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A Gold Bull in a China Shop – Part 2
By Allan Barry Laboucan
In part 1 of this article, I wrote about the long term weakness in the supply chain of gold, and why that would keep the bull market for gold alive for many years. But the weak supply chain is only half of the supply and demand story.
If gold just had weak supply, and also weak demand, it wouldn’t really do much; it certainly wouldn’t have gone from around $250 USD per ounce to nearly $2000. What fueled that massive move was not only weak supply, but also strong demand.
While gold mining companies were spending less on exploration to make new discoveries, which could be developed into new mines, and mining out their known mines. That ultimately resulted in weakening the supply chain of gold. Emerging economies such as India and China were growing rapidly, and in these countries gold is an integral part of their cultures. As they grew, their appetite for gold increased, dramatically in fact, to the point that their demand was overwhelming the weakened supply chain.
This is a fundamental demand that will not change because gold is so engrained in the cultures of India and China. As India and China grow, as well as other emerging economies, more people in these countries can afford gold, and they buy more gold.
But gold supply from mining is not the only source, over the years the central banks of many countries also held a lot of gold. Many of those central banks that held gold before the year 2000 sold their gold, in many cases right near the bottom.
After 2001, many central banks still held a lot of gold, and the strong demand coming from India and China helped eat through that above ground supply. And another big help came a few years later when gold exchange traded funds came around. What happened was a lot of investors were seeing the price of gold go up, and wanted to get in, but didn’t know much about gold mining companies, nor did they want to buy and store gold.
So the financial industry saw an opportunity, and created exchange traded funds, which would go out and buy physical gold and store it, and an investor could then buy the funds that were designed to track the price of gold. These instruments became very popular, and they started to buy up a lot of gold, which also helped remove the above ground supply that wanted to sell.
Demand from exchange traded funds, and from buyers in India and China, have been eating through the above ground supply of gold, as well as what comes onto the market from mining. And will continue to overpower the weakened supply chain for many years.
This combination of weak supply and growing demand is what has driven the price of gold for over a decade, and will continue to drive the gold bull higher for the next decade.
2012-11-14 18:02:35
Source: http://thestockvine.com/a-gold-bull-in-a-china-shop-part-2/
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