The amount of bearish sentiment towards gold prices these days on the part of investors is not surprising to me. Investors often work in herds, moving to “hot” sectors from “weak” sectors very quickly. But, as I have said all along, the “gold play” is a long-term one, not a speculative one.
Economics 101: if demand for an asset or item increases, prices rise. If supply of an asset or item increases above demand, prices fall.
Gold prices follow the same historical economic principle. If we see demand for gold increasing, we can assume prices will also rise, because the supply of gold is limited.
At present, and as I have said in these pages many times before, there is fundamental demand for gold. Central banks and investors alike are hunting for and buying physical gold.
To give you some idea on the strength of gold buying, according to the Census and Statistics Department of the Hong Kong government, gold imports by China from Hong Kong doubled in the month of November 2012 from the prior month. China bought 90.764 metric tons of gold in November compared to only 47.478 metric tons in October of 2012. (Source: Bloomberg, January 8, 2013). Compared to the first 11 months of 2011, for the first 11 months in 2012, Chinese imports for gold also doubled.
Now let’s look at gold demand by the central banks. To say the least, they are running towards gold like never before. Why? Because their printing presses are in overdrive mode. Central banks need to have some physical gold to back their ever-increasing supply of paper currency.
Which central banks are printing the most fiat money?
Take a look at a world map and point at any major country; chances are, they are involved in money printing: the central bank of Japan, the Federal Reserve in the U.S., and the central bank of Brazil, just to name a few. Others central banks, like the European Central Bank (ECB), have also promised to join the fiat money printing club.
Who else? The central bank of Switzerland has been preventing its currency from rising against the euro. The Swiss central bank has printed almost 500 billion francs or $541 billion—nearly the same as the gross domestic product (GDP) the country generates. It is buying currencies, bonds, stocks, and gold with the freshly created money. (Source: Wall Street Journal, January 8, 2012.)
The demand for gold is there, and it is very visible in the price.
Last year was one of the worst years in recent memory for the stock prices of senior and junior gold mining companies. And given what I have just told you above, I see these stocks offering the best “against the herd” opportunity for 2013.
from Stock Market News, Stock Market Advice, Economic Analysis, Investing In Real Estate and Gold by Michael Lombardi, MBA