Gold Bullion: The Victim of Market Irrationality

Keeping up with the subject of irrationality, it’s not just key stock indices working in reverse to the fundamentals; I believe gold bullion prices are facing the same issue. They are moving in the wrong direction in spite of fundamentals suggesting otherwise.

India, the biggest gold bullion-consuming country, is experiencing robust gold demand in spite of the government and central bank working together to curb it. According to traders in India, gold bullion premiums have reached a record high of $100.00 an ounce—about eight percent above London prices. Why? There’s a shortage in the supply of gold bullion to meet the demand in India. (Source: Reuters, October 15, 2013.) As per the World Gold Council’s estimates, the demand for gold bullion in India will be about 1,000 tonnes for the year.

Consumer demand for gold bullion elsewhere is significantly higher as well. And one of the gold bullion buyers I follow closely, central banks, are active, too.

According to the International Monetary Fund, in August, Russia, Turkey, and six other central banks across the global economy increased their gold bullion reserves. The Russian central bank purchased the greatest amount since December of 2012, bringing its gold bullion reserves to 1,015.52 tonnes. Turkey’s central bank bought 23.34 tonnes of the precious metal, and its total gold bullion holdings stood at 487.35 tonnes in August. (Source: Reuters, September 25, 2013.)

Looking at all this, I am more bullish than ever on gold bullion, because I’m focused on the long-term prospects of the precious metal.

In spite of the weakness in gold bullion prices we witnessed in early summer this year, the long-term trend in gold bullion prices is still intact. You can see it for yourself in the chart below.

Gold-Spot Price Chart

Chart courtesy of

I believe opportunities in the form of depressed prices for well-managed senior and junior mining companies are knocking on the doors of investors. No one likes them right now because they have shed a significant amount of value. There’s blood on the streets for gold, it seems, and that’s why the contrarian investor in me likes gold-related investments so much.

What He Said:

“What group of stocks are next to fall in light of the softening U.S. housing market? The stocks of companies that sell retail products to the American consumer, I believe, are next on the hit list. Many retail stocks are already reporting soft sales. In my opinion, they haven’t seen anything yet in respect to weaker sales.” Michael Lombardi in Profit Confidential, August 30, 2006. According to the Dow Jones Retail Index, retail stocks fell 42% from the fall of 2006 through March 2009.