When I look at the demand/supply equation in the gold bullion market, I can’t help but be optimistic. The balance is significantly distorted and suggests higher prices ahead.
Gold Bullion Buyers Continue to Rise
Since the decline in gold prices escalated in 2013, I have been paying attention to what’s happening in the biggest precious metal-consuming countries—India and China.
I only see demand increasing from those countries. In 2013, the Indian government imposed restrictions and tariffs on importing gold. This obviously resulted in a decline in demand from Indian gold buyers. But now that the restrictions have been lifted, demand for gold bullion from Indian consumers is coming back strong.
For the Indian fiscal year (ended March 31, 2015), India imported 900 tonnes of gold bullion—an increase of 36% year-over-year! But remember that for most of 2014, import restrictions existed for gold coming into India.
For the month of March, gold imports into India increased 110% from March of 2014. The country imported 125 tonnes of the yellow metal in March of 2015, compared to just 60 tonnes during last March. (Source: Reuters, April 10, 2015.)
Producers Running Away
Long ago, I had forecasted lower precious metal prices would result in gold producers cutting their production. That’s exactly what has happened. Mines that are no longer profitable at $1,200-an-ounce gold have been closed. And exploration budgets have been slashed, as gold miners conserve cash.
Major gold producers have cut back on production. Take Barrick Gold Corporation (NYSE/ABX) as one example. In 2015, the company is planning to produce between 6.2 million ounces and 6.6 million ounces. Just as recent as 2011, this company produced 7.68 million ounces of gold. (Source: Barrick Gold Corporation, February 16, 2012.)
Yellow Metal a Screaming “Buy”?
It is appalling to me how the mainstream continues to be negative towards the yellow metal. On April 21, 2015, Bloomberg published a story on its web site with the title “New York Apartments, Art Top Gold as Stores of Wealth, Says Fink.” The story was about how Laurence Fink, head of BlackRock, Inc. (NYSE/BLK), believes gold has lost its traditional role as a store of wealth and how contemporary art and apartments in New York, Vancouver, and London are “the two greatest stores of wealth internationally today.” (Source: Bloomberg, April 21, 2015.)
I think the opposite is true. To say gold has lost its traditional role as a store of wealth is ridiculous. You can’t wear a piece of art, let alone an apartment on your finger, wrist, or neck. And it’s basic economics; when demand increases and the supply decreases, prices rise for all commodities. Why would the gold market be any different today?
I believe gold is setting up for huge rewards. I will not be surprised to see a sudden violent move to the upside for gold bullion prices. That’s because there are so many gold shorts out there that if prices rise, these shorts will be forced to cover their positions, pushing prices even higher.