Gold Market Setting Up to Reward Investors

Gold Market Setting Up to Reward InvestorsI’ve been singing the same song to my readers all year: look at dips in the price of gold bullion as an opportunity to buy more of the metal.

When gold fell below $1,150-an-ounce in early November and so many analysts came out with the prediction of $1,100 or $1,000-an-ounce gold, I was writing about what a bargain gold stocks had become. (See “Prices of Gold /Silver Companies to Double from Here.”)

Pay close attention to the circled area in the gold spot price chart below.

Gold - Spot Price Chart

Chart courtesy of www.StockCharts.com

Gold prices have risen by nearly $50.00 an ounce from their early November 2014 lows. And it’s not just the upcoming gold referendum in Switzerland that’s moving gold prices higher.

Gold Demand Increasing, Supply Constrained

Central banks throughout the world continue to increase their gold reserves. This is a phenomenon that started in 2009 and hasn’t stopped.

In the third quarter of 2014, central banks purchased 93 tonnes of gold bullion to add to their reserves. That makes 15 consecutive quarters in which central banks have bought more gold than they have sold. Year-to-date, central banks have purchased 335 tonnes of the metal.

And gold demand from consumers remains high, too.

As Marcus Grubb, managing director of investment strategy at the World Gold Council, said last week, “the long-term sources of demand—jewellery, investment, central banks—remain robust and diverse. People around the world buy gold for different reasons at different times, reinforcing the unique self-balancing nature of the gold market. With recycling at a seven year low and mine supply looking increasingly likely to be constrained in the future the outlook for physical gold demand remains strong.” (Source: “Jewellery in India, the US and the UK – the highlights of Q3 2014 global gold demand,” World Gold Council web site, November 13, 2014.)

Russia and ECB Buying Gold

Russia’s central bank has been a major buyer of the precious metal for some time now. Due to the sanctions imposed on the country, it’s buying local gold production. Year-to-date, according to the World Gold Council, the Russian central bank purchased 115 tonnes of gold bullion for its reserves. In 2013, the central bank bought 77.5 tonnes of gold bullion; and in 2012, it purchased 75 tonnes. (Source: Reuters, November 10, 2014.)

Something interesting we heard from the European Central Bank (ECB) is that it may buy gold bullion, shares, and exchange-traded funds (ETFs) in order to boost inflation in the region. ECB’s executive board member Yves Mersch said that the purchase of gold assets is “theoretically” a tool to “take further unconventional measures to counteract a lengthy period of lower inflation.” (Source: Spence, P., “ECB could buy gold to revive economy,” The Telegraph, November 17, 2014.)

Keeping all this in mind, gold, as I see it, could be presenting the buying opportunity of a lifetime. Prices are low due to irrationality and manipulation (more on this next week); gold’s demand/supply fundamentals are improving; and I believe that the further gold prices go down, the faster and bigger the move to the upside is going to be.

Continue watching the mining shares. They are oversold and offer a great opportunity.