What Are Reasonable Gold Market Expectations?

By Jeff Clark, Senior Precious Metals Analyst

NEW YORK ( Casey Research) -- The historical record shows that those who get washed out during big corrections miss the greatest buying opportunities of a bull market.

With that as context, what can we expect from gold moving forward? Let's start with the short term.

Full market capitulation is underway. Headlines about gold are almost universally negative today, and all about selling. This feeds on itself, and the process may not be over. In this kind of environment, prices will overshoot to the downside. In other words, the bottom may not be in.

What if we get more short-term pain?

Differentiate between short-term sentiment and long-term reality. It's not deleveraging and fear that has hit our sector as it did in 2008, but renewed confidence in the broader markets and lack of higher inflation rates that many expected by now. The current thinking by sellers is that crisis has been averted and therefore there's no need to own gold.

Contrast the selling by these short-sighted investors against record levels of buying by central banks, China and India gobbling up 20% of global annual production and runaway demand at mints.

Fundamentals dictate long-term trends -- and fundamentals don't lie. The longer our fiscal problems are allowed to fester, the greater the eventual structural damage to global economies and standards of living. These forces will sooner or later come to a head, and will play out for several years.

The broader investment community does not yet see a compelling reason to invest in gold -- but when inflation starts pinching pocketbooks and budgets, a sea change will take place. Remember, roughly 98% of U.S. investors don't own gold -- that will change when higher rates of price inflation begin making headlines.

Should gold end the year down, it will not mean the bull market is over. It will mean that inflation remains contained and that we have a longer-than-expected buying opportunity. My suspicion is that it will also mean the turnaround will be stronger and longer than we've seen before.

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