Money

Top 5 Reasons Gold May Rise This Year

by Michael Fuljenz –

Part of the cause for the metals’ rapid rise in early 2012 is a recent decline in the dollar, pushing up the price of nearly all commodities. Gold reached a new four-month high and silver and platinum have outperformed gold so far. Impala Holdings of South Africa (which produces 25 percent of the world’s platinum) warned its customers that deliveries could be cut in half by April, due to a strike at their largest platinum mine at Rustenberg.

Reason 1: China-India-Asia demand. 

China and India are the top two gold consumers in the world. Vietnam buys more gold per person than either China or India. New gold interest is rising in Japan.

Gold buying in China is soaring at a record pace. Hong Kong shipments of gold to mainland China more than tripled in 2011 over the year before. The ravenous Chinese appetite for gold is driven in part by rising personal wealth allowing the Chinese to indulge their cultural passion for gold. A new wrinkle, though, is inflation. Chinese investors have been buying gold as an inflation hedge. And if the inflation rate heats, the gold rush in China could be a game-changer for gold.

Reason 2: European sovereign debt crisis. 

All eyes have been on Europe, and Greece in particular, as negotiations dragged on for a deal to keep Greece from defaulting on its debt in March. An 11th-hour deal was hashed out. Some critics say the deal will actually only make things worse for Greece and ensure a default down the road. In the meantime, the debt problems keep simmering in the rest of the PIIGS (Portugal, Italy, Ireland, Greece, Spain) countries. This is a pot full of possible game-changers for gold.

Overshadowed by the preoccupation with Europe’s debt problems, other developed countries have severe debt problems resulting in credit rating downgrades. 

Reason 3: Central bank buying.

Central banks, once the bane of gold bugs as they dumped their gold on the markets, now have become major buyers in the gold market. Starting in 2010, central banks became net buyers of gold, and the pace has picked up dramatically since then. Central bank gold buying soared 470 percent in 2011, according to the World Gold Council.

The official sector gold rush has been especially pronounced in emerging markets as shrinking confidence in the U.S. dollar as the world reserve currency prompts governments to seek refuge in gold. Russia has openly and steadily been converting its dollars to gold. China is believed to be working to reduce its huge exposure to U.S. debt, in part by converting to gold.

Reason 4: Growing demand, static supply. 

Physical and investment demand for gold in China and India gets huge support from investment demand in the West through ETFs – exchange traded funds.

Malcolm Gissen, co-manager of The Encompass Fund, wrote in a guest piece for Forbes: “ETFs, ETFs, ETFs. During this time of unceasing financial crises, ETFs have made it easier for investors to shield themselves with investments in gold. With gold ETF’s expanding to other parts of the world, the demand for gold as an investment should only increase.”

Even as demand soars, supply remains flat as all the high-yield deposits have been mined out. Lower ore grade means higher cost of production because more ore has to be processed to get the same gold yield as higher grades. “It’s more difficult to find large gold deposits and increasingly challenging to bring remaining stores out of the ground. The process of obtaining mining permits is difficult and time-consuming. The costs of building a mine and getting into production have soared to the point where capital expenditures of $3 and $5 billion are not unheard of. In addition, it can take up to 10 years from the initial discovery of gold to get a gold mine into production,” wrote Gissen.

The game-changer for gold here is a one-two punch of exploding investment demand caused by another financial shockwave (no shortage of possibilities), and a decline in mining production.

Reason 5: Geopolitical crises. 

Geopolitical cataclysms generally change the game dramatically for gold, the traditional safe haven for wealth in times of major worry and uncertainty. The world is full of boiling trouble spots.

The most imminent and probable major geopolitical crisis on the front burner at the moment is possible war with Iran. Israel and Iran have both threatened pre-emptive strikes against the other in recent days. U.S. Defense Secretary Leon Panetta said that these strikes could come as early as spring. When it does, it’s game on for gold.

Mike Fuljenz is the editor of the Numismatic Literary Guild (NLG) award winning “Micheal Fuljenz Metals Market Weekly Report,” and the numismatic consultant for First Fidelity Reserve. His award winning radio show can be heard on KLVI News Talk AM 560 from 6 p.m. t 7 p.m. CST on the last Monday of the month.

 

Read more articles by Mike Fuljenz

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3 Comments on "Top 5 Reasons Gold May Rise This Year"

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Gold, Gold, Gold - What about silver?
4 years 6 months ago

I read a ton of stuff about gold. I own silver because it’s cheaper. Try buying a loaf of bread for gold.

Sawman
4 years 6 months ago

Good move. Also Australian Dollars – good place to put USD. But just buying junk silver (pre-1964 American silver coinage) is a great idea because it’s already been vetted and divided as low as $3 per unit (a silver dime). So owning gold and silver are both good ideas, depending on what amounts of money you’re trying to exchange. And if you want to invest overseas – Australian Dollars are a reasonable place to explore.

Sawman
4 years 6 months ago
All I’ve read for the past three years is that there is a serious move to topple the USD (U S dollar) from its perch as the world’s reserve currency. Money manipulators like George Soros stand to make unfathomable profits, and countries like China stand ready to fill the void, something they’ve longed to do since the middle of the last century. The US has printed so much money for so long that there is no longer any chance that we’ll ever recover those dollars. And we must always remember; EACH DOLLAR IS A PROMISE TO PAY. Each dollar floating around overseas is an IOU. But since 1971 when Nixon decoupled the USD to gold the promise is connected to nothing except our word. And since Johnson started the Great Society spending with abandon, there has been no stopping the printing presses. Other countries are not stupid. They realize what… Read more »
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