When there’s too much uncertainty about an asset class, like there is today with gold bullion prices, I go back to the basic economics of supply and demand. For prices to rise for any asset, you want to see demand increasing and supply remaining the same or even declining.
Gold Bullion Demand Soaring
On the demand side, when it comes to gold bullion, I follow three heavyweights: China, India, and the world central banks. Low precious metal prices certainly haven’t discouraged these buyers from accumulating even more gold.
World central banks purchased 137 tonnes of gold bullion in the second quarter of 2015, making them net buyers of gold for 18 consecutive quarters now. (Source: World Gold Council, August 13, 2014.)
India and China combined took in 371 tonnes of the yellow metal in the second quarter.
These three major players bought 508 tonnes of gold in the second quarter. Total supply of gold bullion for the quarter was 1,032.6 tonnes; China, India, and the central banks purchased about 50% of all the gold produced in the second quarter of 2015!
Just a couple of weeks ago, we saw the People’s Bank of China devalue its currency three times over three consecutive days. These actions caused a significant impact in the currency markets of the Asia Pacific and Indian subcontinent regions; I think gold bullion demand will rise further because of it.
Gold-Producing Regions Cut Supply
On the supply side of the gold equation, major gold-producing regions are reporting weaker and weaker supply.
Take U.S. gold mine production as one example. In the first five months of 2015, mine output in the U.S. economy was 76,900 kilograms (kg). (Source: U.S. Geological Survey, last accessed August 19, 2015.) That’s down 10% from the first five months of 2014. (Source: U.S. Geological Survey, last accessed August 19, 2015.)
Gold production in South Africa is in ruins. See the table below. It shows the year-over-year change in the production of gold in South Africa for the five months between January and May of 2015 (the only data available).
South Africa Year-Over-Year Change
in Gold Production
|Month||Year-Over-Year % Change in Gold Production|
Data source: Statistics South Africa, last accessed August 19, 2015.
Have Gold Prices Bottomed?
After making lows in late July, gold prices have stabilized. Does this mean we have hit the bottom? I’m not sure. There continues to be a significant amount of negativity towards the metal. Irrationality may take it lower. But that doesn’t matter to me, as I know it’s impossible to predict a bottom in any declining market. But I’d much rather buy now at these prices than risk not seeing this opportunity again.
On a fundamental perspective, I believe the supply/demand situation for gold bullion is setting up smart and patient investors for massive rewards.