A Rational Look At Gold

The fundamentals that drive gold prices higher are in full force and improving. Central banks are buying more of the precious metal (to add to their reserves), while countries that are known to be big consumers of gold bullion post increased demand.

According to the India Bullion & Jewellers’ Association, India’s monthly gold bullion imports are expected to rise by as much as 50% in the coming few months—in the range of 70 tonnes to 75 tonnes per month compared to an average of 50 tonnes to 60 tonnes now. (Source: Reuters, September 18, 2014.) This is mainly due to the festival/wedding season fast approaching in India.

If India continues to import 70 tonnes of gold bullion each month, then the total imports just to India will be 31% of all world gold mine production (based on 2,700 tons in annual mine production).

India used to be the biggest importer of gold bullion until China took over as the biggest importer of the precious metal two years ago. And demand for gold in China remains strong as well.

But while demand for the precious metal is rising, production is declining.

In the first five months of 2014, U.S. mine production was 85,400 kilograms (kg), down four percent from the 89,200 kg of gold bullion produced in the first five months of 2013. (Source: U.S. Geological Survey, last accessed September 22, 2014.) As I have written before, lower gold prices have caused gold companies to close mines where production made sense at $1,600 an ounce gold, but not at $1,200 an ounce gold.

While I won’t delve into all the talk on Internet financial sites about gold prices being manipulated, I continue to stress the fundamental demand/supply situation for the precious metal favors higher prices.

I view the decline in gold bullion prices as a buying opportunity. Over the past few weeks, it may seem that gold bullion prices have gotten weaker, but that is only if you look at gold bullion in U.S. dollars. Look at gold bullion in euros or Canadian dollars (or almost any other currency for that matter), and you will quickly see gold prices are much higher outside the U.S. than in the U.S. The greenback has experienced a strong rally over the past two months as the Fed’s talk of higher interest rates (and the eurozone’s lowering of them) has pushed the U.S. dollar higher.

As far as I’m concerned, shares of quality gold mining companies are selling at bargain prices. They offer a great opportunity for contrarian, buy-low investors. 

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Courtesy of Michael Lombardi, MBA

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