Tuesday, October 1, 2013

Gold Eagle Sales & 3 Reasons to Be Bullish on Gold

Yesterday, I posted a chart of US silver eagle sales.  Here is a similar chart of gold eagle sales ...

For most of the year, gold eagle sales exceeded those of 2012.  But that changed in August, and the underperformance continued in September. 

While there has been an increase in the sale of gold coins this year from the U.S. mint, the 883,000 ounces sold so far this year is small when compared to the 145 million ounces of annual gold demand. It's even small compared to the 32,150,746 ounces of jewelry and bar sales expected in China this year. And India is expected to buy as much as China.

So THAT'S not what should worry us in gold. 

What should worry us in gold is that ETFs are selling gold again. The SPDR Gold Shares (GLD), the biggest gold ETF, reports it sold nearly 4 metric tonnes in its latest figures. That brings its gold holding down to 905.99 tonnes – a new low for the ETF. The previous low had been recorded on August 8th at 909.33 tonnes.

After that previous low, holdings increased to 921.03 tonnes just before the U.S. Labor Day holiday. Since then, the selling has resumed.

However, we aren’t seeing the kind of “sell with both hands” mentality we saw earlier this year.  So, this isn’t as bearish as it might look.

We also might worry that interest rates began rising when the Federal Reserve Board started hinting that it would begin to reduce its Quantitative Easing, which had been in the form of federal bond purchases.

Then the Fed said on Sept. 18 it would continue buying $85 billion in bonds each month until it sees more signs of lasting improvement in the economy. But now the focus has now shifted to when that buying will end, and rates are inching higher.

Rising interest rates are usually bearish for gold … at first. That will change when and if we start seeing signs of inflation.  We don’t have official inflation now. The latest annual inflation rate for the United States is 1.5%, as reported by the Bureau of Labor Statistics (BLS) on September 17, 2013.

We can argue about whether official inflation measures real inflation (probably not). But this is what the market watches, and it’s flat.

So, these are some of the forces pushing gold lower in the short-term (the Indian government's suppression of gold sales is also having an effect). However, the long-term forces remain bullish. Those forces include ...

1. China’s Growing Appetite for Gold

I already mentioned that China’s consumption is expected to hit 1,000 metric tons this year. And consumer gold demand in China should rise by at least the same pace as the country’s economic growth, according to the World Gold Council.

2. Central Banks Keep Buying Gold

It's funny how banks keep calling gold a “barbarous relic” even as they load up on the yellow metal. 

Russia, which has the world's seventh largest reserves of gold, increased its holdings in August by the biggest amount since December. Russia increased reserves by 12.722 metric tonnes to 1,015.521 tonnes, according to the IMF. Russia's gold holdings crossed the 1,000 tonne mark in July. 

Turkey raised its gold reserves by the most in five months in August. Turkey added 23.344 tonnes to lift its gold holdings to 487.351 tonnes.

Ukraine, Azerbaijan and Kazakhstan all added to their gold reserves by more than 2 tonnes in August. In all, eight central banks increased their gold holdings in August by a total 44 metric tonnes!

So why the heck are they buying all this gold?

On Monday, Salvatore Rossi, Chief of the Central Bank of Italy, let the cat out of the bag. He told the press: "Gold is unique among assets, in that it is not issued by any government or central bank, which means that its value is not influenced by political decisions or the solvency of one institution or another." 

At the same time, the other major European Central Banks (France and Germany) said they "will not sell their gold reserves, as they can provide a level of confidence, an element of diversification and can absorb some volatility from the central bank's balance sheet."

You know, I think that down the road, we’re going to view selling all our gold to the Chinese at a discount was a MAJOR mistake. 

We have a system in which banks get bigger and make worse mistakes.  The financial markets can and will come under incredible stress. Italy knows it.  Germany knows it. Even France knows it.  And you can bet your bottom dollar that China knows it.

And when financial systems come under stress you need to restore confidence.  Gold can restore confidence. Paper can't.

That makes it all the more important to buy gold when it’s cheap – which is why the central banks are doing just that.

3. Inflation-Fueled Protests Are Spreading

Turn on your TV and watch international news. You’ll see protests and, in some cases widespread civil unrest, in Egypt, Turkey, Brazil, India, Indonesia – even China.

Why are these people taking on police beatings to voice their anger? Because inflation is heating up in those countries, and many of the world’s poor are seeing the cost of living slip out of their grasp.

Inflation may be tame in the U.S. That’s not the case overseas. How long do you think before inflation spreads to our shores?

And inflation and widespread unrest have historically BOTH been supportive of gold.

So, let's sum up:

Should you fixate on US gold eagle sales?  While they do grab headlines, they're a hill of beans compared to Chinese demand, Indian demand, central bank demand, etc.

Are gold prices going down?  Right now, yeah.  I explained why I thought this might happen last week. And rather than pick the bottom, you might want to wait for it. Catching those falling knives can be murder on the fingers.

Are the long-term forces for gold bullish? Yes they are. And they're getting more so. And that just means a shorter-term pullback is going to lead to one heck of a buying opportunity.

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