Cornering the Gold Market: China Close to Buying Half of World Gold Production

China Demand Gold Approaches Half Annual World ProductionMy long-time readers know I’ve been a gold bullion bull for years—ever since 2002! And whenever gold bullion prices get weak, I just buy more. In fact, last year, when gold bullion prices took it on the chin, I bought more.

I like to buy an investment when it is down and out of favor. And that’s how I look at gold today. When I study the demand/supply equation, I see demand rising (especially from China) and supply decreasing as companies pull back on their exploration budgets because gold prices have come down. Because of this, 2014 production of gold bullion will be less than 2013’s.

In 2013, China bought 1,132 tonnes of the precious metal, making it the biggest buyer of gold in the world. According to the World Gold Council, demand for gold bullion in China will increase by 20% by 2017 to 1,350 tonnes annually. (Source: World Gold Council, April 15, 2014.)

Of interest, Chinese households have savings of $7.5 trillion in bank accounts but only $300-billion worth of gold bullion as savings. (Source: Ibid.) Imagine what would happen if only 10% of household bank savings in China moved towards gold bullion.

According to the U.S. Geological Survey (USGS), total gold world mine production in 2013 was 2,770 tonnes. (Source: U.S. Geological Survey, February 2014.) This means the Chinese are buying 41% of all gold mine production!

While it might not sound right if you own gold, what happened to gold bullion prices last year was actually a blessing in disguise. Yes, it did take the speculators out, but it also gave a chance for long-term investors to get in at bargain prices again.

Chinese demand for the precious metal is just one piece of the puzzle. If you bring in the Indian demand for gold bullion, the picture becomes very clear, in favor of higher prices as demand overwhelms supply.

My long-term advice: don’t take the daily fluctuation in gold bullion prices too seriously. The long-term perspective for the precious metal looks better now than it did last year. For potential leveraged profits on gold bullion, look at the depressed mining companies, as they offer great value.

But here are some stronger words on the future of gold bullion from my colleague Robert Appel, BA, BBL, LLB:

“Gold will absolutely bottom this year and then slowly begin its destiny to retest (at minimum) the $1,900 level in the years ahead. The miners will remain weakish until it becomes clear that bullion is in a clear counter-trend to the broad market. The July-August-September period looks the most interesting, but the ongoing interventions by agents of the central banks (which include the ability, for example, to dump a billion dollars of non-existent gold onto the paper markets completely at will, as has already happened once this month) makes the timing problematic.

“Gold and the mines will show a stronger finish to 2014, as has been our call since late 2013. We consider gold’s ‘fair value’ to be around $2,900 an ounce, and that is without counting future geopolitical surprises, of which there should be many.”

(Reprinted from Lombardi’s Profit Taker e-alert, April 21, 2014.)