Why Aren’t Gold Prices Rising?

Guess Who Just Bought Gold for the 14th Consecutive QuarterThe numbers are in…

In the second quarter of 2014, world central banks bought 117.8 tonnes of gold bullion compared to 92.1 tonnes a year earlier—a jump of 28%. Central banks have been net purchasers of gold bullion for 14 consecutive quarters!

According to the World Gold Council, “Economic and geopolitical events throughout the world are sources of ongoing instability and uncertainty. Such events reinforce the requirement for appropriate risk management by central banks through holding gold reserves for asset diversification.” (Source: “Gold Demand Trends Q2 2014,” World Gold Council web site, August 14, 2014.)

Hog wash, I say. Central banks are buying gold bullion because they are slowly moving away from U.S. dollars as their reserve currency and replacing them with gold bullion.

In the second quarter, Russia purchased 54 tonnes of gold bullion, Kazakhstan purchased seven tonnes, and Tajikistan bought three tonnes. Combined, just these three central banks made up more than 54% of all the official purchases of gold bullion in the second quarter.

You won’t see the central banks of France or Germany buying gold bullion because they already have enough (that’s if Germany can ever get its gold back from the U.S.).

So if demand for gold bullion is rising, as evidenced by central banks buying more, gold coin sales near record highs, and gold demand in India rising again now that the government is easing tariffs on gold imports, the million-dollar question is why aren’t gold prices rising?

There is plenty of discussion on the Internet about gold manipulation and how prices are purposely being kept down. I can’t comment on that, but I can tell you three things about gold bullion:

First, the supply of gold bullion in the marketplace has declined this year because gold miners have pulled back on exploration. In 2011, mining for gold when it was at $1,800 an ounce made sense. Mining for gold in 2013 when gold was trading at $1,300 an ounce didn’t make a lot of sense for many mines, though, so they were closed down. Less supply, more demand (as we’ve just seen from the central banks) usually leads to higher prices.

Secondly, according to the International Monetary Fund (IMF), at the end of 2013 central banks around the world had total foreign exchange reserves of more than $11.0 trillion. If central banks use just 10% of these reserves (roughly $1.1 trillion) to diversify further into gold bullion, there will not be enough gold to satisfy the demand.

Finally, the stock prices of quality senior gold mining companies are trading at levels they haven’t been at in years. I continue to believe they offer an outstanding opportunity for “buy low” investors.