In Part 2 of this series, we look at four other bullish reasons for gold’s return to the top of the metals market…
In my last article, we looked at the broader economic and political catalysts that could revive the sentiment for gold.
Investors should note that despite the short-term volatility that we continue to face, the long-term fundamentals continue to be supportive of higher prices.
Even as the metal has fallen out of favor, some are seeing it as a chance to acquire bullion on the cheap – especially in Asia. This inherently means that people still value the metal very much.
For anyone that’s keen to invest in gold, it should be more to do about the long-term prospects of the yellow metal and how it can help shield investors from such headwinds as inflation and times of uncertainty.
Therefore, the gold industry itself is also doing its part to bring the metal back to life with investors.
Here are a few more reasons why the yellow metal should fare better beginning next year…
1) Gold Is Oversold
According to some analysts, gold’s plunge over the last two years has been the result of gold products being liquidated in favor of a strong stock market and spurring a momentum shift.
In fact, gold hasn’t been this oversold since 1985, according to one report.
George Gero, a strategist with RBC Capital Markets further remarked that “Some may have also started looking at a softer economy as anti-inflationary, also taking away some of the impetus to hold gold. Stronger Treasury yields also hurt the precious metal.”
What investors should keep in mind is that anytime something is overbought or oversold, a cooling-off period in the opposite direction typically follows not long after.
In the case of gold, an oversold environment is helping to make way for speculators looking to buy back in at fire sale prices.
2) Price Matching Production Costs
At the same time that bullion prices are falling, the cost of getting the gold out of the ground is becoming more expensive.
Some developers are getting squeezed because the cost of production is actually on par with how much they can sell for.
With fewer large gold deposits to be found each year, miners need to dig deeper and wider in order to find their treasures. However, without a supportive market, there’s no incentive to keep burning through capital.
Factoring the all-in costs of gold production, a number of mining companies are simply finding it unprofitable in such a low price environment.
If prices continue to fall, more companies can be expected to throw in the towel and cease production. The silver lining of course is that, by further halting production, supplies will soon begin to diminish.
When that happens, gold prices will eventually find a bottom and should go back up.
3) Gold Market Is Tiny
While the gold market often gives the perception that it is an incredibly massive asset class, it is in fact quite miniscule compared with others.
You may be familiar with the visual representation of all the gold the world has ever dug up from the ground.
If the 166,500 tonnes we’ve mined to date were to fit in a single box, its sides would each have a length of 20.5m (67 ft) and can fit comfortably within an Olympic-size pool.
Even in today’s depressed gold market, that solid cube of gold would still be worth around $7 trillion. But that pales in comparison to the $50 trillion stock market or the $100 trillion bond market.
Put another way, all the gold EVER mined in HISTORY is only worth 14% of the stock market today or 7% of today’s bond market.
What I’m getting at here is that with such a small market footprint, even a slight increase in the number of gold investors could have major implications on the yellow metal’s price.
4) Demand Rises As Supply Falls
Global gold demand surged 53% in Q2 while supplies fell 6%, according to the World Gold Council (WGC).
Despite the rise in demand, gold prices fell further over the summer.
The WGC noted that the reason why gold prices continued to trend down was due to speculators selling paper gold and gold ETFs rather than physical bullion.
If you recall, April 15th saw a one day sale of $20 billion worth of paper gold on the COMEX, which was triggered by a single, $6 billion sell order by a large investment bank. Panic quickly set in, which led to a further $15 billion going down the drain in just 35 minutes.
Physical gold, on the other hand, did the complete opposite. In Q2 alone, India and China combined for 586 tonnes of gold bullion purchased.
With an increasing amount of available gold being taken off the market, there’s no reason to believe that gold prices will stay depressed for much longer.
And as far as declining supplies are concerned, a slowdown in mining output isn’t the only reason that inventories are falling.
There’s been a sharp drop in recycling activity for gold, where roughly half of all gold mined has been made into jewelry and the rest are held by central banks or private investors, with a small percentage allocated for technological uses.
In 2012, if just 3 percent of existing gold supplies were recycled, it could have satisfied 100% of global demand.
However, the reality is, investors and banks are hoarding gold and will continue to do so at current price levels.
Now could gold continue to fall? Absolutely.
But given that prices are at unusual lows even in the face of all the bullish indicators that I discussed, this could be an incredible opportunity to make a move before the market finally decides to wake up.