Gold Keeps Rising: Time to Drop Your Bearish View on the Yellow Metal?
I will be the first one to agree that it’s very difficult, if not impossible, to price gold bullion. Unlike stocks or bonds, it doesn’t provide investors with income or necessarily have an interest rate. Sadly, just for this reason, the yellow metal gets a lot of scrutiny. We saw what happened to gold prices not too long ago: they were slammed on the notion that the precious metal doesn’t have any use in a portfolio anymore, and it seemed as if no one knew where the precious metal would find support.
Now, a couple of months after the sell-off, the price of gold bullion is up about 20% from its lows around the $1,175 area.
Looking at all this, one must wonder: what’s really next for gold bullion? Is the bull market that began in 2001 over, or do gold bullion prices still have some room to grow?
Chart courtesy of www.StockCharts.com
When I look at gold bullion prices, I tend to focus on the supply and demand side.
Looking at the demand side of gold bullion, it seems robust. As the prices were falling, there was a significant amount of concern that the consumers will eventually diminish in numbers.
We did not see this phenomenon occur. Consumers stayed; as a matter of fact, they rushed to buy more. Keep in mind that earlier in the second quarter of this year, gold bullion prices had a significant downturn. By the logic presented, buyers should have diminished by the end of the quarter.
Consider this: the Word Gold Council (WGC) reported that the demand for gold bullion in China during the second quarter increased to 276 tonnes, up 87% from the same period a year ago. In India, demand was up 71%—an increase to 310 tonnes. (Source: “Consumer demand for gold up 53% in Q2 2013 led by strong growth in China and India,” World Gold Council web site, August 15, 2013.) This is unprecedented and shouldn’t go unnoticed, because these two nations are the biggest consumers of gold bullion.
Similarly, central banks also bought gold bullion in the second quarter. They added 71 tonnes of the precious metal to their reserves.
When I look at the supply side, with gold bullion prices coming down, the miners don’t really have a huge incentive to produce more. They can just wait, let the prices increase, and then produce—this way, they’re able to stay profitable.
For investors, the supply and demand situation of gold bullion is creating a buying opportunity. Gold prices can go higher from here.
Now, the most critical question: how exactly can an investor profit from the current situation in the gold bullion market?
For conservative investors who are saving for retirement and don’t want to risk a lot, they may want to go with something that provides investors with exposure to the physical metal, perhaps an exchange-traded fund (ETF) like SPDR Gold Shares (NYSEArca/GLD). This ETF essentially gives investors exposure to gold bullion for cheap, but keeps their portfolio fluctuations tame.
For investors who are willing to take some risk, they may look into ETFs like the Market Vectors Gold Miners ETF (NYSEArca/GDX), which holds only gold miners.
For investors who thrive on risk and are willing to see their portfolio move up and down a little, you may want to look into ETFs like Direxion Daily Gold Miners Bull 3X Shares (NYSEArca/NUGT), which provides three-times the return of the gold miner index.
Even with all the bullishness in gold bullion prices, investors need to remember that things in the world of finance can turn very quickly. We saw it happen with the precious metal prices not too long ago; fear and irrationality kicked in, and we saw a massive sell-off. If investors intend to buy, they should have stops in place.
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