In my 30-year career in the markets, the biggest profit plays I have seen were centered around getting out of an investment when everyone wanted in (NASDAQ tech boom of 1999, stock market boom of 2007, and now) and getting into an investment when few wanted it (gold in 2001, stocks in 2009, real estate in 2010). Depressed gold bullion prices are offering investors that once-in-a-lifetime “buy low” opportunity right now.
There are three very clear reasons why gold prices will move higher from their current depressed levels.
Reason #1: Central Banks Buying Gold
Over the past few years, world central banks have significantly increased their gold holdings. In fact, after years of being net sellers of gold bullion, since 2009, world central banks have been net buyers of the yellow metal. In the first quarter of 2015, central banks bought 119.4 tons of gold. (Source: World Gold Council, May 14, 2015.)
The first quarter of 2015 marked the 17th consecutive quarter where central banks were net buyers of gold, wherein they bought more of the metal than they sold.
Why are central banks buying so much gold?
Dear reader, it’s no secret. World economic growth is at a standstill. Many major central banks, including those of the U.S., China, Japan, and the eurozone, have kept their economies alive by either printing more paper money and/or bringing interest rates to record lows. What is the use of paper money if there is so much of it in circulation and it doesn’t earn any interest?
Central banks see the writing on the wall. They are accumulating gold in their effort to have something real and tangible in their reserves; something that cannot be created out of thin air.
Reason #2: China and India’s Gold Consumption Remains Strong
In the first quarter of 2015, India consumed 191.7 tons of gold, up 15% from the same period a year ago.
In China, demand in the first quarter of 2015 for gold declined slightly to 272.9 tons, down 7.7% from the first quarter of 2014. The marginal decline in demand for gold from consumers in China can be directly related to the slowdown in that economy from 2014 to 2015.
Recently, a well-known Chinese news source, Xinhua, reported that an investment fund has been set up by the Shanghai Gold Exchange. The fund is expected to raise $16.0 billion and will be investing in gold mining projects in an economic region called the “Silk Road,” which includes 65 countries. (Source: Xinhua, May 23, 2015.) At the very core, this shows how much China favors the precious metal.
Reason #3: Supply Side of Gold Getting Crushed
The decline in gold prices that started in 2011 has constrained production. This is basic economics; when prices are low, producers don’t have much incentive to produce. They shut down factories (or in this case, mines) where production is not profitable.
Major gold-producing countries are reporting a significant decline in their gold production. Below is a chart that shows monthly mine production, year-over-year, in major gold producing country South Africa.
South Africa Year-Over-Year Mine Production
|Month||YOY % Change|
(Source: Statistics South Africa, last accessed June 25, 2015.)
The U.S., Canada, and Australia are all producing less gold than they used to.
Gold Outlook: 2016 to Be Great Year for Investors
The yellow metal continues to be ignored in an environment where demand is strong and supply is contracting for it. Even amateur economists will say this is a perfect recipe for higher gold prices ahead. Sadly, investors who so often follow herd mentality aren’t looking at it this way.
I continue to see the share prices of major gold mining companies as ridiculously cheap.