Could Gold Prices Decline From Current Levels?
These days, the arguments against gold are many. We hear a lot noise suggesting that the demand for the yellow precious metal could be declining, and that there’s room for gold prices to go down further.
First, let’s take the argument of the price of gold going down further. You see, the average cost to produce an ounce of gold at mining companies is around $1,000. We have seen bearish estimates for gold prices as low as $850.00. Could this happen?
If the price of gold makes a move toward $850.00, a massive shortage in the gold market could follow. We could see mining companies scrambling. It wouldn’t be shocking to see many shutting down operations, and some even going out of business altogether. If the gold price does drop to that level, it could be one be best buying opportunity.
Gold Demand Remains Resilient
Now, looking at the demand side for the yellow metal, it remains solid—and it doesn’t look like it’s calming down any time soon.
There are a few buyers that gold investors need to pay close attention to: central banks, India, China, and gold-backed exchange traded funds (ETFs).
The gold demand figures for the third quarter of 2017 were recently reported by the World Gold Council (WGC), and there was a lot of encouraging data.
For instance, central banks remain heavyweight gold buyers. In the third quarter of 2017, they added 111 tonnes of the yellow metal to their reserves. This was 25% higher than the same period a year ago. Remember, central banks have remained net buyers of gold since the financial crisis, and those that have gold continue to hoard it. Gold purchases in the third quarter were dominated by the central banks that don’t have much gold. (Source: “Gold Demand Trends Q3 2017,” World Gold Council, November 9, 2017.)
In China, coin and bar demand soared in the quarter. Investors in China bought 64.3 tonnes of gold in coin and bars. This was 57% higher than the same period a year ago! Impressive.
As for gold ETFs, there was buying in China as well. At the end of the third quarter, gold-backed ETFs held 2,343.2 tonnes of the yellow metal. This was the highest since October of 2016.
In India, gold demand seems to be tumbling. This is mainly because of the new taxes that the government has imposed, and because the gold market has become subject to anti-money-laundering measures.
As this is happening, it’s very interesting to see the rise of gold smuggling in the country. To give you some perspective, as of October 2017, the Air Intelligence Unit (AIU) of Mumbai Customs seized 243 kilograms of smuggled gold this year. This was more than a 100% increase when compared to the same period a year ago. (Source: “One year of demonetisation: As cash returned, so did gold smuggling,” The Indian Express, November 8, 2017.)
What does the smuggling suggest? At its core, it says that the appetite for the precious metal in the country remains strong.
What’s Ahead for Gold?
Dear reader, usually investors tend to run to assets that are soaring in value, and refrain from buying assets that are flat. Gold isn’t shining like Bitcoin or the stock market these days. But I continue to question for how long the yellow metal can be ignored. This can’t be stressed enough: as the metal remains ignored, its fundamentals continue to get better. Long-term investors could really reap massive rewards.