I recently read an article that bashed gold into the ground, as I read it many points stood out to me as very true, whereas a few points were false. Being a tenacious gold bull myself, I found that being a collector affected my perception in the gold market. The phrase, “Buy and sell it, don’t marry it”, comes to mind. If you are a collector, be prepared to take losses now in the gold market, as a bullion investor be prepared to look at facts and figures to avoid losses. The past three months SPDR Gold Trust ETF (GLD) has seen a 6.5% fall. The past six months has seen a 12.5% fall in GLD.
This article will examine facts and figures and get to the grit with gold.
Silver is considered an industrial precious metal. We eat, drink, filter, clean, and communicate with it. The fact of the matter is that gold is just as useful as silver in most applications, even anti-bacterial. Gold’s electric conductivity is close to silver, silver being the most conductive metal. Gold does however have its own unique property, being the least reactive of metals. This is where gold may have its most value in the future. Space is where gold has some of its best uses.
Gold’s reflectivity, conductivity and corrosion resistance have played a vital role in space exploration for decades. Its efficiency as a reflector of heat and infra-red radiation has been invaluable in numerous NASA undertakings.
(source: World Gold Council)
Gold definitely has its uses.
The argument saying gold is a bad investment because it has no intrinsic value is simply a fallacy. Gold is valuable for its good looks and properties, does it need intrinsic value? A copper pipe has intrinsic value in the copper where it can be melted down for more uses, where as a pipe has a smaller range of uses. The same can be said for a plastic bottle, the plastic can be recycled and used again where as a bottle there are fewer uses. Gold can be melted down and turned into gold…obviously. The fact of the matter is gold doesn’t need intrinsic value. Asking for intrinsic value from gold is like trying to ask for an egg from a pig.
All of these points cater to the more conservative gold bulls. The technical and factual details may cater to the more liberal gold bull.
USGS estimated that 2,700 tonnes of gold were produced in 2011. This is after the all time peak in 2001 of 2,600 tonnes to gold. After a little plateau for ten years, gold production is making another move upwards. Along with this, in 2011 six major producers saw gains, where only two producers saw losses. To put this into scale, back in 1970, total gold production was 47.5 million ounces split up like this:
In 1970 South Africa was the major supplier, with Russia coming in as second. Compare this to now:
More and more gold deposits are being mined globally. The global leaders are the minority when compared to the rest of the world. All this new supply is met with shrinking demand.
On a tonnage basis, demand totaled 4,405.5 tonnes [T] in 2012, down by 4% from 2011 as an increase in demand from institutional investors and central banks only partly offset a year-on-year decline in consumer demand.
(source: World Gold Council)
The World Gold Council also estimated that:
The supply of gold contracted by 1.4% to 4,453.3t. Lower levels of supply from recycling was the main reason for the 2012 decline.
These numbers look very good for gold. Supply shrank a bit and production is a little over half of total demand. Although demand itself shrank 4%, the supply fell too. To put it all together:
(global scale in tonnes)
It appears that recycling gold may be the only reason it stays at current price levels, the production deficit cannot go on forever.
The main cause for worry in the gold markets is simply the technicals. The “Death Cross” made headlines all over the place and is the major indicator for bearishness for gold. The moving average cross mixed with the major support cross is an increasingly more alarming signal. As of 4/3/2013 the MACD and RSI indicators are still slightly bearish for the short term with a possible ten or twenty dollar climb after the RSI bottoms out at 24-25 and MACD turns upwards. The major support level is $1500-$1550. Once gold crosses this, we could see any price down until $1300 in the following months. Hopefully gold stays above $1500 an ounce. The other worrisome chart is the S&P 500 vs. GLD.
This chart shows GLD’s performance against the S&P. It is sorry to look at in the first place but the real issue is the correlation between gold and the rest of the market. Gold falls with the S&P! With the obvious bubble in the market currently, we could see CATASTROPHE in gold if the S&P takes a major hit. Something similar to what happened in 2009.
Supply and demand figures look very appealing to me as a gold bull. Same with simple gold uses and history. What is the largest concern is how the technicals read and as much as it pains me to say, gold is in for a hit. The best way to go into the next few days and next week is to watch the support levels. If major resistance is found soon then buy. If gold falls below $1500, sell. Selling ends the pain.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in GLD over the next 72 hours. Please do your own research, but consider all ideas.