Why The Price of Gold Likely Has a Quickly Approaching Floor

Price of Gold
Gold Coins

Like most individuals that are in businesses that are directly or indirectly tied to the price of precious metals, we’re interested in the factors that affect the price of gold, why it’s moving in a particular direction, and when we’re likely to see a floor or ceiling.  A recently published article by Bloomberg about the gold buying habits of middle aged Chinese women indicates that we might be near a bottom.

Historically, demand for gold in the Indian culture, especially during wedding season, has been one of the largest factors impacting the price of gold, but Chinese buying of gold in the form of jewelry, bars and coins has recently surpassed that of India.  In fact, since the gold crash in mid April, Chinese have purchased 300 tons of gold worth $16 billion.  We should expect to see sustained high demand for gold in China as the country continues to become wealthier.

There have been recent reports of Chinese women cashing out their retirement savings and purchasing gold.  While this is oftentimes the case due to other limited investment opportunities, the sense is that high levels of demand will continue to keep the price of gold elevated, which effectively will act as a floor for the price of gold.  Furthermore, central banks around the world, especially from India and China, are net buyers of gold and have been for quite some time.

At the moment, most jewelry, gold, and coin stores in China have very little to no inventory, and are having a difficult time restocking and meeting the demand of their customers.  While not to the same extent, demand in the United States has also been extremely high since the collapse in gold prices.  U.S. gold coin dealers have also been having a difficult time meeting demand, which has caused gold coin premiums to increase above their historic rates.

As to where the price of gold is going to go in the short term, it’s anyone’s guess; however, gold fundamentals continue to be strong, and in parts of the world such as India and China, we’re not likely to see a pullback in demand anytime soon.  Central banks continue to inflate their respective currencies, the Cyprus bank crisis is still fresh in people’s minds, there are concerns of other potential large bank failures, sovereign debt concerns in a number of southern European countries and a concern that the economic recovery in the United States may not be sustainable.

 

Tony Davis
Tony Davis