Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Gold Prices

Gold prices reflect the marketplace’s underlying value attributable to gold as determined by futures (derivatives) securities. Because gold is a resource commodity, its value is inherently volatile and, according to history, tends to trade in “mania” phases.

Gold prices in recent history have been quite strong, rising for the better part of a decade. Currently, gold prices have been experiencing a large price consolidation and many financial market participants feel that the commodity is about done its current price cycle.

Gold prices are influenced by a number of factors, including the value of the U.S. dollar, geopolitical events, and the perception among futures traders regarding global demand and supply for physical gold.

Strength in gold prices often reflects a view in the marketplace that there is uncertainty in the world. Their volatility makes them difficult to forecast and predict their direction. Because of this, the underlying commodity represents a risk-capital asset.

India Buying 450% More Gold?

By for Profit Confidential

How Can Gold Prices Possibly Go DownThe demand and supply situation for gold bullion, something I’ve often talked about in these pages, has taken a new course…one very favorable to gold bulls like me.

Gold buying in India is up 450% in the first nine months of 2014 compared to the first nine months of 2013. (Source: Government of India, October 14, 2014.) The jump in gold bullion buying in India is related to the easing of restrictions on gold imports into the country by the Indian government in 2014.

The buying of gold bullion in China continues to be strong. And world central banks are increasing their gold reserves, too.

In the chart below, I’ve compared the gold holdings of various central banks now compared to their gold reserves in 2011.

Three-Year Change in Gold Reserves of Five Countries

Country Gold Holdings in October 2011 (in tonnes) Gold Holdings in October 2014 (in tonnes) % Change
Russia 841.1 1112.5 +32.27%
Turkey 116.1 511.7 +340.74%
Kazakhstan 67.3 181.9 +170.28%
Korea 39.4 104.4 +164.97%
The Philippines 147.8 194.4 +31.53%

Data source: World Gold Council web site, last accessed October 23, 2014

Mind you, the central banks mentioned in the table above are just a few of the many that have posted a significant increase in their gold bullion reserves. Unfortunately, many countries (like China) do not regularly release data on their gold purchases.

Meanwhile, the supply side of the gold bullion equation is bleak.

As I wrote in 2013 when gold bullion prices got whacked, the lower gold prices go, the more mines taken off-stream as gold mining companies close operations where production costs come in at … Read More

A Rational Look at Gold

By for Profit Confidential

Rational Look at GoldThe fundamentals that drive gold prices higher are in full force and improving. Central banks are buying more of the precious metal (to add to their reserves), while countries that are known to be big consumers of gold bullion post increased demand.

According to the India Bullion & Jewellers’ Association, India’s monthly gold bullion imports are expected to rise by as much as 50% in the coming few months—in the range of 70 tonnes to 75 tonnes per month compared to an average of 50 tonnes to 60 tonnes now. (Source: Reuters, September 18, 2014.) This is mainly due to the festival/wedding season fast approaching in India.

If India continues to import 70 tonnes of gold bullion each month, then the total imports just to India will be 31% of all world gold mine production (based on 2,700 tons in annual mine production).

India used to be the biggest importer of gold bullion until China took over as the biggest importer of the precious metal two years ago. And demand for gold in China remains strong as well.

But while demand for the precious metal is rising, production is declining.

In the first five months of 2014, U.S. mine production was 85,400 kilograms (kg), down four percent from the 89,200 kg of gold bullion produced in the first five months of 2013. (Source: U.S. Geological Survey, last accessed September 22, 2014.) As I have written before, lower gold prices have caused gold companies to close mines where production made sense at $1,600 an ounce gold, but not at $1,200 an ounce gold.

While I won’t delve into all the talk … Read More

Where I’d Put My Money Now

By for Profit Confidential

Annual Supply of World Gold ShrinkingAs gold bullion prices declined last year, I said supply would contract as gold miners pulled back on exploration and closed mines that were not profitable at $1,200-an-ounce gold.

For the supply of gold bullion to increase, there needs to be more discoveries. Sadly, the opposite is happening. According to SNL Metals & Mining, gold discoveries have been trending downward. In the 1990s, there were 124 new gold discoveries totaling 1.1 billion ounces of gold bullion. But since 2000, only 605 million ounces of gold bullion in total has been discovered at just 93 discoveries. (Source: Kitco News, July 18, 2014.)

For there to be more gold discoveries, mining companies need to spend more on exploration and that just isn’t happening. In 2013, when gold prices plummeted, major mining companies pulled back on their spending. Furthermore, exploration companies that need funding found it very difficult to get money, so they also pulled back on finding gold.

But gold bullion discoveries aren’t just slowing; the time it takes to start production at a mine is increasing as well. Between 1996 and 2005, it took an average of 11 years to bring a discovery to production. Between 2006 and 2013, this has increased to 18 years. (Source: Ibid.)

With all of this (it being harder to find new gold bullion and it taking too long for production to start once gold is discovered), the supply of world gold bullion is shrinking.

And demand for gold bullion, well, it just keeps rising. Aside from investors buying gold coins and jewelry at near record levels (with India now easing its stiff tariffs on gold … Read More

Dying for Gold? This Man Almost Did

By for Profit Confidential

Four Key Arguments for Owning GoldThe most compelling argument for owning gold bullion I have ever heard…

A 63-year-old businessman went to a doctor complaining he had swallowed a bottle cap in anger after he had a fight with his wife. After a three-hour surgery, the doctors found 14 ounces of gold bullion in the man’s stomach. The police and Customs were called, and the gold recovered was confiscated. (Source: “Gold bars removed from Indian man’s stomach,” BBC News, April 18, 2014.)

This is just one of the many ways smugglers are bringing gold bullion into India. In this particular case, this man was willing to die for gold!

You see, the Indian government has imposed rigorous duties on importing gold bullion into the country. As a result, imports of gold bullion between May of 2013 and November fell more than 88%. In May of 2013, 162,000 kilograms (kg) of gold bullion was imported into India, and by November 2013, it had declined to 19,300 kg. (Source: Ibid.) As the government imposed its high duties, smuggling of the precious metal into the country increased. And as I just told you, people are risking their lives to get the yellow metal into the country.

To recap what I have been writing about gold bullion:

  1. More and more central banks have been buying gold bullion to stabilize their reserves. For years, central banks sold their gold; now they are buying it back.
  2. The decline in gold prices has forced gold miners to cut exploration projects for the simple reason that they need to conserve cash. Less exploration means less supply down the road. Also, there has been
  3. Read More

How Past Investment Trends Predicted This Stock Market Action

By for Profit Confidential

Speculative Fervor Declines on Growing RiskIt’s just the same old story with stocks. One day they’re up; the next day they’re not.

If 2013 was a breakout year from the previous long-run recovery cycle, 2014 is a year of choppiness.

Stocks just can’t seem to latch onto any particular trend. A convolution of influences from earnings results to geopolitical events continue to beat down what positive sentiment sprouts from the data.

It’s no surprise to have choppy capital markets after such a strong year of capital gains. And that’s the thing I always try to keep in the back of my mind: stocks are about the future—a future stream of earnings discounted for every potential eventuality at prevailing rates of interest.

With downside leadership in equities provided by the high-valuation large-cap technology stocks, it’s difficult to imagine the main market indices accelerating near-term, especially as the marketplace has already voted on this earnings season.

A familiar mantra coming from a lot of Wall Street analysts is that the pace of U.S. economic activity should accelerate towards the end of the year. Several firms are calling for stronger oil prices and lower gold prices accordingly.

But if the choppy action in stocks so far this year is any guide, things are unlikely to unfold as expected. And the catalyst for downside is unlikely to be due to corporate performance or the Federal Reserve. Companies are expecting to meet existing guidance, and the central bank continues to provide a stable low interest rate environment.

Geopolitical events unfolding between Russia and Ukraine are a growing risk for investors. A “sell in May and go away” type of scenario … Read More

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