Daily Gains Letter

Update: My 2014 Gold Outlook

By for Daily Gains Letter |

Gold OutlookIn 2013, gold prices saw the worst tumble in a few decades. This decline in prices caused many to panic, and the negativity towards the yellow metal increased significantly. As we begin 2014, this sentiment seems to be holding on. It’s not uncommon to hear analysts or investors say how gold bullion isn’t worth holding and that there are better opportunities.

However, I’ve been bullish on gold for some time, and I stand by my bullishness. The main reason for my take on the precious metal comes down to the most basic factors that determine price—supply and demand. I continue to see a declining supply and increasing demand. Keeping all else the same, this is the perfect recipe for higher prices ahead.

On the demand side, we are seeing buying from countries across the globe. This was something that was said to have slowed when the gold bullion prices were going down back in April of 2013 and then again in June of 2013.

Australia’s Perth Mint reported sales of gold bullion coins and bars increased by 41% in 2013 compared to a year ago. The Mint sold 754,635 ounces of gold bullion in 2013 compared to 533,333 ounces in 2012. (Source: Sedgman, P., “Perth Mint Gold Sales Surge 41% in 2013 on Worst Rout Since 1981,” Bloomberg, January 2, 2013.)

At the U.S. Mint, the increase in sales of gold bullion coins has been similar to that of Australia’s. The U.S. Mint, for the entire year of 2013, sold 856,500 ounces of gold bullion in American Eagle coins. This was 13% higher compared to the same period a year ago, when the U.S. Mint sold 753,000 ounces of gold bullion in American Eagle coins. (Source: “Bullion Sales/Mintage Figures,” United States Mint web site, last accessed January 3, 2013.)

When I look at nations like India and China—two of the biggest gold bullion–consuming nations—the demand looks robust, as well. In India, the government and central bank have imposed restrictions on buying; they want to slow the demand for gold bullion, but they are failing. Smuggling has become a new major way of bringing the yellow shiny metal into the country. In China, exact numbers aren’t really available, but just by looking at the imports of gold bullion from Hong Kong, those numbers show that the appetite for the yellow shiny metal in China remains solid.

On the supply side, the conditions are becoming bleak, and the production of gold, according to some indicators, is already declining. Consider the U.S. gold bullion mine production. In the first nine months of 2013, mine production declined by 2.85% compared to the same period a year earlier. Between January and September of 2013, U.S. mines produced 170,000 kilograms (kg) of gold bullion. In the same period of 2012, these mines produced 175,000 kg. (Source: “Mineral Industry Surveys,” December 2013, U.S. Geological Survey web site, last accessed January 6, 2014.)

With all this said, one thing has to be made very clear: the negativity towards gold bullion can continue for some time, and the prices may go down further. Investors looking to buy the metal may want to consider investing in an exchange-traded fund (ETF) like SPDR Gold Shares (NYSEArca/GLD). These investors also have to remember to not over-leverage their portfolio with gold bullion; a limited percentage of the portfolio value placed in gold will do the job. By following this investment strategy, investors will protect their portfolio from massive draw-downs and won’t miss out on their future goals.

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