We’ve seen gold pull back over the last two months, and no wonder –- the European Central Bank was selling it like hotcakes. The bank issued a statement saying: “Over the past two months, the ECB has conducted gold sales amounting to 37 tonnes of gold.”
That’s enough to meet over 4% of all gold demand in the first quarter. And in a market where prices are driven on the margins, that was enough to pound prices lower.
Now, however, the ECB says it’s done selling. It has sold 60 tonnes in the first year of the most recent Central Banks' Gold Agreement (which covers sales of the yellow metal), and isn’t planning on selling any more this year.
Other banks should be in no rush to sell, either. That’s because they’re running dangerously low on the yellow metal! According to figures from the International Monetary Fund, gold holdings by central banks and other government organizations declined for the eighth straight year in 2006 to a 60-year low! Bullion holdings were 867.6 million ounces last year, down 1.2% from 2005, the lowest since 1948, according to the World Gold Council.
Of the top 15 government holders, Russia was the only bank to make purchases last year, up 3.8% to 12.91 million ounces in December from 12.44 million a year earlier, according to the IMF. China's holdings of 19.29 million ounces in December have stayed unchanged since 2001. I expect that to change soon now that China has openly announced that it’s going to diversify its $1.2 TRILLION in foreign reserves, most of which are held in low-yielding U.S. bonds.
Global demand is ramping up. Demand for the yellow metal increased 4% in the first quarter from a year earlier, even as the spot price of gold increased 17%, according to the World Gold Council. Identifiable gold demand jumped to 831.7 tonnes of gold worth $17.3 billion, compared to the first quarter of 2006, in which buyers sought 797.8 tonnes of gold worth $14.2 billion.
The biggest positive force: Chinese demand. Consumer demand for gold in China was up 31% vs. the same quarter last year, as the Chinese flocked to buy gold jewelry and commemorative “lucky balls,” particularly around the Chinese New Year in mid-February.
Demand in the world's largest gold market, India, also surged in the first quarter, rising by 50% from the same period a year earlier. Strong economic growth and the onset of the wedding season played a role.
Intensified demand in Asia comes as the yellow metal is already in a supply/demand squeeze. Demand from consumers and investors is rising, and yet ...
Global gold production is falling. In Peru, for instance, the Energy and Mines Ministry reported this morning that gold production in that country fell 14% year-over-year in March. That’s not the first time production has declined there, either. And Russian, South African, US and Canadian gold production is all down year over year.
There is one place where gold production is growing at a double-digit rate – China. But it can’t keep up with booming Chinese demand. Worldwide, global mine output fell by over 3% to 2,471.1 metric tonnes.
It’s important to remember that gold production is falling even in the face of higher prices. The big gold miners would LOVE to produce more gold … they simply don’t have the resources. The only way they can get more is by exploration (which takes a lot of time and money) or buying up smaller producers.
This is where going global really pays off. There are great undervalued miners around the world, and the big miners know it. By buying stocks of those small producers, you not only can ride the rising price of gold, you can get a potential rocket launch if the stock is snapped up by one of the big boys.
Falling dollar points to higher gold prices. There is another good reason to buy gold. And that is to protect yourself against a likely fall in the U.S. dollar. It’s often said that a currency is a vote of confidence in the economy it represents. And if the U.S. economy is slowing, you can expect foreign investors to put their money to work elsewhere. That means they’ll need fewer U.S. dollars. Also, gold has moved opposite the dollar 79% of the time this year. To see what I’m talking about, look at this chart.
You can see that gold has trended higher while the U.S. dollar has trended lower. The recent rally in the dollar hasn’t done much to change that trend.
Three Ways to Play a Summer Gold Boom
You can always buy the StreetTracks Gold ETF (NYSEARCA:GLD). While that will track gold, it’s not leveraged to it like miners are.
If you prefer mutual funds, check out U.S. Global Investors’ World Precious Mineral fund [UNWPX]. This no-load fund returned 52% in 2006 and is outperforming its benchmark, the Amex Gold Bugs Index, by a wide margin.
If you have the stomach for risk that comes with investing in individual stocks, I recommend adding a small-cap miner with takeover potential: Aurizon Mines (AZK).
It has over a million ounces in resources. It has a producing mine. Its Casa Bernardi mine went into pre-commercial production in the first quarter and full commercial production in the second quarter. Its price has been beaten down. Aurizon is off its highs even as its resource base is increasing. It’s a bargain. It has great future potential. Along with Casa Bernardi, Aurizon has a resource at its Joanna property that is a potential mine-maker all on its own. And its Kipawa Property has three distinct gold targets as well as the potential for uranium and diamonds.
Good luck, and good trades.
Disclosure: Sean Brodrick, an analyst for MoneyandMarkets.com in Jupiter Florida, has recommended a " long" position on Aurizon in his “Red-Hot Canadian Small-Caps” portfolio.