The past two weeks have tested the nerves of even the strongest of gold bugs. And today, I’ll try to make sense of it all for my readers; whether this is an opportunity, or time to give up.
Let’s start by looking at the chart of gold prices below. The obvious: gold prices have fallen from a peak near $1,900 an ounce in 2011 to around $1,100 an ounce today—their lowest level since the beginning of 2010.
The decline in gold prices has spooked investors, companies that produce gold, and analysts. This week, The Goldman Sachs Group, Inc. came out swinging at gold, saying prices are headed to $1,000 an ounce.
Chart courtesy of www.StockCharts.com
What I’ve told you above is the obvious; what you already know. Now let’s dig a bit deeper.
Gold Price Fundamentals Continue to Improve
This may sound harsh for those who regularly read Profit Confidential: I would like to see gold prices go down to $1,000 an ounce.
Let me explain.
If the price of gold does go down to $1,000 an ounce or below, we will see an instantaneous collapse in supply. Big-cap mining companies will not be able to produce at that price. It’s that simple. Consider this: in the first quarter of 2015, Barrick Gold Corporation (NYSE/ABX) produced gold at an all-in sustaining cost of $927.00 an ounce—not too far from current market prices for gold.
I have already noted in these pages how the supply of mined gold is declining in the U.S., South Africa, and Australia. Expect more precious metal producing regions to do exactly the same, as the price of gold remains suppressed.
So, at a time that the gold supply situation is just about to get worse, demand for the yellow metal is rising. As gold bullion prices plunge, buyers buy more, as if the decline in prices doesn’t really affect them.
Just last month (June), the central bank of Russia added $350 million more worth of gold bullion to its reserves. Its gold holdings now stand at $48.22 billion. In May, the deputy governor at Bank of Russia, Dmitry Tulin, said, “As you know we are increasing our gold holdings, although this comes with market risks, the price of it swings, but on the other hand it is a 100% guarantee from legal and political risks.” (Source: FX Street, July 23, 2015.)
Over the past few years, we have seen smaller central banks jump in and buy the yellow metal. And I think China is ecstatic that gold prices have fallen; it can continue on its buying spree at cheaper and cheaper prices.
Demand for gold from consumers remains solid, too, with the U.S. Mint and The Royal Canadian Mint reporting a sharp increase in the sales of gold coins.
Gold Prices Today Similar to Stock Market Opportunity of 2009?
I know it’s difficult to even have a bullish thought when prices are falling, but you have to look long-term. When I look at gold, it reminds me of the financial crisis of 2009 and the stock market collapsing. Not many investors had bullish aspirations for stocks back then. But in the midst of it, a great buying opportunity was developing. Back then, the majority had failed to realize it.
Gold has come under fire. Investors have bought into the belief that the U.S. economy is improving, interest rates will rise, and there’s no inflation. So why do you need gold?
Personally, I think you need gold because the Federal Reserve has created almost $4.0 trillion in new dollars out of thin air; China is printing more paper money; Japan is printing more paper money; and the European Central Bank is printing money now, too. So, to tell me that gold, a commodity that cannot be created out of thin air, is worth less than money that comes off a printing press; I just don’t buy it.
We’ll never know why gold prices collapsed over the past two weeks. We’ll read all kinds of theories of who was behind the multi-billion-dollar gold contracts (not real gold) that were dumped onto the market during thin trading hours. But we’ll never know for sure.
But I know what it means. Fortunes are made when investors buy assets when everyone is selling them; buying beaten-up assets when they are low. Today’s depressed gold prices are just that; a great opportunity for contrarian investors who recognize that gold is a beaten-up asset trading at very low prices.