What You Absolutely Need to Know About Gold’s Future
Since gold prices have begun their recent slump, some in the mainstream media have even said that the bull market in the metal that began in 2002 is over. They are saying gold bullion has no space in their portfolio and that it isn’t really a store of wealth anymore.
But the fundamental reasons for a rise in the value of gold bullion are actually increasing. The demand is going up and supply appears to be slowing—the very recipe for a price increase.
The demand for the metal remains very strong. According to data from the Hong Kong Census and Statistics Department, imports of gold bullion to mainland China from Hong Kong increased to 108.781 tonnes in May, compared to 80.101 tonnes in April—a 36% increase in just one month. (Source: Ananthalakshmi, A., “UPDATE 1–China’s net gold imports from Hong Kong jump in May,” Reuters, July 5, 2013.)
And there are major concerns on the supply side. The cost to take gold out of the ground is getting higher than the metal’s current price, making mining gold a losing proposition. Consider that Barrick Gold Corporation (NYSE/ABX, TSX/ABX), one of the biggest senior gold bullion miners, is halting its production at one of its biggest mines, the Pascua Lama mine in Chile, due to its costs increasing from $5.0 billion to $8.5 billion. And Barrick isn’t the only one facing a problem in rising production costs; there are others who are in very similar situations.
“If the prices below $1,300 are sustained for more than two quarters, without significant changes to spending, I would expect we could see rating downgrades,” said Donald Marleau, an analyst at Standard and Poor’s Rating Services. (Source: Macdonald, A., “Gold Drop uncovers Miners’ Debt Woes,” Wall Street Journal, June 28, 2013.)
So have gold bullion prices bottomed?
It is too early to tell, but it’s clear that the case for higher gold prices is gaining strength. I certainly wouldn’t be surprised to see gold losing some strength over the short term due to speculative selling—short selling in anticipation of even lower gold bullion prices.
But in the long-term view, gold bullion has a bright future.
Once the dust clears in the gold markets, the miners will be the ones who will profit the most. Right now, they are in trouble, but when gold bullion prices start to tick higher, investors may profit from exchange-traded funds (ETFs) like Market Vectors Gold Miners ETF (NYSEArca/GDX). This ETF invests in gold miners and provides investors with diversification.
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