Commodity Trade Mantra

Pay Greater Attention to Gold – Here comes a Perfect Storm for Higher Gold Prices

Pay Greater Attention to Gold - Here comes a Perfect Storm for Higher Gold Prices

Here comes a Perfect Storm for Higher Gold Prices

Why Peak Gold Is Making the Perfect Storm for Rising Gold Prices From Birch Gold Group.

Another significant buy signal is emerging for gold.

Experts believe we’re quickly approaching ‘peak gold,’ meaning production could soon hit its permanent ceiling and begin declining – while demand continues to grow.

If the peak gold hypothesis is proven true, then gold prices could likely soon reach record highs. Here’s everything you need to know, and how you can take advantage of this historic event in the gold market…

Running Out of Gold

All natural, nonrenewable resources are alike when it comes to production efficiency. The supply lifecycle of any such resource looks something like this:

1) Discovered – When a resource is found to have economic value, its supply is tapped for the first time.

2) Supply Rush – After the resource is first discovered, its massive reserves are easy to mine and harvest, which results in a supply rush (e.g. the American gold rush).

3) Booms & Busts – As a market forms around a resource after the initial supply rush, production goes through booms and busts. Harvesting the resource in question grows harder with time, but technological advances intervene. Production maintains a steady upward trajectory in the long-term, with many ups and downs in the short-term.

4) Peak Production – Eventually, increased production efficiency from technology isn’t enough to negate the reality of the resource’s dwindling finite supply. Once production reaches this ‘peak,’ it cannot increase any further.

5) Production Decline – After production hits its peak, it steadily falls as the finite resource supply comes closer to being exhausted.

6) Exhaustion – Finally, the resource’s supply is entirely tapped. Production slowly comes to a complete stop.

But what does all this mean for the price of a resource? Well, supply/production is only one half of the equation.

The other half is demand. And that’s where things get especially interesting.

That’s because supply/production of a natural, nonrenewable resource is a zero-sum game. It spikes strongly in the beginning, grows steadily until hitting its peak, and then declines to nothing.

But demand is a totally different story. As supply/production slows down, scarcity grows and demand tends to speed up in response.

Only one thing can happen when supply/production fall while demand rises: Gold prices go through the roof. And that’s exactly what will happen when ‘peak gold’ finally arrives…

When to Expect ‘Peak Gold’ to Hit

How soon should we be looking for peak gold to manifest itself? If you’re thinking along the lines of 5, 10, or 15 years… think again.

According to mining industry experts, peak gold could be just around the corner.

Randall Oliphant, chairman of the World Gold Council, predicts today’s environment of rising demand and stagnating production could be ushering peak gold in right now. In fact, Oliphant believes 2017 will be proven as the year of peak gold within the next 12-24 months.

Bloomberg reports:

The world may have already produced the most gold in a year it ever will, according to the chairman of the World Gold Council.

Production is likely to plateau at best, before slowly declining as demand rises, especially given global political risks and robust purchases by consumers in India and China, Randall Oliphant said in an interview Monday.

Oliphant’s concerns over peak production echoed similar comments at the conference, being held this year in Colorado Springs. David Harquail, chief executive officer of Franco-Nevada Corp., said earlier Monday that the gold industry continues to be in an ex-growth phase where new mining projects are simply replacing older assets that are running out of ore.

How High Could Gold Prices Rise?

If experts are correct in their peak gold predictions, production will likely plateau in the months to come, before beginning to falter and decline. Meanwhile, global demand is on the rise, with no signs of slowing down.

As a result, Oliphant is making a conservative estimate that gold prices will reach at least $1400 in the next year. But from a longer term perspective, prices could climb far higher.

Add to all this the growing volatility in international politics, and the increasing flight to safe-haven assets, and you can clearly see a perfect storm brewing for gold prices.

This could be a prime opportunity for investors who act soon enough. Oliphant concurs, saying, “All this uncertainty seems very fertile ground for people to get into gold.”

Gold Is ‘Worthy Of Greater Attention’

Even though gold prices have dropped well below the $1,300 level, it is still doing well and is in need of more in-depth analysis, says Bloomberg Intelligence’s Mike McGlone.

“With the record-setting stock market barely beating gold, the metal may be worthy of greater attention,” noted the commodity analyst in a report Wednesday.

He pointed out that while both gold prices and the S&P 500 Index are up about 20% since the beginning of the Federal Reserve’s tightening cycle in 2015, most of the news headlines have been focused on stocks rather than the precious metal.

“Despite all of the attention on stocks, gold prices may be looking ahead to a more favorable endgame at a steep discount to historical highs with inflation brewing, a potential dollar peak and the lowest CBOE Volatility Index ever,” McGlone said. “The higher stocks go, the greater the reversion risk, apparently supporting gold prices.”

But, the biggest risk facing gold prices right now is a “sustained dollar recovery,” which is partly to blame for September’s move below the $1,300 level in the first place. The U.S. dollar is estimated to be one of the “primary” drivers directing gold prices for the rest of the year.

As of now, the precious metal is projected to hold support above the $1,250-$1,260 an ounce, which is the “most widely traded range for the past 12 months,” according to McGlone.

As of Thursday afternoon, December Comex gold is trading at $1,273.80, down 0.23% on the day, S&P 500 is at 2,551.53, up 0.54% on the day, and the U.S. dollar index is at 93.95, up 0.47% on the day. – Anna Golubova

Gold-Backed ETF Holdings Climb Again in September on North American Demand

After surging in August, gold continued to flow into ETFs last month, signaling continued strong demand for the yellow metal – specifically in North America.

According to the World Gold Council, gold-backed ETF holdings increased by 22.4 tons in September. This follows on the heels of a 31.4 ton increase in August.

With the price of gold surging in early September, the combined liquidity of gold ETFs rose sharply month-over-month to $1.51 billion per day, an increase of 20% versus the year-to-date average liquidity of $1.26 billion per day.

North American ETFs drove the increase with other regions seeing slight outflows. After taking in 27.8 tons of gold through funds listed in the region in August, North America upped her game in September with investors adding 35.0 tons. This more than compensated for European fund outflows of 12.0 tons. Asian funds also saw slight outflows of 1.7 tons. ETFs in other regions saw slight inflows.

Analysts say a weakening euro against the dollar last month helped drive the outflow in European markets. Nevertheless, European funds continue to lead inflows on the year. The European market accounts for close to 56% of all 2017 ETF gold inflows at 120 tons.

Global gold-backed ETFs collectively hold 2,357 tons of gold. Funds have added 191.9 tons of gold on the year, equivalent to $7.5 billion. This represents an increase of 7.7% of global AUM from December 2016.

Inflows of gold into ETFs are significant in their effect on the world gold market, pushing overall demand higher.

ETFs are backed by physical gold held by the issuer, and are traded on the market like stocks. They allow investors to play gold without having to buy full ounces of gold at spot price. Since their purchase is just a number in a computer, they can trade their investment into another stock or cash pretty much whenever they want, even multiple times in the same day. Many speculative investors appreciate this liquidity.

There are good reasons to invest in ETFs, but they aren’t a substitute for owning physical metal. In an overall investment strategy, SchiffGold recommends buying gold bullion first.

When considering gold-backed ETFs, you should always keep in mind that you don’t actually own the gold. Buying the most common ETFs does not entitle you to any actual amount of the precious metal. – Peter Schiff

 

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