"There's lots of contrarian reasons telling you that gold's poised for quite a big rally," Longview Economics economist Harry Colvin tells CNBC in a Feb. 4 interview.
"You look, for example, at speculative positions; they've unwound considerably. Sentiment used to be quite bullish; it's now bearish. Fund flows in the physical market are now rolling over. You know, on a contrarian basis there's a good argument to own gold. The real reason though is QE3. The Fed [is] expanding their balance sheet at $85 billion a month. And that's just the similar kind of pace to what they were doing in QE1 and QE2. And of course it injects liquidity into markets, it debases the dollar, and underpins the rally in gold prices. ... The speculators always give up on gold at the lows. Everyone is always bearish at the lows. That's the time to buy it. We're going to get a good rally this year. ...
"We don't need inflation pressures for a gold price rally. We haven't had inflationary pressures in recent years. The only inflationary pressure we have is from QE pushing commodity prices up. You look around the world, there's lots of deflation in the West. U.S. wage inflation is at a 60-year low. There's a big output gap. There's loads of unemployment. There are deflationary pressures. And that's why we've got the Fed stepping in to build inflation pressures, to do QE, to get asset prices up, to create a wealth effect, to try and get the economy going. ...Gold doesn't really change its colors. Since 1971 and the end of Bretton Woods long-term trends in gold prices have been determined most entirely by real interest rates in the U.S. ...
"Gold's gone sideways for 16 months. That's because the balance sheet in the Fed has gone sideways for 16 months. The balance sheet is about to expand rapidly. And with that we're going to get a rally in the gold price, it's going to go hard this year and probably into next. ... We're going to get a rally that was similar to the rally that we got in QE1 and QE2 when the balance sheet expanded and injected liquidity into markets. ... We'll get over $2,000 and we could go even higher. It depends on how much QE they do."
"You look, for example, at speculative positions; they've unwound considerably. Sentiment used to be quite bullish; it's now bearish. Fund flows in the physical market are now rolling over. You know, on a contrarian basis there's a good argument to own gold. The real reason though is QE3. The Fed [is] expanding their balance sheet at $85 billion a month. And that's just the similar kind of pace to what they were doing in QE1 and QE2. And of course it injects liquidity into markets, it debases the dollar, and underpins the rally in gold prices. ... The speculators always give up on gold at the lows. Everyone is always bearish at the lows. That's the time to buy it. We're going to get a good rally this year. ...
"We don't need inflation pressures for a gold price rally. We haven't had inflationary pressures in recent years. The only inflationary pressure we have is from QE pushing commodity prices up. You look around the world, there's lots of deflation in the West. U.S. wage inflation is at a 60-year low. There's a big output gap. There's loads of unemployment. There are deflationary pressures. And that's why we've got the Fed stepping in to build inflation pressures, to do QE, to get asset prices up, to create a wealth effect, to try and get the economy going. ...Gold doesn't really change its colors. Since 1971 and the end of Bretton Woods long-term trends in gold prices have been determined most entirely by real interest rates in the U.S. ...
"Gold's gone sideways for 16 months. That's because the balance sheet in the Fed has gone sideways for 16 months. The balance sheet is about to expand rapidly. And with that we're going to get a rally in the gold price, it's going to go hard this year and probably into next. ... We're going to get a rally that was similar to the rally that we got in QE1 and QE2 when the balance sheet expanded and injected liquidity into markets. ... We'll get over $2,000 and we could go even higher. It depends on how much QE they do."
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