There seems to be no shortage of conflicting analysis on the future of the gold market. Some analysts believe gold will head lower towards $1,100, while others see the yellow metal moving higher towards the $1,500 level. In all actuality, these short-term forecasts are meaningless as they fail to understand the coming big change in gold investing.
Up until the past 40+ years, gold has been used as money by the majority of advanced societies. After Nixon dropped the convertibility of the dollar for gold in August of 1971, gold began trading in the futures market at the NYMEX in 1975. Since then, the price of gold has been valued relative to its fabrication and investment supply and demand forces.
Philip Klapwijk, former chairman of GFMS gave a presentation titled “Is the Gold Bull Market Over?” at the LBMA/LPPM Precious Metal Conference in October. During his presentation he provided the following chart:
(original chart includes my annotations)
Klapwijk is implying that even though the gold surplus is forecasted to decline in 2013 compared to the past several years, it is still very large historically. GFMS figures the surplus by subtracting fabrication (minus coins) from the total of mine supply and gold scrap.
As you can see from the chart, the supposed gold surplus was much smaller during the 2003-2005 time period. At this point in time, gold traded from an average of $363 in 2003 to $445 in 2005.
Interestingly, as the gold surplus increased, so did the price of gold. From 2008 the gold surplus increased from approximately 1,000 tonnes to average around 2,000 tonnes between 2009-2012.
Here are the average annual prices of gold (Kitco):
During the 2008-2012 time period when the supposed gold surplus doubled, so did the price of gold… not quite, but it did rise from $872 in 2008 to $1,669 in 2012.
There are several points worth discussing here. First, if there wasn’t such a large gold surplus, there may not have been enough available supply to meet demand. This can be clearly seen in the next chart from Klapwijk’s presentation:
Investment demand doubled from less than 1,000 tonnes in 2008 to nearly 2,000 tonnes in 2009. GFMS states investment demand as the sum of implied net investment, physical bar and all coins & medals.
Second, it has been investment demand that has been driving force in pushing the price of gold higher. If we take out implied net investment and look at just physical bar and coin demand, this is the result:
We can clearly see that as physical bar & coin demand increased substantially, so did the price of gold. In 2011, gold hit a high of nearly $1,900 in Sept. 2011. In the following two years as the price of gold moved lower, so did the physical investment demand.
However, with the huge take-down in the price of gold in April & June of this year, physical investment demand increased the most in history. In just the first half of 2013, physical bar and coin demand hit a record of 914 tonnes.
Third, fabrication demand has had the least impact on the price of gold. Why is this so? If we look at the first chart again, the so-called gold surplus fell to its lowest level in 2005 while the price of gold only increased from $410 (2004) to $445 (2005).
The most important event most analysts fail to recognize is the “BIG CHANGE” coming in gold investing in the future. Today, most traders and investors look at gold according to its supply and demand forces. Very few are prepared for the time when gold is revalued higher as a monetary metal — and that time if fast approaching.
Furthermore, the majority of investors have their funds allocated in paper assets that provide a yield. Everyone is after yield. I would like to remind the investor who places his or her faith in digits in an account that promise a yield… this is based on a healthy and growing economy.
I have provided information in prior articles showing that a growing economy is only possible due to a growing energy supply. Unfortunately, the world has already hit a peak in cheap oil, but will soon hit a peak in total liquid production. When this occurs, the global economy only has one way to go… and that is to contract.
This will have serious ramifications on paper assets that promise a yield. I believe as the world peaks in oil production and falls down the slope of depletion, investors will be forced to change their investment strategy from obtaining a “YIELD” to acquring “PHYSICAL ASSET SAVINGS.”
Those who are smart enough to realize this before the majority of investors will switch out of paper assets and move into physical assets such as gold before the available supply dries up and blows away.
I will be discussing this coming change to “PHYSICAL ASSET SAVINGS” in more detail in following articles.
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