Last week, the market reacted favorably to reports of some relatively strong economic indicators. Durable goods orders were up slightly, by 0.7%. The Labor Department also reported the lowest number of new unemployment claims since 2006. And manufacturing in China is up, which could indicate a rise in consumer demand. Given these factors, gold experienced a bit of a selloff and finished the week right on the cusp of that critical $1,300 threshold, thus lending more credence to the theory that gold has found a new floor.
There’s some good rationale to back up this theory of a floor for gold prices. First and foremost, it costs a little less than $1,300 to pull gold out of the ground these days, which means that when the price sinks below production cost, supply would likely tighten. Not only that, but China and India have absorbed a good deal of their scrap and recycled supply by now. That means supply is less elastic. The Chinese and Indian gold consumers are long-term holders who generally understand the purpose of gold, as we at Birch Gold define it: A store of wealth, not to get rich off of, but to protect what you already have. Gold is a bulwark against inflation, currency shocks and times of economic and geopolitical uncertainty – and if you don’t think we’re currently facing all of these conditions, we have a bridge to sell you. Our clients who understand this tenet will generally back their savings with more gold whenever the price dips below that critical mark. They’re constantly looking for strategic opportunities to add to their golden nest egg, and the $1,300 price point makes a lot of sense as the mark to look for under current conditions.
We say “current conditions” because a number of factors can change. Currencies get devalued. Mining operations can make new discoveries, find new efficiencies, close down or exhaust locations. Things happens to the mining industry, much like any other. Supply can change, and so can demand. More geopolitical unrest tends to accelerate demand. Poor economic outlooks encourage gold buying. Bad governance and irresponsible banking practices push people into something more solid and more out of reach to these sometimes nefarious forces. There is no shortage of things like these that push big picture demand for gold.
This is why many of our clients see the dips as buying opportunities. While others in the gold market might see a surge in the price of gold as an exciting time to buy, they might also get discouraged and sell when they see a dip. Everyone knows the age-old axiom that you are supposed to buy low and sell high, but it’s human nature to operate on emotions. Emotion pushes us to do the opposite – to buy high and sell low. And if you acted on such emotions, over time you might be tempted to believe that any asset – gold included – is a horrible “investment”. But those of us who can remain rational, those who don’t sell on the highs, they’re the ones that history has kindly rewarded.
All that being said, some analysts are predicting lower gold prices again this week, and if we are truly seeing a floor, that means more bounces around the $1,300 mark. What that means for you is that some really great buying opportunities are potentially lining up, so plan accordingly and pay close attention. We are a phone call away when you determine the time is right.