What we are seeing right now in the gold bullion market is unprecedented. The mainstream media continue to rail against gold as an investment, and prominent pundits have even declared that the precious metal will decline to $1,000 or even lower. But, in my opinion, it looks like these commentators are unable to see past the recent decline in prices.
When I look at the amount of negativity in the gold bullion market, I actually take it as a bullish signal. Contrarians will agree with me on this: when there’s blood in the streets, the best buying opportunities arise.
Gold has come under intense scrutiny in the paper market, but it seems to have become a buying opportunity for those who thought they had missed out after the gold bullion prices reached their highs in 2011.
Nothing has changed. The fundamental reasons for the rise in gold bullion remain in play. In spite of the recent price decline, the demand for gold is still just as valid as it was at its highest.
The clearing statistics by London Bullion Market Association (LBMA) showed that the total transfer of gold bullion among its members increased by 17.2% to a daily average of 28.2 million ounces in May—the highest amount in 12 years. In fact, in the same period a year ago, the LBMA reported just 19.5 million ounces in gold transfers.
And the monetary value of gold bullion transfers stood at a daily average of $39.8 billion in May—the highest since August of 2011. (Source: “LBMA: Volume of Gold Transferred Climbs To 12-Year High in May,” Kitco News web site, June 28, 2013.)
Central banks, which have been a net seller of gold bullion, are now buying. The first quarter of this year marked the seventh in a row in which central banks purchased more than 100 tons of gold bullion.
Central banks in countries like China need significant amounts of gold bullion because other major central banks (like those in the U.S. and Germany) hold a significant portion of their reserves in gold bullion—more than 70%—while China holds just less than two percent. If China decides to bring its central bank reserves even just to 10%, it would cause a profound rise in the price of gold bullion.
Remember, central banks will never say when they are going to buy; however, their actions speak louder than their words. Believe me when I tell you that they want to buy more gold bullion.
What the mainstream advisors don’t realize is that gold bullion stores its value and protects itself from uncertainty. Consider, as an alternative, the U.S. dollar: the buying power of Americans continues to decrease—what could be bought for one dollar in 1980 costs $2.83 in 2013. (Source: Bureau of Labor Statistics web site, last accessed July 2, 2013.) The opposite is true with gold bullion.
Frankly, I am bullish on gold bullion because it has great prospects in its future. Demand continues to increase, and the uncertainty around the future of the U.S. dollar makes the precious metal even more desirable. The stress in the gold bullion prices is simply due to a false belief in a U.S. economic recovery created by the stock market and the Federal Reserve.
~ by Michael Lombardi, MBA
This article Why I’m Bullish on This Precious Metal Right Now was originally published at Investment Contrarians