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Gold: The News is Getting so Bad it’s Getting Good!
Gold opened last Friday morning in New York at a 5-year low of $1130 per ounce. Gold hasn’t closed below $1130 since April 1, 2010. It’s small consolation to U.S.-based gold investors that the yellow metal is still rising in terms of the euro. Due to the strong dollar, exacerbated by the ongoing crisis in Greece, the price of gold in euros is up 7.2% so far in 2015, vs. a 5.5% decline in dollar terms. Gold is also up so far in 2015 in terms of most other European currencies, nearly all of the Latin American currencies, and in Australian, Canadian and New Zealand dollar terms.
Going back a full year, gold is up nearly 8% in euro terms vs. a 13% decline in U.S. dollar terms. Gold investors in Europe, Japan and Canada have seen gold prices rise during the last 12 months:
Gold’s fall to $1130 last week is almost entirely due to last week’s surge in the U.S. dollar. First, the Greek crisis drove many currency investors to flee the euro to the safe oasis of the U.S. dollar. Then, Fed chair Janet Yellen testified before Congress in words which raised expectations of an interest rate hike later this year rather than in 2016. Also, positive economic indicators – such as a report that jobless claims fell sharply last week – hurt gold too, since positive economic indicators tend to raise expectations of an interest rate hike by the Fed in September or October rather than December, and rising U.S. interest rates should drive more investors into the dollar.
A New Look at Gold’s Supply/Demand Fundamentals
Physical demand is increasing. Last month, there was a 253% month-over-month rise in demand for American Gold Eagle coins. Specifically, 21,500 ounces of Gold Eagles were sold by the U.S. Mint in May vs. 76,000 in June. During the first half of July, the Mint sold 71,000 ounces of Gold Eagles, so July is certain to eclipse June sales in a summer of skyrocketing coin demand.
The Mint ran out of American Silver Eagles for the second time in the last eight months. The U.S. Mint’s press release in early July said, “The significant increase in demand for American Eagle Silver Bullion Coins depleted our current inventories.” The July silver sellout comes just five weeks after the Mint suspended an earlier allocation policy that rationed the sales of Eagles.
American Silver Eagle sales in June surged to over 4.8 million coins, more than doubling May and surpassing June 2014 sales by 80%. In the first week of July, 2.6 million one-ounce silver coins sold, putting July on a 10-million+ sales path vs. just two million in July of 2014, so there is reasonably strong demand for physical gold and silver, but the sentiment of the paper traders (in gold ETFs and futures contracts) remains the “tail that wags the dog” in the gold market.
Frank Holmes, the CEO and Chief Investment Officer of U.S. Global Investors, a fund family which specializes in resource markets, said last week that the largest gold futures investors (including hedge funds) have cut their bullish positions by 55%! “That’s more than 14 million ounces below levels hit in January this year, when gold reached its 2015 peak. The net long positioning is also the lowest since October 2006 when gold was worth less than $600 an ounce.”
The long-term cure for low gold prices is … low gold prices. When miners can’t make money digging up gold – and most mines can’t make any profits at less than $1200 per ounce – then the mines close up and less new supply comes on market. With a decline in newly-mined gold, plus flat or rising demand, the gold price will recover, which means that low prices can be good news.
Moe Zulfiqar, a research analyst at Lombardi Financial and editor of Profit Confidential says that mining conditions in the major gold-producing regions are dismal, saying, in summary, that “the producers aren’t producing.” He says that between 2013 and 2014, gold production from U.S. mines declined almost 8%, from 230,000 kilograms in 2014 to just 212,000 kilograms in 2014. He also notes that 2015 production “will be much lower than the 2014 figures.” In addition, South African gold production is running 4% to 9% lower every month in 2015 through May.
Zulfiqar says “Economics 101 say that this is a perfect recipe for higher prices ahead.” How high? He concludes: “I am still not ruling out gold going to $2,000 in the next couple of years.”
The big institutions are short-term trend-followers. There is no doubt that the short-term trend for gold is down, but commodities move in massive waves determined by the fundamentals of lower supply (closing mines) and rising physical demand, based on global monetary stimulus (debasing currencies in the long run) and a world filled with crises and dangers, for which gold remains the ultimate store of value in hard times, and a portfolio balancer in the best of times.
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