While gold prices trade near a five-year low, central banks around the world are snapping up the precious metal.
Between June and September of this year, the People’s Bank of China (China’s central bank) added 654 tonnes of gold bullion to its reserves. (Source: Reuters, November 30, 2015.)
To give you some perspective, the annual global gold mine production is around 2,800 tonnes. So in the past five months alone, China’s central bank has purchased 24% of the entire world mine production for 2015.
I expect China to continue to add more gold to its reserves, as the Chinese yuan will soon be granted reserve currency status by the International Monetary Fund (IMF). Following this status change, the smart move would be for China to back its yuan with a solid asset and that asset is gold.
There are other central banks that are buying the precious metal, too. Between March and September, Russia’s central bank purchased more than 144 tonnes of gold. (Source: World Gold Council, last accessed December 1, 2015.)
Consumer Gold Demand Surging
On the consumer side, demand for gold is strong and it’s not just India and China where demand is increasing.
Here’s what the head of market intelligence at the World Gold Council had to say about gold demand in the third quarter of this year: “China and India remain the dominant figures in the global gold market, accounting for close to 45% of total demand. But what was particularly noticeable this quarter is that the consumer response to the price dip was a truly global occurrence. There were significant gains in bar and coin demand in China and across Europe, but it was in the U.S. where we saw the most dramatic growth, with U.S. Mint Eagle sales reaching their highest level since Q2 2010.” (Source: “Gold demand climbed in Q3 2015 as consumers across the globe capitalised on buying opportunity,” World Gold Council, November 12, 2015.)
In the third quarter, demand for jewelry increased six percent year-over-year and investment demand (bar and coin purchases) increased by 27% globally!
Gold Price Forecast for 2016
With all this said, please look at the gold price chart below.
Chart courtesy of www.StockCharts.com
Gold prices are making new lows despite extreme buying. As a contrarian, I see this as a great opportunity for investors. Whenever the supply/demand equation of a commodity tightens, but the market moves prices lower, you get the best returns over the long-term.
I am watching gold mining stocks. They are the most hated—even more hated than gold—and a contrarian investor’s heaven. I believe the shares of depressed quality senior gold mining companies are setting themselves up for huge upside when gold prices turn. I see 2016 as a great year for gold and an even better one for gold miners.