Demand/Supply Equation For This Investment Guarantees Higher Prices Ahead?

by: Profit Confidential

By Michael Lombardi, MBA

The demand and supply situation of gold bullion is clearly going in favor of the bulls, and I continue to believe the precious metal is presenting investors with a buying opportunity of a lifetime. I believe that if I buy now, I will profit later.

Let me explain…

Demand for gold bullion is rising, and it’s not just happening in the typical precious metal-consuming countries like India and China, but in the U.S. and elsewhere in the world as well. Central banks are also buying.

2013 was a very interesting year when it came to demand for the precious metal. We saw a massive amount of sellers come in and bring down the prices for gold bullion. Gold bugs like John Paulson changed their tone towards the yellow metal as prices fell.

But while the sentiment towards gold bullion was turning negative, central banks were buying more of the precious metal. Why were they buying? As I have told my readers over and over again, the currency markets jeopardize their reserves. According to the World Gold Council, in 2013, central banks around the global economy bought 369 tonnes of gold bullion. (Source: World Gold Council, February 18, 2014.)

Central banks have now been net buyers of gold bullion for 12 consecutive quarters, or since 2009. They were net sellers of the precious metal before then.

And central banks aren’t the only ones buying gold bullion; consumers are buying as well. At the global level, the demand for gold bullion bars and coins in 2013 increased to 1,654 tonnes, compared to 1,289 tonnes in 2012. This was the highest amount ever recorded by the World Gold Council.

Global jewelry demand for the precious metal in 2013 was 2,209 tonnes, the highest amount since 2008.

When precious metal prices were declining, we heard mainstream analysts argue the U.S. economy was getting better and that there was no point owning the useless metal. Sadly, they were wrong. We saw more buyers come in. As gold prices declined, buyers got a chance to buy more at lower prices.

As we saw prices for gold bullion decline, my prediction about mining companies eventually throwing in the towel and cutting down production at marginally profitable mines came true. Barrick Gold Corporation (NYSE:ABX), a major gold miner, in its yearly guidance, said it plans to produce between 6.0–6.5 million ounces of gold bullion in 2014. In 2013, it produced 7.16 million ounces. (Source: Barrick Gold Corporation, February 13, 2014.) Miners are cutting back on production. This reduces the supply of gold bullion coming to the market, but demand is rising—not declining—for the precious metal.

Dear reader, it can’t get any more obvious than this: demand for gold bullion is simply increasing and supply is declining. Even an amateur economist will tell you that this is the perfect recipe for higher prices.

Finally, I’m not focused on what’s happening in the gold pits on a day-by-day basis. I’m concerned about the changing demand and supply equation of gold bullion and how it will affect prices two years from now.

There is no doubt that gold prices were punished last year. You can thank emotional selling, fear, and maybe even manipulation for that. But this year is setting up for a surprise. 2014 has turned out to be very good for the gold investors, and from my point of view, it’s only going to get better from here.

Disclosure: None