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Gold’s “Stealth Bull Market” in the Second Half of 2013
After 12 straight years of rising prices – from 2001 through 2012 – gold will likely close 2013 with its first declining year of the new Millennium. Nearly all of this decline came in the second quarter of 2013. But since the middle of the year, gold has staged what might be called a “stealth” bull market.
Here is the scorecard between the precious metals and stocks from June 30 to October 31, 2013
Looking back a little further, in the last five years – from the financial cataclysm of mid-September, 2008 to the same dates in 2013 – Deutsche Bank found that silver and gold were the best performing asset class among 39 major stock, bond and commodity indexes. Greek stocks came in last, but silver led the pack:
Much has been made of the raging bull market in stocks, which began in March 2009. Since 2011, the press has compared red hot stocks to a collapse of the gold “bubble.” But through all the ups and downs of the last five years, the best performers have been silver and gold, not stocks or bonds.
Looking forward, the best two month period of the year is about to begin. A study by Bloomberg of gold price data from 2002 to 2011 said that gold’s best three months come in the final one-third of the year.
November is the best month of the year for gold, September comes next and December comes in at #3:
Bloomberg also found that gold gained more in the last four months of the year (14.6%) than in the first eight months (8.6%). Most of this seasonal demand is based on a series of festival seasons in a variety of cultures – Ramadan in the Muslim world, the Indian wedding season and Christmas in the west. Then, in February, we celebrate Valentine’s Day and the Chinese New Year. For all these holidays, gold jewelry is a common gift, so jewelry fabricators tend to order tons of gold to meet rising demand late in the year.
Why is gold recovering? The fundamentals of supply and demand govern the price of most investments, including gold. Here is a rundown of the basic supply and demand picture for gold at the close of 2013.
The Supply Side: New Gold Mine Production is “Frozen” at 2,500 Tons Per Year
Annual gold mine production peaked in the year 2001 at 2,600 tons. That was a year in which gold prices averaged a paltry $271 per ounce. Despite rising prices since then, the average annual gold mine output in the next decade was just 2,450 tons – never approaching the 2001 record. Looking forward, it will be almost impossible to increase the volume of newly-mined gold due to the rising costs and risks of gold exploration and extraction in some of the world’s most remote locations, where most of the gold is found.
The largest gold mines in the world are mostly found in very hard-to-reach places with undeveloped roads and weak infrastructure. Unfortunately, gold is mostly found in unstable political regimes. According to www.mining.com, the world’s 10 biggest gold mines, in order, are found in (1) Indonesia, (2) South Africa, (3) New Guinea, (4) Uzbekistan, (5) Russia, (6) Mongolia, (7) Dominican Republic, (8) South Africa, (9) Australia and (10) Ghana. On that list, only Australia can be considered a relatively “safe” nation, in terms of political stability, good labor relations, infrastructure, low crime and free markets.
The quality of gold ore is also decreasing sharply. In 1998, when gold averaged $298 per ounce, the average gold grade of the world’s top 10 mining companies (which dominate the industry) was 4.6 grams per ton of ore. Today, the average grade is only 1.1 grams per ton. (Note: There are 31.1 grams in a Troy ounce.) In the last 15 years, 40% of the new gold mine discoveries have contained an average grade of just 0.7 grams per ton. As a result, many gold mining companies are losing money on these investments.
In addition, indigenous populations are resisting new mining efforts. In a typical grass roots resistance movement, Mining.com recently reported (in October 2013) that “about 2,000 people, including environmentalists and horse-riding farmers, rallied Friday in downtown Montevideo, Uruguay’s capital, to protest against three large scale mining-related projects expected to begin before year end.”
All of these new developments tend to limit the new supplies of gold coming to market. Even after a new gold deposit is discovered, it takes years (often a decade or more) to bring that gold into production. During that time, any number of political hurdles can intervene. It’s very difficult to generate a profit in gold mining in the best of times, but the decline in gold prices this year has caused many mines to close.
We’ve also seen mining strikes, protests against mining pollution, political theft of private property in lands controlled by autocratic dictators, and bad judgment in the mining industry. The biggest cause of low supply growth, however, is the low gold price. Low gold prices cannot justify new mine exploration.
A new development in the supply picture has been the sharp decline in warehoused gold at the New York Commodity Exchange (COMEX). Due to massive selling in early 2013, the COMEX hoard has fallen from three million ounces at the end of 2012 to just 672,000 ounces in September, a 77.6% decline. This means that any “panic buying” scenario could cause the COMEX to run short of available gold supplies.
Gold Demand: Asia (mostly China) is on Pace to Absorb 80% of New Supplies
China does not report its central bank gold purchases, but we can get a good idea of Chinese gold demand from their monthly imports via Hong Kong, China’s main port of entry for gold, where gold imports have recently surpassed 100 tons a month. In August of 2013 (the latest totals available as we go to press), China imported 131.4 tons of gold, up slightly from July’s totals of 129.2 tons and a quantum leap from the 112 tons imported in June. The timing is important: After gold hit its annual low of $1192 on June 28, Chinese dealers upped their orders. Unlike Americans, Asian investors tend to buy gold on price dips!
For the last six years, China has been the #1 producer of new gold, mining about 400 tons per year, but China also leads the world in gold imports. Gold consumption in the first half of the year rose 54% over the same six months in 2012. For all of 2012, China consumed 832 tons of gold, so a 54% increase for the 2013 implies 1,281 tons of gold demand this year – or about 50% of new gold mine production.
China’s imports have now topped 100 tons a month for four straight months – May, June, July and August. It’s important to note that these are the four months AFTER gold’s sharpest (mid-April) price collapse. Chinese demand was much lower in the first four months, but China’s net gold imports through Hong Kong total 745 tons for the first eight months of 2013. If you add in the 600 tons of demand in India, that comes to 1345 tons in eight months, an annual rate of more than 2000 tons for China and India alone. That means India and China represent about 80% of projected new gold mine production in 2013.
China has about 100,000 gold jewelry stores and 20 banks that sell gold ingots or gold-linked accounts. China produces about 60% of the world’s gold jewelry. Over half of that demand is for weddings. With 2.6 billion people living in the combined nations of China and India, there are a lot of weddings! About 13 million couples are married, per year, in each nation, and gold figures in some way in most weddings.
In addition, the world’s central banks are still buying gold, although not at record rates. In 2012, central banks bought the most gold in nearly 50 years, 535 tons. This year, they are on pace to buy about 350 tons. In general, the “emerging” (poor) nations are buying gold, while rich nations are standing pat, but at least the rich banks are not selling gold to help balance their debt-ridden budgets. In particular, the U.S. has resisted calls to sell its gold hoard, and the European central banks sold only five tons this year, the lowest sales since 1999 (and those five tons of gold sales were for the production of coins, in Germany).
Conclusion: Cautious Optimism in Gold Justifies a Gradual Gold Accumulation Plan
In any market – including the precious metals – most people watch the daily price swings and they want to know “why did gold (or stocks) go down (or up) today”? The correct answer is usually “emotion.” Traders act first, then they think. They shoot, then aim. They react to new headlines before they read the details of the story. Anyone looking at today’s low price of gold would think that the world was all of a sudden a very safe place: The central banks of the world stopped printing fiat currencies; all budgets are balanced; gold mines are pouring out new supplies from massive new discoveries; and war is obsolete.
Traders in Asia have a different view. They buy gold as a preferred form of savings, irrespective of their personal fears of global unrest, inflation or deflation. Gold is wearable wealth in India and a sign of rising affluence in China and other Asian lands which have been mired in unspeakable poverty for so long.
We agree with Zack’s, a leading investment firm, in their cautious common-sense conclusion in a recent report on gold and the mining sector: “Demand for gold will undoubtedly continue to rise in the long term, thanks to the rising middle class in India, China and other emerging markets. The Euro-zone debt crisis will also be an important driver for gold demand. Furthermore, demand for gold bullion and coins are currently at unprecedented levels. It may, however, take months for this new demand to feed into prices… At current levels, one should invest in gold as a long-term investment, which will grow in value and add diversification to a portfolio. For quick returns, it is advisable to focus on other assets.”
Will gold soar any time soon? Probably not. But that’s good. We want the gold price to stay low enough for long enough that we can accumulate a significant holding for portfolio balance and asset protection.