Gold Prices: Huge Change in Gold Market Could Send Prices Soaring

Gold PricesThis Could Send Gold Prices Soaring

Don’t be discouraged by small fluctuations in gold prices on a daily basis. They’re nothing but the result of noise and speculation. Keep your focus on the long-term—gold bullion has a great future ahead.

There are a few things to pay attention to when trying to assess the gold market, but one of the biggest factors investors shouldn’t ignore is China.

If you look closely, you will see there’s significant demand for gold bullion from China—consumer and official demand. And, this demand surprisingly is inelastic, meaning it’s non-responsive to what gold prices do.

Going back a little, since their peak in 2011, gold prices have declined more than 30%. In this time, one would expect the demand for the precious metal has declined, too. In China, this hasn’t been the case.

In fact, it has been the complete opposite of what was originally anticipated. We were told buyers will run away as gold prices remain suppressed.

With this said, consider the central bank of China. In June of 2015, it reported that between June 2009 and June 2015, it added 604.34 tonnes of gold bullion to its reserves. This move wasn’t surprising. It was expected all along.

What’s interesting to note is that it continues to add gold to its reserves. Between July of 2015 and December, the central bank purchased closed to 104 tonnes of gold bullion. Then, in January of this year, it added more—16.7 tonnes of the precious metal. (Source: “Changes In World Gold Official Reserves,” World Gold Council, last accessed March 16, 2016.)

Here’s something to keep in mind: don’t be too quick in thinking that the central bank of China will stop buying gold anytime soon. The Chinese currency was recently added to the International Monetary Fund’s (IMF) Special Drawing Rights (SDRs) basket. This means that China has to back its currency and gold could really help.

As for consumer demand for the precious metal, it’s solid as well.

In 2015, China was the biggest precious metal consumer, ahead of India. To give you some perspective, in 2015, gold jewelry demand in China was 842 tonnes, and gold coins and bar demand was 209 tonnes. (Source: “Gold Demand Trends Full Year 2015,” World Gold Council, February 11, 2016.) Again, it doesn’t look like this demand will diminish anytime soon given the economic conditions in China.

Where’s Gold Headed Next?

Dear reader, we currently stand at a critical point in the gold market.

Buyers like China haven’t cut back on their purchases despite lower prices. They are now buying more than ever.

As this is all happening, with lower gold bullion prices, mine production is getting hurt. You have to ask: what will happen when buyers remain resilient and supply is taking a hit? This phenomenon could cause gold prices to shoot through the roof.

I remain bullish on the yellow precious metal. It remains the best-performing asset in 2016. I am not worried about what happens to gold prices on a daily basis. However, I will be worried if major gold consumers like India and China pull back significantly on their precious metal consumption. Luckily, they’re buying now and I really don’t see ending anytime soon.

I will end with this with this one warning: if you don’t look at gold now, you could be really kicking yourself later.