The “Fundamental” Side Argument for Higher Gold Prices

By Friday, February 8, 2013

Basic rules of economics are at play with gold bullion prices; when demand rises, prices increase. We currently have a significant amount of demand for gold bullion by both investors and central banks, but the supply for the yellow metal is very limited.

The importation of gold bullion into Mainland China from Hong Kong increased 94% in 2012 to a new all-time high. According to Bloomberg, 834.4 metric tons of gold bullion was imported into Mainland China in 2012, compared to only 432.2 metric tons in 2011. (Source: Bloomberg, February 5, 2013.)

In the first half of its fiscal year 2013, demand for gold bullion increased 29.15% in Pakistan. On a month-to-month basis, the appetite for gold bullion increased 121.96% from November to December 2012. (Source: Bullion Street, February 5, 2013.)

Standard Bank Plc notes that the demand for gold bullion in January 2013 was higher than usual. The Standard Bank Gold Physical Flow Index indicates that gold bullion demand in January increased to the highest it’s been since November 2012 due to “good” buying in South East Asia. (Source: Standard Bank Plc, January 22, 2013.)

In addition to this, the central banks, which I believe will become the biggest driver of gold bullion prices, have been buying more of the metal. In the last six out of seven quarters, central banks around the world have been purchasing about 100 metric tons of gold bullion. (Source: International Business Times, December 28, 2012.)

Let’s remember, central banks used to be the net sellers of gold bullion; now they are buyers. Let me give you some idea about the amount of their buying: the central bank of Ukraine increased its holdings of gold bullion to 7.72% in 2012, compared to 4.36% in 2011. Similarly, the central bank of Brazil doubled its holdings of gold bullion (which it keeps in reserves) from October 2012 to November 2012.

Gold bullion is becoming the “go-to” source for safety once again. It looks to be the only option to store wealth in a world where central banks are in a rush to devalue their paper currencies. Don’t listen to the “noise” about gold bullion; just look at the supply and demand situation, and you’ll see the fundamentals for gold bullion are quite strong.

Where the Market Stands; Where It’s Headed:

Stock market optimism is far too high. Investors are getting back into stocks, and stock advisors are turning very bullish—both bearish indicators. On the other hand, corporate insiders are net sellers of stock, corporate earnings growth has slowed to a snail’s pace, and we had negative GDP in the U.S. in the last quarter of 2012—more bearish indicators. How anyone can be bullish on stocks; I just don’t understand.

What He Said:

“The Real Threat to the Economy: U.S. retail sales are falling, the producer price index is crashing, house prices, car prices are all falling—and no one is talking about deflation but me. Fed governors are still talking about inflation—they’ve got it wrong. There’s no need for me to get into the dangers of deflation as I’ve written about them (many times) before. Let’s just put it this way: Deflation is about the worst economic state a country will experience. The risks to the U.S. economy in 2007 are greater than I’ve seen in years.” Michael Lombardi in Profit Confidential, November 15, 2006. Michael was one of the first to warn of deflation. By late 2008, world economies were embedded in their worst state of deflation since the Great Depression.

About the Author, Browse Michael Lombardi's Articles

Michael Lombardi founded investor research firm Lombardi Publishing Corporation in 1986. Michael is also the founder and editor-in-chief of the popular daily e-letter, Profit Confidential, where readers get the benefit of Michael’s years of experience with the stock market, real estate, economic forecasting, precious metals, and various businesses. Michael believes in successful stock picking as an important wealth accumulation tool. Michael has authored more than thousands of articles on investment and money management and is the author of several successful... Read Full Bio »