Gold prices have been used as a store of wealth for centuries. Naturally, prior to the modern period, the monetary system was quite basic and rudimentary. Gold prices can be quite erratic and have a history of massive swings. One issue with gold prices is that supply can and does come back into the market. Unlike other commodities that are used up, such as oil, when gold prices move up, people can sell their holdings, which can be melted down and added to the world supply again. High gold prices are usually a sign of a lack of faith in paper money, usually due to inflation, which erodes the value of fiat money.
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
From our recent reader survey, I see our readers are not that concerned about what happens in the eurozone. But there’s a phenomenon occurring there that I believe every investor who is interested in gold bullion should be aware of.
Let me explain…
It’s a known fact that when central banks print more of their paper money, it’s usually bullish for the yellow metal. We saw this after 2009, when the Federal Reserve started to print more paper money; gold bullion prices skyrocketed.
In the eurozone, there continues to be major economic problems in the region. Italy, the third-biggest economic hub in the eurozone, has reported its unemployment rate hit 13% in February—the highest unemployment rate ever recorded in the country. (Source: Reuters, April 1, 2014.)
To help countries like Italy, Greece, Spain, and Portugal with their economic woes, the European Central Bank (ECB) has lowered its benchmark interest rate—but that hasn’t spurred bank lending as bad debts on the books of major eurozone banks keep piling up. Even once-strong eurozone countries like France are under economic scrutiny.
Now, as no surprise, the ECB has started talk about following the same route the Federal Reserve has taken—printing paper money.
At a conference last week, one of the ECB’s Executive Board members, Yves Mersch, said the ECB is ready to turn on its printing presses. The president of the ECB, Mario Draghi, has also said quantitative easing in the region may be needed if inflation in the eurozone continues to remain subdued. (Source: Reuters, April 7, 2014.)
Hence, to the printing presses of the Federal Reserve, the Central Bank … Read More
Central banks are still adding gold bullion to their reserves and the smaller countries are getting into the act big-time.
According to the International Monetary Fund (IMF), in the month of March, Iraq’s central bank added 36 tonnes of gold bullion to its reserves—worth about $1.5 billion. This is the first purchase by the central bank since August of 2012, when it bought 23.9 tonnes of gold. (Source: Reuters, March 25, 2014.)
Sure, you could say, “Michael, 36 tonnes of gold bullion is nothing for a central bank.”
I agree. But looking at the bigger picture, it is very significant for a small country like Iraq—a country whose annual gross domestic product (GDP) is smaller than Amazon.com’s sales for 2013—to be getting into gold bullion in a big way. The official announcement from the central bank of Iraq sent the message that it bought the gold bullion to stabilize the country’s currency and add insurance to their reserves.
Since 2009, central banks around the global economy have become net buyers of gold bullion, and I don’t think they will stop anytime soon. The main reason for this is that the central banks see a significant amount of volatility coming to the world of paper currencies—something they hold in their reserves.
Too many major world currencies are in a downtrend. The U.S. dollar has been on a decline since the beginning of 2014. The Canadian dollar is hitting multiyear lows. The Japanese yen has been plummeting.
Where do we go next with gold bullion?
At present, the amount of negativity towards gold bullion is immense. But the fundamentals paint a different … Read More
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