By Profit Confidential
One basic rule of economics states that when the demand increases for an item and supply for that same item declines, its price usually increases. Let’s apply this to the gold market today.
Demand for gold bullion is exuberant. In spite of the decline in the price of the precious metal, we are seeing the continual buying of gold, not only by consumers, but also by central banks—the most conservative of investors.
According to the Word Gold Council (WGC), in the second quarter, the two biggest gold-consuming countries, India and China, continued to show robust demand. In China, the demand for the precious metal in the second quarter was 276 tonnes—up 87% from the second quarter of 2012. (Source: World Gold Council, August 15, 2013.)
In India, in spite of the country’s government being bent on curbing demand for gold bullion, demand for the precious metal remains strong. Demand for gold bullion bars and gold coin investments in India increased by 116% in the second quarter and jewelry demand increased by 51% compared to the second quarter of 2012. (Source: Ibid.)
Also in the second quarter, central banks added 71 tonnes of gold bullion to their reserves, resulting in ten consecutive quarters that central banks have been net buyers of gold bullion.
Meanwhile, the supply side of the gold bullion equation has decreased—setting the stage for higher prices for the precious metal. In the second quarter of this year, total supply of gold bullion was down six percent from the same period a year ago. With gold prices having come down, gold miners could be cutting back on production, pushing the supply of the precious metal down further.
So where will the prices of both gold bullion and gold stocks go next?
My “take” on the situation with gold bullion and gold stocks has been the same since gold prices contracted this spring. After a 10-plus-year bull market in gold, in the April to June 2013 period, we simply experienced a price correction in an ongoing bull market in the precious metal. Corrections are healthy for any bull market; they work to drive away speculators, and they offer long-term investors another opportunity to get in at low prices.
I don’t think we will see a “march” right back to $1,900-an-ounce gold, but we will eventually break right through that level. We may even experience minor corrections on the way back up. But the bull market in gold bullion, as far as I’m concerned, is still intact. As for gold stocks, as I’ve been saying all year, they are severely undervalued.
What He Said:
“Home-building in the U.S. will enter a quasi depression state in 2008 and the construction industry will make 2008 a record year for pink slips. I predict a major homebuilder will go bankrupt in 2008.” Michael Lombardi in Profit Confidential, January 10, 2008. Just as predicted, WCI Communities, the largest U.S. luxury homebuilder, filed for Chapter 11 protection on August 4, 2008.
Article by profitconfidential.com
