What’s Up Three Times More Than Stocks So Far This Year?

Where Gold Will Trade in the Second Half of 2014Investors who bought gold bullion in early 2014 know it was a great decision. The precious metal has increased 10.2% in price between January and June, while the Dow Jones Industrial Average climbed by just three percent.

So far, so good—and as expected.

Going forward, it will not be surprising to me to see the precious metal outperform the stock market in the second half of the year as well.

Why will this happen?

As demand for gold bullion continues to rise and as supply declines (the exact situation we have today), gold bullion prices will have no option but to rise.

In the table below, I have plotted the production of gold bullion at U.S. mines for the first three months of the year compared to the first three months of 2013. Production at U.S. gold mines is declining month after month.

Production at U.S. Gold Mines, 1Q2013 vs. 1Q2014

Month 2013 Output (in Kg) 2014 Output (in Kg) % Change Year-over-Year
January 18600 18,500 -0.54%
February 17,300 17,100 -1.16%
March 18,700 18,200 -2.67%
Total 54,600 53,800 -1.47%

Data source: U.S. Geological Survey web site, last accessed July 1, 2014

While the chart above only details U.S. gold mining production, gold bullion production across the global economy is declining. Last year, as the yellow metal witnessed a massive sell-off in price, gold mining companies cut back on their exploration and capital expenditures budgets. This is now catching up and derailing production. And I see the situation for supply only getting worse.

Meanwhile, demand for gold bullion keeps rising.

We continue to see significant demand for the precious metal—and not just out of India or China. Consider the Royal Canadian Mint. On May 1of this year, it reported that for the year 2013, its revenues were the highest in the firm’s history. Sales of gold Maple Leaf coins at the mint increased by 47.7% from the previous year—and exceeded the 2011 record. The mint sold 1.14 million ounces of gold bullion last year. (Source: Royal Canadian Mint, May 1, 2014.)

What’s even more interesting is that central banks with a significant amount of gold bullion refuse to sell as others around the world are buying. The Central Bank Gold Agreement (CBGA) among European central banks calls for a limit of 400 tonnes of gold bullion to be sold each year for central banks to raise cash.

As of June 2, 2014, these central banks have only sold a combined 68.7 tonnes of gold bullion since 2010. (Source: World Gold Council, June 2, 2014.)

Those looking to profit from the precious metal haven’t missed the boat yet. The junior gold mining sector is still way oversold; it presents a great opportunity for bargain-hunting investors.