Similar to everything else financial, gold bullion prices follow the same main premise of economics: prices rise when demand increases, and prices decline when the supply increases.
At present, on the demand side, we have central banks buying gold bullion. In fact, they have turned into big buyers, collectively buying the most gold in 49 years in 2012. Central banks are buying gold bullion because they need it, as the fiat currencies they created are causing great havoc to their reserves. In these pages, it is very well documented which central banks are buying. What is interesting is that the list of gold bullion purchasers is increasing.
Demand from individual investors for gold bullion is also increasing. In the first three months of 2013, the U.S. Mint sold about 40% more gold bullion coins than it did in the first quarter of 2012. It sold 292,500 ounces in coins of gold bullion from January to March of this year, compared to 210,500 in the same period of 2012. (Source: The United States Mint web site, last accessed April 2, 2013.)
Now, for the supply side of the story; worldwide gold bullion production from mines in 2012 totaled 2,700 tons. Compared to 2011, the increase in gold mined was a menial 1.5% in 2012. (Source: “Mineral Commodity Summaries,” U.S. Geological Survey web site, January 2013, last accessed April 3, 2013.)
In 1990, worldwide gold bullion production from mines was 2,127.3 tons. A simple calculation shows gold bullion mine production has only increased about 27% over a 23-year period, or a compound annual growth rate (CAGR) of 1.04% per year. (Source: United States Geological Survey web site, last accessed April 2, 2013.)
When I look at the current demand and supply equation of gold bullion, I affirm my bullish status on the metal.
There hasn’t been a major world discovery of gold bullion in years. Nor are any major mines expected to come on-line in the next three years. We have supply that isn’t really changing, but we have robust demand, as central banks and individual investors alike are rushing to the metal.
The recent pullback in gold bullion prices is very normal. Only in bubbles do prices increase without rest. I continue to see gold bullion having a shiny future ahead.
Wednesday, April 3rd, 2013
By Michael Lombardi, MBA for Profit Confidential