April 2013 was a turning point of sorts for the gold investment industry. Gold fever struck and people started to transfer their investments from gold-backed paper investments to physical bullion. According to the World Gold Council, this flip-flop, fueled by a gold price drop in mid-April, has left many shops empty, forcing refineries to start waiting lists.
Why This Sudden Surge in Gold Demand?
It’s the Asian market, specifically India and China, although Vietnam is not far behind. All three markets realized premium increases, with the State Bank of Vietnam’s reaching US$150/oz. The premiums were pushed to extreme levels, over and above the spot price of gold. Premiums reached US$40/oz in China, as reported by the Shanghai Gold Exchange, and in Mumbai, gold premiums went up to US$26/oz, until it finally settled down at US$10/oz. a few weeks later.
The demand for gold has been on the increase for the first quarter of 2013, with India leading the charge. Representing 28% of the world’s consumer demand, India may experience up to a 150% increase in the second quarter than what it was a year ago. This translates into 400 tons of gold being shipped into India alone, totaling roughly half of the world’s total imports in 2012.
Supply and Demand
With the demand of gold on the rise, the prices will likely stay on the incline as supplies start to run short. According to Peak Resources, the supply of gold is now extremely limited. The mining attempts have turned into very costly endeavors as miners have to dig deeper into the ground, costing more money than ever.
As World Gold Council researchers noted, 82% of the consumers in India and China, when polled in May 2013 predicted that gold prices would increase or stabilize over the next five years. There are no signs of a downward trend, anytime soon. In fact, 45% of the Indian and Chinese investors claimed they bought gold in the last six months.
As paper gold demands continue to decline and the desire to own physical coins and bars increase, experts believe the precious metals market will strain supplies while global demand soars to new heights. With supplies already at their maximum limits, the price of gold will begin to move in conjunction with increased demands.
Beyond the physical gold boom in China and India, there has also been an upward trend in demand elsewhere. In the United States, the US American Eagles realized the highest dollar value ever, coming up to $311M in April 2013.
Similarly, in the UK, the government has increased their coin sales three times in the same month. Australia’s Perth Mint reported an all-time high level of demand for physical gold in five years.
Michael Wittmeyer, the president of JM Bullion, a precious metals dealer, recommends that investors stick to what they have been doing rather than straying. The best thing to do is to try to get in at the lower prices. He feels the precious metals are going to soar higher than ever. This is because gold is fundamentally a sound investment. Even with dips in price, it generally maintains its worth no matter what the stock market is doing at the time.
Some critics believe that gold will come crashing down pretty soon, and that the demand cannot continue to increase like it has in the last few months. Since gold has no loyalties or allegiances, it will be interesting to see what happens as the global demand for physical gold continues to climb.
Marcus Grubb from the World Gold Council predicts, however, that the Asian markets will end up with record high demands by the middle of 2013. Even if gold ETFs continue to see a decline, the physical gold market will likely continue to prosper, with markets ready in the Middle East, China, and India.
As history reveals, for the last 5,000 years, people have seen economic ups and downs, from the gold boom days to the Great Depression. During times of financial chaos and uncertainty, time and time again, investors have seen precious metals as being the safest bet.
It is time for investors to decide whether they bail on physical gold after the slight decline in price – a hiccup, really – or if they continue to move forward to build their nest eggs out of gold. Only time will tell what ends up really happening to gold in the future.
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