By Michael Lombardi, MBA • Wednesday, May 20, 2015
The basic factors that determine the price of an item, demand and supply, continue to suggest gold bullion is setting up to surprise investors on the upside. In fact, I believe current gold prices have a “for-sale” sign on them.
Gold Bullion Buyers Continue to Buy
In these pages, I have been paying attention to three sources of demand in analyzing future gold prices, those sources being India, China, and central banks.
In the first quarter of 2015, central banks purchased 119.4 tonnes of the yellow metal. They have been buying gold for 17 consecutive quarters! (Source: World Gold Council, May 14, 2015.)
Just a few years back, central banks were net sellers of the precious metal. Their buying tells me their perspective on gold has changed. With this, I expect them to remain major players in the gold market for the remainder of 2015 and well into 2016.
India and China continue to be big buyers of gold, too.
In the first quarter of 2015, jewelry demand from India was 150.8 tonnes—an increase of 22% from the same period a year ago, when it was 123.5 tonnes. Expect this number to increase further. Last year, the Indian government still had some restrictions in place on gold imports, which curbed consumption, and those restrictions have now been lifted.
“While the mainstream may not think so, I believe gold is presenting investors with a solid opportunity.”
Demand for gold for jewelry in China was 213.2 tonnes in the first quarter of 2015, a small decline of nine percent from the country’s demand for gold for use in jewelry in the first quarter of 2014.
India, China, and central banks combined bought 483.4 tonnes of the yellow metal in the first quarter of 2015 alone.
Supply Side Crashing; Production Very Questionable
While demand for gold is rising, the supply of world gold is contracting.
In 2014, U.S. gold mine production amounted to 212,000 kilograms (kg). In 2013, gold mines in the U.S. produced 230,000 kg. This represents a decline of eight percent. (Source: U.S. Geological Survey, last accessed May 14, 2015.)
We now have January 2015 production statistics and the supply data remains on the negative side. In January of 2015, U.S. mines produced 17,400 kg of gold, down two percent from the 17,800 kg they produced in January of 2014. (Source: U.S. Geological Survey, last accessed May 14, 2015.)
Demand from India, China, and central banks in the first quarter of this year was nine times the amount of gold U.S. miners produce in a quarter!
The U.S. is one of the top four gold producers in the world. If you look at the data for other major gold producing regions, they are showing similar results; gold production is contracting.
Gold: The Next Big Trade?
While the mainstream may not think so, I believe gold is presenting investors with a solid opportunity. Yes, the supply/demand imbalance means higher prices ahead. But with the global economy slowing here in 2015, central banks may have to accelerate those paper printing presses. And when that happens, gold prices usually rise.
In investing, patience pays. Gold is presenting investors with one of those patient buy-low-and-wait plays. And I see senior gold mining companies as the best way to profit as the true value of gold becomes obvious to the market again.