Three Big Reasons Why Gold Prices Could Be Setting Up to Soar
Gold prices could be setting up to surprise investors in a big way. Those ignoring the precious metal could be making a very big mistake. $2,000/ounce gold is possible much sooner than many anticipate.
What could drive the price of gold to $2,000 an ounce? Understand that the fundamentals of the gold markets are turning in favor of those who are bullish.
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Investors need to watch three factors, especially: 1) demand for gold continues to soar; 2) geopolitical uncertainty remains in abundance; and 3) the supply side may not be able to provide enough gold, going forward.
Soaring Demand For Gold: India Quietly Buying Huge Sums
With gold prices well below their 2011 highs, one would assume that buyers are not as motivated to buy the metal. If you subscribe to this thinking, you could be very wrong. Buyers remain in the market. They are now buying like we haven’t seen in a while.
Take India, for example. Over the past few months, it seems like Indian consumers just want more gold. After the demonetization—a move by the Indian government that made the most-used currency notes useless—there were fears that gold buyers would diminish.
This didn’t happen.
Consider this: in February, $3.48 billion worth of gold was imported into India. In March, gold imports soared to $4.17 billion (this is not a misprint). In April, this amount was $3.85 billion. (Sources: “Quick Estimates For Selected Major Commodities For February 2017,” “Quick Estimates For Selected Major Commodities For March 2017,” and “Quick Estimates For Selected Major Commodities For April 2017,” India Ministry of Commerce And Industry, last accessed May 19, 2017.)
Doing the simple math, in three months, $11.5 billion worth of gold was imported into the country. Assuming that gold prices averaged $1,270 an ounce over those three months, 9.05 million ounces of the yellow precious metal was imported into India.
Central Banks Remain Persistent Buyers of the Yellow Shiny Metal
But this isn’t all.
Pay attention to the central banks. It looks as if they are in dire need of gold. The first quarter of 2017 marked the 25th consecutive quarter when central banks were net buyers of the precious metal. (Source: “Gold Demand Trends Q1 2017” World Gold Council, May 4, 2017.)
Mind you, the key is to look at smaller central banks more than the big ones. The central bank of Kazakhstan, for example has been buying gold for 54 consecutive months. At its core, this says they just want the precious metal, no matter the cost.
Gold-Backed Funds Witnessing Inflows Again
It gets better!
In 2013, there was one thing that really did damage to the price of gold: gold-backed funds. There was huge amount of selling by them. Now they are buying again. In the entire year of 2016, 531 tonnes of gold was bought by gold-backed funds. In the first quarter of 2017, the funds amassed another 109 tonnes of gold.(Source: “Gold Demand Trends Full Year 2016,” World Gold Council, February 3, 2017.)
Bringing in some perspective, the total mine production in 2016 was around 3,000 tonnes, according to the U.S. Geological Survey. This means these gold-backed funds purchased about 21% of global gold mine production in just few quarters. (Source: “Gold,” U.S. Geological Survey, last accessed May 19, 2017.)
Political Uncertainty Remains In Abundance
Here’s the thing: gold prices react highly to political uncertainty as well. Geopolitical uncertainty could cause demand to surge even more. And, if you have read the newspapers or watch the news, there’s abundance of uncertainty, not just in the U.S., but around the globe.
President Donald Trump has come under fire for allegedly leaking a confidential intelligence report (and its source) to Russian officials. True or not, as it stands, this is spooking investors and causing them to question whether there could be a sort of impeachment in order. (Source: “Trump revealed intelligence secrets to Russians in Oval Office: officials,” Reuters, May 16, 2017.)
Understand that impeachment would mean political chaos in the U.S., and this could have an impact on the U.S. dollar. So, there could be a rush toward safe-haven assets such as gold.
Don’t just stop here.
Britain will be voting soon. The main motivation for this early election is that the Conservative Party could win a majority, and this would make the Brexit negotiations easier. (Source: “Theresa May calls for general election to secure Brexit mandate,” The Guardian, April 19, 2017.)
Keep in mind, last year, when there was the Brexit vote, there were ripple affects around the world. We saw key stock indices plunge and investors look for safety. It would be unwise to think this couldn’t happen again. If the Conservative Party wins with a majority, it could only add to the uncertainty, and this could be good for those who own gold.
Could There Be Wars?
Adding more to this, just recently, we heard that the U.S. administration could be brokering an arms deal with Saudi Arabia that could be worth $350.0 billion over 10-year period. What’s interesting to note here is that Saudi Arabia is pushing for an “Arab NATO,” but the other superpower in the region (Iran) is not involved in it. Could this have dire consequences? Yes, we could see a war that sends gold prices soaring in an instant. (Source: “Donald Trump to announce $350bn arms deal with Saudi Arabia – one of the largest in history,” Independent, May 18, 2017.)
Moving to the east, the issues only get bigger. There’s North Korea, which continues to test new missiles and threaten the peace in the Korean Peninsula. This has China, Japan, the U.S., and other nations worried. Could there be preemptive strikes against the rogue country? It hasn’t been ruled out yet. This could be positive for the price of gold as well.
Also, don’t forget the South China Sea issue. China is building man-made islands in the South China Sea. This has neighboring countries worried about China’s intentions. The U.S. is active in negotiations, and is trying to monitor the situation. For example, On May 19, it was reported that Chinese jets intercepted U.S. jets in the South China Sea. Know this: one mistake could lead to fireworks in the region. This could be another catalyst that causes a spike in gold prices. (Source: “Chinese jets intercept US aircraft over East China Sea, US says,” BBC News, May 19, 2017.)
Supply Side Crushed
Keeping all this in mind, one question must be asked: if gold demand continues to surge, could the supply side be able to provide enough of the precious metal? Sadly, the supply side is crushed. This is great for those who are bullish on the precious metal. Economics 101: if demand surges and supply doesn’t keep up, you will see a spike in prices.
You see, the decline in the price of gold back in 2013–2015 was a blessing in disguise. It caused severe pain for the mining companies, and they were forced to fight for their survival.
You know what they did? The first thing they could do was cut their exploration spending. This is essentially investment in future spending.
Now we are starting to see its effects. Production at gold companies seems to be diminishing.
Take Goldcorp Inc. (NYSE:GG), for example. In the first quarter of 2017, the company reported gold production of 655,000 ounces. In the same period a year ago, its gold production amounted to 784,000 ounces. If you do the math, this represents a decline of 16.4% year-over-year. (Source: “Goldcorp Reports First Quarter 2017 Results,” Goldcorp Inc., April 26, 2017.)
For the entire year of 2017, the company expects to produce 2.5 million ounces of gold. If this is the final figure, it would be roughly 10% below 2016 figures.
Don’t for a second think that Goldcorp is the only company doing this. This is very evident among other major mining companies as well. When gold prices were going higher, major companies ran to extract the high grades. Now, as they have cut back on exploration, they are left with lower grades and, as a result, production is dwindling.
This may sound like a bold statement but, if the situation in the supply side continues to persist, it could snap the gold market. We could see buyers scrambling to buy gold and, when there’s not much left to buy, we could see a bidding war sending the precious metal price through the roof.
Long-Term Gold Price Outlook Bullish: $2,000 Gold Possible
Dear readers; if there’s one thing to keep in mind, in the early stage of the bull market, moves to the upside are usually slow, and not as big. Then the asset gets known to investors. As more investors jump in to buy, we see an escalation in prices.
Now, with gold, 2016 was the first year since 2012 that the price of gold increased. Know that 2017 so far has been great for gold investors. Gold prices have risen a little over eight percent. If the precious metal is able to sustain its gains, it’s going to show up in investors’ watch lists, even for those who ditched gold in 2013.
Then, all of a sudden, fundamentals could start to matter, and we could even see double-digit percentage gains in the gold price in 2018.
Here’s the thing: if this continues, we could even see the gold price at $2,000 before 2020. With time, we will know more, but gold appears to be a great opportunity, relative to other assets. It’s being ignored for all the wrong reasons.
