The headline from last Thursday’s Wall Street Journal read: “Global Gold Demand Down 16%” quoting recent data from the World Gold Council (WGC) to explain why “global demand for gold slumped … ” but the facts from the actual report aren’t nearly as bearish as this headline suggests.
First, according to data from the WGC, demand for the yellow metal plummeted. However the reality is gold demand statistics faced an impossibly difficult comparison this year with the same period a year ago.
Recall that it was during the second quarter of 2013 that gold prices dropped a breathtaking 25 percent, as gold hit a low of $1,178 an ounce. The decline was driven mainly by fast-money investors in a panic to sell gold-backed ETFs, with most of the outflows coming right at the bottom.
Second, while speculators were dumping paper-gold a year ago, smart money investors were buying the real thing, as demand surged for gold bullion, coin and jewelry. The fact is: Long-term buyers of gold backed up the truck to take advantage of what was described at the time as a “once in a generation event.”
Predictably, as a result of the surge in physical demand a year ago, 2014 second-quarter results showed a slump in gold bar, coin and jewelry buying compared with 2013; it was simply impossible to measure up to last year’s buying stampede.
|Global central bankers have been some of the steadiest buyers of gold, adding to their official holdings for 14 consecutive quarters.|
Third, there was also some good news in the WGC report that wasn’t widely reported. For starters, exchange traded funds — which triggered the sharp 2013 selloff — have apparently exhausted their selling. ETF outflows slowed to a trickle of just 39.9 tons last quarter, compared to a flood of 402.2 tons of selling a year ago.
Also, central banks continue to be eager buyers, with demand up 28 percent this year alone. In fact, global central bankers have been some of the steadiest buyers of gold, adding to their official holdings for 14 consecutive quarters.
Central banks are fond of talking-their-book about the absence of inflation, as they continue to print money with reckless abandon. But their actions speak much louder than their words! Keep this in mind as you digest financial media reports from the Fed-sponsored Jackson Hole symposium this week.
The lesson: Ignore the scary headlines that don’t give you the whole story, and stick to the facts instead.
Inflation-Deflation Tug-of-War and What it Means for Gold
I consider gold and especially precious metal stocks to be outstanding bargains today from a contrarian point of view. Mining shares in particular offer a unique combination of undervaluation and investor neglect that is often found in great long-term buying opportunities.
You see, the consensus view about gold is uncertain at the moment … and that’s a good thing because it creates a bargain buying opportunity without having to fight a crowd of eager buyers.
The global economy is still in the midst of an epic tug-of-war between the forces of inflation and deflation. Ultimately, the outcome will have major implications for the trend in gold, energy and other commodities — not to mention bonds, global currencies and many other markets.
On the deflationary front: We have a big chunk of the global economy sliding back into recession:
Last week we learned Japan’s economy shrank a stunning 6.8 percent last quarter, so much for the miracle of Abenomics.
The euro zone is tipping back into recession too: Italy’s economy shrank 0.3 percent last quarter, France was flat, even Germany, the so-called growth engine of Europe, stalled last quarter with output shrinking 0.2 percent.
Japan has been in and out of recession so many times over the past two decades that I have honestly lost count. And this is a triple-dip recession looming in Europe … its third economic contraction since 2007!
With these major economies in decline, this is clearly a negative for gold and precious metal stocks.
On the inflationary side of the ledger: Recent upbeat data on the U.S. economy paints a brighter picture, including:
* Six straight months of payroll growth over 200,000 jobs per month — the first time that’s happened since before the Great Recession in 2007! …
* Stronger than expected 4 percent growth in second-quarter gross domestic product (GDP), plus bullish readings from manufacturing and service sector industries …
* Likewise, the upbeat data is pushing inflation higher too, which is now showing up even in the government’s flawed measure, the consumer price index (CPI).
In the last three months alone, consumer prices are up nearly 3 percent at an annual rate. And so far this year, the CPI has accelerated at a yearly pace of 2.5 percent. That’s double the 1.2 percent rate during the first seven months of 2013.
Now, Janet Yellen will tell you this is nothing more than “noise” in the data, but lately the volume of inflationary noise is just too loud to ignore anymore.
Obviously, this is long-term bullish for gold.
While this tug-of-war plays out, uncertainty prevails and investor anxiety is on the rise. This translates into higher volatility for gold, silver and mining stocks in recent months. It all depends on whether each new piece of economic data is inflationary or deflationary in nature.
But uncertainty is precisely what great buying opportunities are made of!
Of course we can’t know the exact day or hour gold will bottom: Perhaps the low is in place already, months ago, or maybe the ultimate low lies in the future. But the following two charts explain just how much profit potential is in store for investors.
The chart above from the expert natural resource analysts at U.S. Global Investors (GROW), shows how the price of gold reverts to the mean over time. In fact, all financial markets swing alternately between overvalued and undervalued levels, driven by the emotions of hope and fear among investors who make up the markets.
Gold suffered a bear market from the peak in 2011 to last year’s low, declining 28 percent in value during 2013 alone! But now the price of gold is reverting back to the mean, from deeply undervalued territory. And as you can plainly see, it has plenty of room left to rally. Gold mining shares performed even worse, with the Philadelphia Gold and Silver Index (XAU) of mining stocks plunging 47.6 percent last year, but this year we’ve witnessed an upside trend reversal.
But for over a year now, gold mining stocks have been outperforming the price of gold to the upside, a very bullish sign. Year to date XAU is up 17.3 percent, as you can see above, far ahead of the 4.7 percent gain in gold itself. This bullish performance puts gold mining stocks far ahead of nearly every other stock market sector this year.
This tells me gold in the ground (mining stocks) is correctly being recognized as a bargain at today’s prices … and the smart money is already buying ahead of the crowd.
Bottom line: The last time gold mining shares were this undervalued and neglected by investors in 2008, XAU soared 266.4 percent higher in just two years. Will history repeat over the next few years? Keep tabs on the inflation-deflation tug-of-war and stay tuned!
P.S. Be sure to watch your inbox this afternoon for Mike Larson’s afternoon edition. Inside you’ll find the closing market numbers, a timely feature story, and comments from readers just like you.