Why Gold Is Set to Rise Further Despite Recent Fall

The past few days saw the price of gold gyrating and falling  15% or so from its most recent high a few weeks ago. From briefly touching $1,900 per ounce in early September, gold most recently dropped and now hovers around $1,600.

This seems to reinforce the belief by some observers that  after 10-year bull run, gold is now in a “bubble”, that it has “reached the top”, and should now be on a ” bearish path”.

Well, gold’s recent fall, of course, has been linked to the widespread fears and concerns of a  Greek debt default. The fate of the Euro zone and the euro itself now appears to hang in the balance as the 17-member group desperately struggles to find solutions for its most indebted members .

The investors are fleeing the Euro and commodities – gold prominently among them – in favor of the US dollar and US treasuries.

The irony is that the investors are seeking refuge in US dollar and US treasuries, as if the US dollar and US treasuries are safe havens.

Conveniently forgetting that barely 2 months ago, the world held its breath as the  “richest country on earth” teetered on the brink of a debt default, and which eventually resulted in its loss of triple A rating by Standard & Poor.

Frankly, many financial experts and economic gurus are still debating as to which is the bigger problem: the US debt problem or the debt problem of the Euro zone.

It looks like the world financial markets or investors in general are clutching at straws, and now would readily  jump from the proverbial frying pan to the fire, or perhaps, vice-versa.

Well, without even mentioning the increasing clamor for a return to gold standard, a complex subject I would prefer to discuss separately in a future post, I can cite at least  three reasons why gold is set to reverse the recent fall and should rise even further.

Here are the three reasons:

1. Central Banks have become net buyers and aggresively loading up on gold.

For a long time, Central Banks were either  net sellers or  fence-sitters, meaning, they did not increase their positions in gold. It was only  recently that Central Banks have been increasing their gold positions in an effort to  “diversify reserves away from the US dollar”.

As per information from World Gold Council (WGC) and Gold Fields Mineral Services (GFMS), Central Banks have started accumulating gold reserves since last year, 2010. Total official sector  (CB) gold purchases for 2010 amounted to a whopping 216 tons.

For 2011, up to just half of the year, total CB purchases jumped by three times already, over the 2010 figures. This is according to GFMS, the UK-based premier independent research and consultancy group on precious metals.

Some of the  biggest buyers, have been Mexico (100 tons), Russia (50 tons), Korea (25 tons), and Thailand (19 tons).

The most active purchasers are particularly  from Asian Central banks. 

2. Gold supply is dwindling.

The current deposits of gold being mined are fast drying up just like oil. There are very few newly discovered gold mines. This fact alone can lead to an increasing scarcity of supply for gold  which, in turn, can only lead to increasing prices for gold.

Barrick Gold, the world’s biggest gold mining company, reports that the entire gold mining industry is having great difficulty finding new gold deposits.

The fact is that while there recently has been a substantial increase in gold exploration activity and spending related thereto, the results of such explorations have been generally dismal.

If ever,  big new discoveries proved to be located in very remote and inhospitable areas like in the case of Seabridge Gold’s KSM deposit which is located in a prohibitively far corner of British Columbia.

Needless to say,  however huge such deposits of gold  may be, the cost of development thereof would run into billions and it would take years before its effects are felt in the market.

3. China and India are very much into the  “gold bug”

China and India are very interesting cases; they led the global demand for gold, accounting for more than half (52%) of all global purchases in gold in 2010, according to GFMS.

Not only are these two giants the biggest gold buyers in the world, their buying demands are growing close to 100% year on year, again according to figures from GFMS.

China has recently overtaken South Africa as the world’s number one producer of gold. This has been a result of deliberate effort on the part of China to diversify its assets and increase its gold holdings.

In fact, not only is China the current biggest producer of gold; it is also among the most active buyers of gold in the open market.

The general belief is that Chinese gold purchases largely explain why dips in the price of gold have been relatively short-lived. That is why the current dip in gold price is expected to be short-lived as well.

At present, China’s gold holdings are still considered very low compared to the size of its economy. Compared to other big economies like US, France, Germany and Japan, China has a lot of catching up to do in the gold arena. In fact, tiny Belgium owns more gold “per capita” than China.

India, on the other hand, is another very active gold buyer. In fact, about a couple of years ago when IMF announced that it was selling 200 metric tons of gold, the Indian Central Bank offered to buy the entire amount. Just like China, India is still very much underweight in gold reserves  compared to the huge size of its economy.

India, by the way, has been the traditional leader in gold jewelry, accounting for  close to half of world trade in gold jewelry.

India’s record as the number one gold jewelry market remains unmatched and with a population of more than a billion, India’s potential and glitter as the foremost gold market is not about to wane. It is  set to  grow even more and more.

Note that in Asia in general and India in particular, gold is not only  worn and displayed to celebrate Ramadhan, Diwali (Indian festival of lights) and other special occasions; it is regarded as a “symbol of wealth” to be worn everyday.

So, you still think that gold is in a bubble and in a downward path? Think again.