For those individuals that closely follow the precious metals market, and more in particular, the gold and silver markets, you’re likely aware that 2013 was one of the worst performing years in recent memory. In fact, the losses sustained in the gold and silver market of 28% and 36%, respectively, were the worst in 32 years. The mainstream media had all but written off gold and silver by the end of 2013, with further projected losses by the end of 2014, but much to the surprise of many, gold and silver has rebounded thus far in 2014, and shows no signs of slowing down. While the mini rally is still in its infancy stage, we believe that there are three reasons why gold and silver will continue to be a strong performer in 2014 and beyond.
At the time of this writing, the price of gold and silver is at $1238 and $20.15 an ounce, respectively. While gold and silver are positive for the year, both metals are still below the total estimated all-in mining production costs. According to this article by Seekingalpha.com, the third quarter all-in gold mining production costs for some of the largest mining companies was $1,244 an ounce. Silverstrategies.com also recently published third quarter silver mining costs, which averaged $21.39 an ounce. It’s highly unlikely that current prices will remain below the cost of production, which means that we’ll likely begin to see the closing of unprofitable or less profitable mines and a supply shortage if the price of gold and silver remains below the cost to produce it. If nothing else, a supply squeeze should help to bolster prices.
While the Federal Reserve recently announced that they’re going to be tapering their bond buying program from $85 billion a month to $75 billion a month, this still translates into the Fed increasing its asset base by $900 billion a year, which is nearly unprecedented. While the Fed’s actions should help to continue to suppress interest rates, expanding the monetary base will likely also result in a weakening of our currency, namely the U.S. dollar. A weaker U.S. dollar is seen as a positive by the Fed and economists, as it helps to reduce the price of our exports, but it also causes imports to be more expensive. The result from the perspective of gold and silver is a positive one, as historically the value of the dollar and the performance of gold and silver have been inversely related. Foreign demand for dollars may also be waning. Foreign countries, such as China, have recently entered into currency swaps with other nations, which means that they may be moving away from the dollar, further reducing the value of the dollar and likely increasing the price of gold and silver.
Foreign Demand for Gold & Silver
Foreign demand for gold and silver is nearly unprecedented, as India and China continue to be the largest buyers of gold and silver in the world. Even though India has made numerous attempts to curb demand for gold, by increasing import taxes by as high as 10% for gold bullion and 15% for gold jewelry, and by requiring that jewelers export 20% of all jewelry, Indian demand for gold can’t be stopped. The government’s efforts have created somewhat of a black market with smuggling becoming more prevalent, as evidenced in the following article from Triblive.com. China, on the other hand, continues to encourage its citizens to acquire gold and silver, and they appear to be listening, as China has recently overtaken India as the largest importer of gold in the world. The Chinese government is also acquiring gold at nearly unprecedented rates, which is further addressed in the following article from Mineweb.com, and is on pace to match the holdings of the U.S. inside of ten years. Strong demand in the East is further illustrated by the recent opening of a 2,000 ton capacity gold vault in Singapore.
While 2014 has just begun, we’ve already seen a mini rally in the gold and silver markets and believe that the trend will continue throughout the year. First and foremost, the price of gold and silver are currently below mining costs, which is unlikely to continue for long. Operating at a loss will cause mining companies to close unprofitable mines, resulting in supply shortages. Secondly, while the Federal Reserve has recently announced the tapering of their bond buying program, annual asset purchases of $900 billion are still nearly unprecedented, which should continue to put downward pressure on the dollar. Lastly, strong foreign demand should continue to push up the price of gold and silver in the global market.
Tony Davis is the owner of Atlanta Gold & Coin Buyers, a full service Atlanta based coin and bullion dealer specializing in buying, selling and appraising coins and coin collections of all types and sizes. Visit his website at www.atlantagoldandcoin.com for additional information on the products, services and educational resources offered by his company. Tony can be reached at [email protected] or at 404-236-9744.