-date gain to 12.1%. Looking ahead to 2012, however, the bullish fundamentals that have propelled the price of gold to 11 straight years of gains remain in place, according to Jeff Nichols.  As Managing Director of American Precious Metals Advisors, Nichols has for the greater part of the past decade maintained a particularly bullish view on the gold price.

Nichols discussed his latest outlook on the yellow metal at the China Gold & Precious Metals Summit in Shanghai earlier this month.  Despite gold’s recent weakness, he asserted that “Gold will move up sharply in the years ahead, reaching heights that might lead some to label me a ‘gold bug.’  I believe that the price of gold will, over the course of this decade, reach a multiple of recently prevailing prices.”

“Prices of $3000, $4000, and even $5000 an ounce are very likely during the course of this long-lasting bull market,” he added, “a bull market that still has years of life left to it…I’d be very surprised to see gold dip into ‘three-digit’ territory – that is below $1000 an ounce – ever again.”

Nichols went on to discuss 12 “building blocks,” or catalysts, that formed the basis of his bullish gold price outlook.  Several noteworthy factors included:

- low or negative real rates of interest and unprecedented central bank monetary creation

- the affect rising wealth is having on emerging-economy central banks…prompting some countries that are over-weighted in U.S. dollars and underweighted in gold to diversify their official reserves through the prudent acquisition of the yellow metal

- the legitimization of gold as an investment class and rising investor participation

- world gold-mine production, although growing, will not keep pace with the expected growth in global gold demand

With respect to rising demand for gold from central banks – which Nichols highlighted as one of the most critical building blocks – he noted that “Importantly, much of the gold bought by central banks has been bought for the long term – and will likely be held not just for a few days or months or even a few years…but for decades or longer, even at much higher prices.”

“As a result, central banks are now creating an upside bias to the market and are reducing the ‘free-float’ available to meet future demand, even at much higher prices,” he continued.  ”As a consequence, we can expect less downside volatility – and a more sustainable bull market with much higher prices in the years to come.”