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.
The 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|
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
As 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
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