The direction Where the Real Opportunity in the Gold Market Isthe price of gold bullion is headed is heavily debated these days. Those who are bearish continue to say the shiny yellow metal has no space in an investor’s portfolio. They argue that the price action we have seen in the gold bullion market since the beginning of the year, especially the sell-offs in April and June, were just a few minor sell-off episodes. We are headed much lower than $1,000.
When it comes to the price of gold bullion going forward, I have to distance myself from the bears. I cannot predict where gold prices will bottom or where will they top, but what I see is certainly worth noting. Both the fundamentals and the technicals of gold bullion are showing the presence of bullish sentiment.
At the very basic level, the demand for gold bullion is increasing, and it is very evident. Take sales of gold bullion coins at the U.S. Mint, for example. For the first seven months of 2013, the demand was higher by 82% compared to the same period a year ago. The U.S. Mint sold 679,500 gold bullion coins in total, compared to only 374,000 in the previous year. (Source: “Bullion Sales/Mintage Figures,” U.S. Mint, last accessed August 14, 2013.)
Demand for the precious metal in China is robust and continues to increase. Consider this: according to the Chinese Gold Association, in 2012, 460 tonnes of gold bullion were consumed in the Chinese economy; this year, the number has increased to 706.36 tonnes. If the demand remains, China may very well become the biggest consumer of gold bullion in the world (it’s currently India). (Source: Ananthalakshmi, A., “China H1 gold consumption soars, set to surpass India as top user,” Reuters, August 12, 2013.)
On top of this, the central banks continue to add more gold bullion to their reserves. This is very important to note, because they have turned into net buyers of the precious metal. This tells me that they are seeing value in the shiny yellow meal—their buying hasn’t stopped despite a decline in gold bullion prices.
On the technical front, just look at the chart below:
There are few important things to note here.
First, the price of gold bullion crossed above its 50-day moving average recently, and proceeded to hold above it. This is significant to note, because this is the first time since at least the beginning of 2013. The price did break above the 50-day moving average last July, but dropped below it the next day.
In addition, the moving average convergence-divergence (MACD) indicator and relative strength index (RSI) are both showing bullish divergence, as prices made new lows, but indicators didn’t. This is considered a bullish indicator for prices ahead among technical analysts.
Keeping all this in mind, I see value in gold miners. Due to the sell-off in gold bullion prices, they have been beaten lower. Some senior miners are now selling for junior prices.
This goes without saying, but there’s uncertainty around gold bullion prices. If an investor does decide to own gold miners, they need to be careful. They should look at miners with low costs of getting gold bullion out of the ground and strong balance sheets.
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