by – Mike Fuljenz
Scotiabank’s recent mining conference featured a panel of gold experts with their views for 2015. The predicted prices were all over the map, but most specialists admitted they had no real way of knowing. In fact, host Andy Montana, director of ScotiaMocatta, said gold would stay “right where we are now.” Two other panelists, however, foresee $2,000 gold, either in 2015 or surely within the next four to five years.
“We may be in the trough now,” said Marcus Grubb, managing director of investment and strategy for the World Gold Council. Since gold’s average rise from a trough has been 90%, “that would put you at $2,000” (within four or five years). By contrast, Rob McEwen, chairman of McEwen Mining, said that we could reach “two grand” much faster, in 2015. He also said that gold will ultimately peak at $5,000.
Grubb cited Asian demand and central bank buying as two long-term engines of growth for gold, while McEwen defended his prediction of a more rapid rise to $2,000 by citing the rapid monetary expansion in the U.S., Europe and Japan. He also said that inflation is worse that the official statistics say it is, and that the dollar will take a turn down again. He sees money “moving out of dollars” and into hard assets.
Five Fundamentals (& Two Wild Cards) That Should Drive Gold Higher in 2015
After 12 straight rising years (2001-12), followed by a down year (2013) and a flat year (2014), where will gold go next? Will gold resume its multi-decade bull market or fall further during the months to come? Here are five fundamentals (and two wild cards) that could push gold to $1500 or higher in 2015:
Central bank buying accelerated in the second half of 2014, even as gold prices declined in terms of the U.S. dollar. Gold had a great year outside the U.S. Gold has been rising strongly in terms of most other currencies, none more so than the Russian ruble, where gold rose about 65% in 2014 (due to the ruble’s 60% fall to the dollar). Russia bought over 150 metric tons* of gold in 2014. Russia has now increased its gold hoard every year for nine straight years. Through the first 10 months of 2014, Russia’s gold purchases have already topped the previous record of 139.7 tons in 2010. Through October 31, 2014 (the latest figures available), central banks have bought a total of 335 metric tons vs. 324 metric tons in the same 10 months of 2013. We expect this trend of rising central bank gold buying to continue in 2015.
Gold miners are cutting production, which will eventually lead to a supply shortfall and higher prices. When the price of gold kept rising each year from 2001 to 2012, many mining companies explored for gold in remote places with small gold deposits, in the belief that gold would keep rising to $2000 and beyond. Since 2001, the average gold content per ton of ore has fallen from 2.5 grams to under 1.7 grams. Since the average cost to mine an ounce of gold is $1168, many mining operations were closed down when gold fell below $1200. (In 2010 there were six gold discoveries that promised two million ounces of gold or more, but in 2011 there was only one and in the last two years, none.) It’s harder and harder to find economical gold deposits, so new gold supplies are down, due to gold’s low price. At first, recycled scrap made up the shortfall in supply, but gold supply from recycling scrap fell to a 7-year low in 2014.
ETF demand leverages gold’s rise (or fall). The advent of gold exchange-traded funds (ETFs) in 2004 clearly helped leverage the price of gold higher, but that sword cuts two ways. Throughout most of 2013 and 2014, the Wall Street crowd stayed out of gold, but the Wall Street herd usually invests in what’s hot, selling anything that falls. If gold should turn hot, the Wall Street crowd could quickly jump on the gold bandwagon. Hedge funds are slowly turning bullish on gold. The net long position in gold and futures options rose for four straight weeks in late 2014, reaching the most bullish gold position since August. When investors buy the SPDR gold ETF (GLD), the ETF must buy physical bullion to back up demand, so ETF buying is a “virtuous circle” of demand, causing gold to rise, thereby attracting more ETF buyers.
Asian demand is almost certain to rise, due to a relaxation of government gold import controls in India, and a thirst for gold as an currency hedge in China. Between them, China and India are home to 30% of the world’s population, but they account for over 50% of global demand. China is the world’s #1 gold producer and #1 consumer, buying over 1000 metric tons per year on the official markets in Shanghai and Hong Kong, with an undisclosed amount bought by the central bank in Beijing. Meanwhile, India has repealed its “80-20” rule, which required gold dealers to export 20% of the gold they import. That was a money-losing proposition for dealers, since imports were subject to a 10% duty (tax), forcing dealers into a money-losing trade. This repeal came at the start of India’s wedding season, boosting demand in India.
The U.S. dollar will either fall or flatten out, giving U.S. investors an advantage in the gold market. In 2014, gold was flat in terms of the dollar, but it was up over 10% in terms of most major currencies, since the dollar appreciated by 10% or more against most other currencies, including the two biggest currency blocs, the euro and yen. In dollar terms, we’ve seen a “double bottom” of $1142. First, we saw gold hit a multi-year U.S. dollar low of $1142 on November 5. That was the same day that the Daily Sentiment Index survey of traders found that only 3% were bullish on gold. Shortly after that, gold rebounded to $1200 in mid-November and then fell to an overnight low of $1142 on December 1. This amounts to a bullish “double bottom” chart formation, which implies a “W-shaped” recovery in the price of gold.
Two wild cards, not yet on the horizon but always a threat, are (1) a terrorist strike on America, or (2) a major stock market crash. We haven’t seen a terrorist attack on American soil in over 13 years, and we haven’t seen a major stock market crash in six years, so Americans are beginning to feel secure enough to pour the majority of their assets into stocks and bonds, ignoring gold. Gold’s last two big bull market surges began (1) shortly after September 11, 2001, and (2) after the major stock market crash of 2008. If we see an attack on America or a major stock market crash in 2015, we could see investors turn to gold in a major way, providing a 50% to 90% gain (to $1800 or even $2200) in the next three to five years
P.S. I didn’t mention the word “inflation” once in this article. Gold is far more than an “inflation hedge.”
*A metric ton (or tonne) is composed of one million grams, equivalent to 32,150 Troy ounces, or 2,204.6 pounds.