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Arie Goren
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I am a retired global analyst, currently busy in investing and writing articles about stocks at several investing publications and websites. I have also developed strategies for creating winning portfolios according to specific formulas. In January 2015, I was ranked among the world’s top 10... More
  • Why Now Is The Time To Buy Gold 1 comment
    Feb 20, 2014 3:53 PM | about stocks: DGL, GLD, IAU, PHYS, SGOL

    After the dramatic decline of the price of gold by 38.5%, from its all time high of $1,923.7 an ounce on September 06, 2011, to $1,182.30 an ounce on December 31, 2013, the price has rebounded by 11.2% to $1,315.10 on February 19, 2014. Is this 2014 year to date uptrend going to continue? In my opinion, there is a reasonable chance it will. I base my opinion on the fundamental parameters of this precious metal - demand, supply and reserves.

    (click to enlarge)

    Data: TradeStation Group, Inc.

    (click to enlarge)

    Data: TradeStation Group, Inc.

    (click to enlarge)

    Data: TradeStation Group, Inc. Inflation was calculated according to the U.S. Consumer Price Index (NYSEARCA:CPI).

    On February 18, the World Gold Council published its Gold Demand Trends Full Year 2013 report, all the demand and supply data for this article was taken from this report.

    Gold as a Resource

    If we look at gold as a resource, then the fundamentals of gold are very good. The main use of gold is in jewellery as shown in the chart below. The demand of gold for jewellery in 2013 was at 2,209 tonnes (metric ton), the highest since 2008 and 313.4 tonnes (16.5%) higher than the demand in 2012. The demand of gold for electronics, other industrial uses and dentistry, was at 405 tonnes in 2013, just two tonnes less than in 2012.

    (click to enlarge)

    Source: World Gold Council

    Gold as a Long-Term Investment

    I distinguish long-term investment in gold through buying small bars and coins from short-term investment in gold through ETFs and similar products. An investor who buys a gold bar or gold coins does not intend to sell them in a short time, he would rather keep them for years. Long-term investment remains strong in 2013, as a matter of fact it was the strongest ever, 1,654 tonnes, 365 tonnes more than in 2012.

    Central Banks Gold Demand

    Ever since 2010 central banks have become net buyers of gold after many years of only net selling. Central banks net purchases were 368.6 tonnes in 2013, 175.5 tonnes less than in 2012. The fact that central banks continue to buy gold demonstrates their belief in the value of gold.

    Gold as a Short-Term Investment

    Gold had been out of favor by short-term investors in 2013. There was net strong outflow from ETFs and similar products of 880.8 tonnes. This is compared to 279.1 tonnes inflow in 2012, 185 tonnes inflow in 2011, 382 tonnes inflow in 2010 and 623 tonnes inflow in 2009. Lack of inflationary pressure, more stable world financial system and financial adviser's recommendation against gold were the main reasons that caused investors and speculators to sell their holdings.

    According to World Gold Council, investor sentiment is clearly changing. Major gold-backed ETFs seen net inflows this year while short interest has fallen, COMEX net-long futures positions have increased, and money is again flowing into gold in major markets.

    Gold Supply

    The total world gold supply decreased to 4,339.9 tonnes in 2013 from 4,415.2 tonnes in 2012. Total mine supply, which represented 68.4% of the total supply, rose 144.1 tonnes to 2,968.5 while total world gold recycled production decreased by 219.4 tonnes to 1,371.4 tonnes due to the decline in the gold price.

    Here are some important ETFS for gold which are traded on NYSEArca:

    SPDR Gold Shares (NYSEARCA:GLD), Sprott Physical Gold Trust ETV (NYSEARCA:PHYS), ETFS Physical Swiss Gold Shares (NYSEARCA:SGOL), iShares Gold Trust (NYSEARCA:IAU) and PowerShares DB Gold (NYSEARCA:DGL).

    The table below presents the trailing total returns of holding these funds; year to date (February 19), one year, three years and five years. The returns for the three and five years are annualized.


    After analyzing the latest gold demand trends, we can see that the appetite for physical gold remains strong. Demand for jewellery and bar and coin is rising, and central banks continue to buy gold.

    Examining the supply side, the cost of producing gold is rising, the world's richest deposits are being depleted in an accelerated rhythm, new discoveries are relatively rare, it is difficult to find gold in commercial quantities, and it also takes time, typically 5 years, and plenty of money to bring mines into production. According to the U.S. Geological Survey's 2013 report, the aggregate unmined known reserves of the entire world's gold mining companies are only 52,000 tonnes. As a result, some gold miners are already losing money, which will cause them to close inefficient mines. Rising demand and decreasing supply will result at a higher price for gold.

    In my opinion, net inflows to gold ETFs will remain in 2014, and I recommended investing in gold now, with a long-term perspective.

    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.

    Additional disclosure: I am long gold through CFD.

    Stocks: DGL, GLD, IAU, PHYS, SGOL
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  • Pgman701
    , contributor
    Comments (102) | Send Message
    Agree Arie and bought GLD this past week.
    23 Feb 2014, 08:41 AM Reply Like
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