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Outlook for 2010
by Lawrence Roulston

Economic news in North America and Europe continues to focus on the fragile state of the recovery. The focus of discussion is whether the recovery is sustainable. Undoubtedly, there are serious problems remaining to be resolved, including high unemployment, massive and rapidly growing government debt, uncertainty with regard to a great deal of consumer and business debt especially in the United States, and countless other very real concerns.

Anybody who reads a newspaper or hears the television news can list off all of the problems facing the American economy. However, it is not a given that the presence of those problems will plunge the economy back into recession as some people would have you believe. The situation is improving, and growth in United States this year is forecast to exceed 2%. That level of growth is much less than most people would like to see, but certainly it is a movement in the right direction. Personally, I see growth in United States remaining at a slow pace for perhaps another couple of years, as the economy works through those various challenges.

The situation in other parts of the world is very different. China, the fourth largest economy in the world, saw its economy slow briefly to about 6% in the early part of last year. The country finished the year with an overall 8% growth. Projections now show that the economy is back near the 10% a year growth range. The government is now taking measures to restrain the pace of growth in certain aspects of the Chinese economy. A sharp drop in exports from China was at least partially offset by soaring internal consumption. One measure of the level of consumption is that China is now the world’s largest automobile market. Government stimulus spending has been an important element in sustaining growth. That spending has been directed at improving infrastructure, setting the country up for sustained growth.

India also largely avoided the impact of the worldwide slowdown, with its economy continuing to grow. Other parts of the developing world saw slowdowns, in some cases quite dramatic, but most regions are already back onto a solid growth path.

The impact on the metals markets of the sustained growth in Asia has been dramatic. Metal prices fell sharply at the outset of the financial crisis, but have recovered strongly. It is important to recognize that the strong gains in the metal prices have come while the developed world is barely climbing out of recession. We will come back to that point in reference to base metals in the next installment of the outlook.

The gold price is now consolidating around $1130 per ounce after briefly exceeding $1200 an ounce in December.
Every analyst who comments on the gold market has a different explanation of what factors are driving the gold price through its daily gyrations. In reality, a worldwide audience of investors are making independent buy and sell decisions based on their individual interpretations of all of the factors that impact the market.

Some of the factors influencing the gold market are:

the financial crisis further damaged investors’ faith in financial assets and in paper currencies;
some investors believe that the massive subsidies and liquidity injections into the worldwide financial system will ultimately lead to inflation;
the US dollar, being the most common measuring stick to value gold, has been under considerable pressure due to the economic situation in United States and the massive debt resulting from the stimulus spending;
the Madoff scam has added yet another black mark on the US financial system, adding to
growing skepticism among worldwide investors;
rapid economic growth in the emerging economies is seeing a great deal of money flowing out of the US financial system and into the emerging markets, putting further downward pressure on the dollar.
Central banks have signaled their intention to continue to hold gold as an essential part of their foreign currency reserves. Some countries, notably India and China, are actively increasing the amount of gold in their holdings. The US dollar will continue to be an important part of the international reserves system. However, many nations will seek to diversify a portion of their holdings and gold will see a growing role. The net result is that there will be less official sector gold available to the market in coming years then there has been over the past decade.

China has now surpassed India as the largest consumer of gold. The growing middle class of China is actively buying gold jewelry and other ornaments. The economic slowdown in the developed world saw an enormous drop-off in the sales of gold jewelry over the past year and a half. Recovery in the emerging economies should see a return to buying gold jewelry, which remains the biggest element in the demand picture for gold.

China is now also the world's largest producer of gold, largely from small-scale production throughout the country. Gold production in the rest of the world has been declining steadily since 2002. The gold mining industry is struggling to increase production, but expansion is constrained by the lack of available deposits suitable for mine development.

There are many reasons to expect the gold price to trend higher over time, with consumer demand growing, mined supply seriously constrained and official sector sales slowing. However, the big swing factor in the gold market is investor sentiment. Investors can switch from buyers to sellers in the space of a couple computer keystrokes.

At this moment, gold appears to be in a consolidation pattern. The more likely trend is upward, but there remains a risk to the downside. I continue to view playing the short term moves in the gold price as extremely speculative, as there are so many variables impacting on the market, most of which are very difficult to predict.

A long-term uptrend in the price of gold seems sustainable. An even surer bet is that gold mining companies will continue to acquire gold deposits from junior companies. We have had considerable success over the years with companies that advance early-stage gold deposits through the exploration and development cycle. That process has produced numerous ten-fold returns for subscribers. That will continue to be our primary focus.


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