Gold Has No Bubble; Only A Very Bullish Outlook

Includes: GLD, PHYS, SGOL
by: Antonio Carradinha

There are, in fact, divided opinions on the estimates of gold prices for 2013 and subsequent years. Furthermore, the reasons given by analysts from both "sides" are repetitive and often emotional while they often indicate a merely personal opinion.

After reading a well written article on Seeking Alpha presenting a possible case of a bubble topping in Gold (NYSEARCA:GLD), I must express my contrary opinion given the fundamental factors that I develop below.

To lay this paper I will identify the main bases that lead me to conclude that gold will rise in 2013 and subsequent years:

  1. China is a buyer of long haul
  2. The decisive portion of demand for investment in gold will soar
  3. On the supply side, the scrap plays a decisive role
  4. Mining output is not rising enough in annual terms

First, a note: it is crucial to use current data whenever possible because we are discussing future gold prices.

As an important fact, we can start by saying that the February 20 ended a terrible week for gold prices. At that day, a true capitulation happened which as we know is extremely bullish. It is true that most investors, for reasons of greed and fear, tend to buy on the rise and normally sell on the way down. On the plunge I mentioned, the exaggeration is so overwhelming that obviously it had to stop at some point. When a rendition takes place that is exactly what happens in terms of reversing the decline.

Charts courtesy of

Apart from this factors of market sentiment and investor behavior, there are other fundamental aspects to consider which have decisive importance.

China is a major player

China is a major player in relation to Gold. In fact, it became clear that this country aims to diversify its reserves and that gold is one of the selected assets.

Gao Wei, an official from the Department of International Economic Affairs wrote a commentary in the China Securities Journal in November 2012 stating: "While gold prices are currently near record highs, China can build its reserves by buying low and selling high amid the short-term volatility."Gao also described China's gold reserves as being "too small", according to articles on the subject released by Bloomberg.

Confirming this forecast, the World Gold Council published last week a very interesting study in which, among other aspects, favoured gold as one of the most attractive alternatives in the diversification process. It also assured that "purely through portfolio optimisation analysis of these assets, renminbi, gold and Australian dollar assets emerge as the most important for diversification. However, given the limited size of Chinese and Australian sovereign debt markets, gold emerges as the dominant asset for diversification with optimal allocations to gold of approximately 8%."

Investing in gold is now growing again

We know that the best and more smart times to buy are after heavy sell-offs. As I have mentioned above, the 20 of February was a capitulation day for gold. Traders and investors "had reached the limits they could bear, so they sold aggressively. And naturally selling begets selling. The more sellers pile in the lower prices go which scares in a whole new round of sellers. The absolute best time to buy is that very capitulation day. As fear peaks, prices are at their cheapest."

There is another fundamental aspect. The Obama victory marked the expectation of more Fed intervention to monetize deficits and debt growth, so interest rates don't rise to much higher levels. This is very significant for gold.

Let's now see the volume traded in the Gold ETF after 20 February. It can be noticed that all sessions when prices have risen show generally a larger volume than those that have declined. The recovery is underway with various technical signs that I will not mention here because they are not the aim of this study.

Mining Output

Mining output is expected to be almost identical to 2012 as new production comes on stream, but to some extent this will be countered by falling production at existing mines as producers have encountered lower ore grades and production disruption. Gold is a rarity as it is increasingly difficult to find and extract it due to technical issues and ever more long process of studies, licenses and permissions required for a mine to produce gold.

With data from the USGS it is possible to represent the following table:

Mine Production (metric tons)

2011 2012(e)
China 362 370
Australia 258 250
United States 234 230
Russia 200 205
South Africa 181 170
Peru 164 165
Canada 97 102
Indonesia 96 95
Other countries 1,068 1,113
World total (rounded) 2,660 2,700

Of course, we have to conclude that for 2013, and subsequent years we tend to believe that mining output will struggle to meet the 2011 levels. If we think in any demand pressure as I mentioned before, it is very likely that the price of gold will probably climb.

Scrap plays a decisive role

Gold supply from scrap is extremely important as it represents around 37% of total supply. The importance of scrap has increased since 2000: as price has climbed more old jewelry and other pieces have cashed-in. Scrap supply peaked in 2009 at around 40% of supply but has since slipped. A large amount of old jewelry has already been sold, and it will not be a surprise to see scrap as a percentage of the total supply continue to drift lower in the years ahead.


The law of supply and demand naturally applies to the gold market. What is likely to happen on a global basis is an increase in demand and a decrease in the supply of gold in 2013 and future years. For the reasons described above, this should make possible the sustained increase in the price of gold in the near future. In my analysis, I did not consider serious problems in the world political situation. As you know, this can by itself trigger prices of Gold. In addition, I have not mentioned the possibility of further weakness of the US Dollar which is one of the biggest drivers of growth demand and rising prices of Gold. I think that the reasons I have presented are sufficiently strong to make believe that there is no bubble popping in Gold.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.