This Could Be Big for Gold Prices
Something just happened in the gold market that suggests gold prices are severely undervalued. Don’t expect to read this in the mainstream financial publications.
Gold buyers are increasing in numbers.
You see, in 2013, when the precious metal’s prices were plummeting (for all the wrong reasons as I see it), the mainstream media told investors that buyers would be running from gold. Big investment companies said gold prices would fall further. They were all wrong.
The data proves them wrong.
Do you remember the biggest reason why big investment houses called for gold prices to drop significantly? They were concerned about gold withdrawals from exchange-traded funds (ETFs) and other similar products. Investors were selling these instruments, and gold holdings of these instruments were declining.
These investment instruments reported gold withdrawals of 183.6 tonnes in 2014, and withdrawals of 128.3 tonnes in 2015. That’s 311.9 tonnes of gold.
The numbers are now showing us a 360-degree turn, though. In the first quarter of 2016, ETFs and other similar products witnessed inflows of 363.7 tonnes! Yes, this happened over just one quarter. More gold was bought by ETFs in one quarter than was sold over the last two years. (Source: “Gold Demand Trends Q1 2016,” World Gold Council, May 12, 2016.)
This is impressive and something that shouldn’t be ignored.
Those regular gold buyers that I have been tracking for a while remained in the market in a big way as well.
Central banks purchased 109.4 tonnes of gold bullion. The first quarter of 2016 marked the 21st consecutive quarter when central banks purchased gold for their reserves. Looking at this, it continues to become more evident that they want more gold. Their actions are screaming louder than their words.
Demand for gold out of India and China remains very resilient as well. In the first quarter, 116.5 tonnes of gold was consumed in India. In China, this figure was 241.3 tonnes.
Long-Term Gold Price Outlook: Bullish
I have been arguing one simple thing in these pages: in the gold market, we have a demand and supply issue.
Knowing this, over the past few years, due to low gold prices, a significant amount of damage has occurred. Mining companies have pulled back on their exploration and capital expenditure. This means they have essentially reduced investments on future gold production.
Now, with demand increasing, we could see discrepancies—a lot of buyers and not enough gold.
This phenomenon could be great for those who are bullish on gold and it could result in gold prices rocketing in a very short time. We have seen a minor episode of it already; gold prices are up 20% year-to-date.
To me, it will not be shocking if we see a much faster rise in gold prices going forward.
Where could gold prices end in the next couple of years? If the conditions remain persistent, it will not be shocking to see gold at $2,000 an ounce. Obviously, time will tell.
With all this in mind, I am keeping a close eye on gold mining stocks. If gold prices go to $2,000 from their current levels, a few mining companies could easily double, or triple, investors’ money.