All Signs Point to a Sudden Change in Gold Prices

Gold PricesWhile the gold bullion naysayers keep their bearish view, the fundamentals for the precious metal continue to gain strength.

We have seen a significant amount of selling in the gold bullion market. But consider this: according to data compiled by Bloomberg, gold bullion holdings in global exchange-traded products (ETPs) have plummeted 589.4 metric tons this year to 2,042.5 tons—the lowest since May of 2010.

And if that trend continues, it would be the first drop in gold bullion holdings of ETPs since they were brought onto the market in 2003. (Source: Financial Post, July 4, 2013.)

On top of all this, hedge funds are also predicting lower gold bullion and precious metal prices. And some of the biggest banks around the world have also cut their forecasts.

In the second quarter of this year (April to June), gold bullion prices plummeted 23%—the most since 1920. The primary reason for that is that investors were suddenly convinced that the precious metal wasn’t as precious as its price indicated once the Federal Reserve announced that it will soon be starting to apply the brakes on its runaway money printing.

But that move, when it comes, will only make physical precious metals more valuable. Gold is simply becoming scarce, and buyers will soon be scrambling to buy.

Remember—and I have said this before—it was only in the paper market that we witnessed increased selling. The demand for the physical market remains strong.

The cost of borrowing gold bullion has increased sharply. The one-month gold bullion lease rate rose to 0.3% on July 9, up from 0.12% a week ago. (Source: Financial Times, July 9, 2013.)

Dear reader, you must remember: gold bullion trades globally. We are witnessing staggering demand out of Asia—the usual gold bullion buyers—and refineries there are operating at full capacity. UBS, a global bank, points out that the price of gold bullion in China remains $40.00 above the benchmark London spot prices.

Here’s what my colleague and resident gold bug, Robert Appel, BA, BBL, LLB—the smartest guy I know when it comes to understanding and explaining what’s happening with precious metals—had to say:

“Regression analysis of the gold market back to the 1970s suggests that the time to repair the damage is often about equal to the time to make the damage. In fact, top analyst Louise Yamada, who advises corporations and large funds, and commands large fees for her advice, has said the very same thing in many of her CNBC interviews. Assuming the base builds this fall, this suggests that the total damage was spread over 2 years. Therefore, according to ‘traditional’ analysis, gold should be back in favor by 2015. Now, note we used the words ‘traditional analysis.’ If you factor in the unusual dynamic of this specific market—all world markets joined at the hip electronically; the gold whack that was artificial and not organic; Western nations on the edge of another 2008-style event; false unemployment data; the Fed trying to walk and chew gum at the same time; Japan on a kamikaze mission; and unknown weather patterns—this could happen sooner than expected.

I remain bullish on gold bullion prices in the future because the fundamentals are aligning perfectly. Right now, there’s a significant amount of negativity towards it and other precious metals but I have to go by the old adage: ‘In the times of most uncertainty, the greatest buying opportunity arises.’”

Michael’s Personal Notes:

I am watching the Chinese economy very closely, because any economic slowdown there could have an adverse effect on the already struggling U.S. economy.

And here’s what I’ve seen: the stock advisors are not mentioning how critical the Chinese economy really is, how companies based here in the U.S. can face hard times if it slows, and how that could ultimately lead to lower key stock indices.

Dear reader, the most important thing you need to know about the Chinese economy is that it’s an indicator of global economic health and demand. Currently, it looks as though its health is deteriorating. Exports from the Chinese economy to the global economy plunged 3.1% in June, a month in which they were expected to increase by four percent. (Source: Reuters, July 10, 2013.)

What that means is that demand in the global economy is declining—and that strengthens my belief that the global economy is headed toward an economic slowdown. In June, exports from the Chinese economy to the U.S. economy fell 5.4% and those to the eurozone fell 8.3%.

Customs spokesman in the Chinese economy, Zheng Yuesheng, said, “China faces relatively stern challenges in trade currently… Exports in the third quarter look grim.” (Source: “China warns of ‘grim’ trade outlook after weak exports surprise,” Reuters, July 10, 2013.)

The Chinese economy is now expected to slow to 7.5% this year. But not only exports are declining; the factory output and investment growth in China, the second-biggest economic hub, are also headed downhill.

I think these numbers might even be too optimistic considering the economic slowdown in the Chinese economy could become severe, as the credit market problems are starting to unfold. Businesses not being able to borrow money to run their daily operations can hurt demand in the country. Consequently, high unemployment will probably become an important issue going forward.

Economic slowdown in China means U.S.-based companies operating in the country will also see their profitability decline. We’ve heard from companies like Caterpillar Inc. (NYSE/CAT) that are showing concerns with their operations in the Chinese economy; meanwhile, other companies—like Wal-Mart Stores, Inc. (NYSE/WMT), which has significant operations in China—are facing troubled times as well.

And you can add to this list the exporters to China—any economic slowdown in China’s economy means they will be selling less to the country. As I said before, the strength of the Chinese economy is an indicator of overall global health.

As I continue to point out in these pages, the key stock indices are not reflecting the reality of the economic situation—it’s far worse than they would indicate.

I remain pessimistic toward the key stock indices, because I don’t see a lot of improvements; rather, I see risk piling up significantly. This irrational rally can only go on for so long. Eventually, it will all come back to where it should be. And problems in the Chinese economy might just be the spark that brings investors back to their senses.