Just by looking at the supply and demand situation, gold prices seem severely undervalued. Precious metal investors must pay attention to the basic fundamentals and completely disregard the noise surrounding it.
Economics 101 suggests that prices increase when demand increases or remains the same, and the supply declines.
This is exactly what we see happening in the gold market.
Demand Rising as Gold Prices Are Down and Out
Back in 2013, when gold bullion prices began their first descend, we were told, “give it some time, the buyers will eventually run away.”
This hasn’t happened yet.
We are following three main buyers; India, China, and the central banks. And they haven’t given up whatsoever.
Consider this; in the second quarter of 2015, central banks, China, and India combined purchased 508 tonnes of the yellow metal. The total demand for the quarter was 914.9 tonnes. In other words, these three buyers were over half of the entire demand for the quarter! (Source: World Gold Council, August 13, 2015.)
Interesting to note; buying activity in the U.S. and Europe is increasing, too.
Consumer demand for gold in the U.S. increased three percent in the second quarter from the same period a year ago, and demand in Europe jumped by 14%.
While the buyers remain in the market, we see the supply side is getting crushed. This is not unexpected. You see, when prices are down, suppliers don’t really have any incentive to produce more—their margins are thin. For some, it’s not even feasible to produce because the costs are too low.
Right now, no matter where you look; production is declining.
For instance, in the first five months of 2015, U.S. mines produced 76,900 kilograms (kg) of gold bullion. (Source: U.S. Geological Survey, last accessed September 1, 2015.) In the same period a year ago, this figure was 85,400 kg. (Source: U.S. Geological Survey, last accessed September 1, 2015.) This represents a decline of almost 10% year-over-year!
Other major gold producing regions are telling the same tale; South Africa is reporting a slump in gold production, and Australia is struggling as well.
Technical Analysis Turning in Favor of Bulls
The basic fundamentals are suggesting gold prices are setting up for huge rewards. When we look at the precious metal from a technical perspective, there’s bullish sentiment building up. Please look at the chart below and pay attention to the circled area.
Chart courtesy of www.StockCharts.com
After the decline in early July, we saw significant support building until early August. The price traded in a range and didn’t break below (circled area). This phenomenon is indicative of sellers failing to take the price lower. Now, the precious metal price trades above it 20-day moving average and the 50-day moving average. In other words, its short-term and immediate term trends are turning in favor of bulls.
I continue to monitor gold prices very closely. As the days go by, reasons to look at the precious metals are increasing. With this, mining companies are looking like a great opportunity as well.