“Why would someone be bullish on gold right now? Stocks have the momentum. Let me warn: you will be better off buying stocks than buying gold bullion.” These were the “wise” words of my good old friend Mr. Speculator, when I met him over the weekend.
Not too long ago, he was afraid about what would happen to his stock position. Now, his opinion has changed. Mr. Speculator thinks key stock indices will hit new highs and gold bullion—which provides safety against the backdrop of a weak economy—will go down further. He said, “It will be a bad year for gold investors.”
Mr. Speculator may be right about the key stock indices. The momentum on the stock market is significantly noticeable. We see buyers come in and buy after every decline. This can continue, but you have to keep in mind that the fundamentals are becoming weak. This can be troublesome and could create a massive sell-off very quickly.
On gold, however, I completely disagree.
I have been bullish on gold bullion for some time, and my main argument has to do with the demand and supply of the precious metal. I see demand for gold bullion increasing, while the supply side is being threatened due to low prices.
We are seeing China become the biggest consumer of gold bullion. It was India before, but the government and the central bank of the country are working very hard to curb the demand for the yellow shiny metal. According to the China Gold Association, in 2013, the total precious metal consumption in the country increased by 41% to 1,176.4 tonnes. This was the first time when Chinese demand for gold reached more than 1,000 tonnes. (Source: Standing, J. and Ananthalakshmi, A., “UPDATE 1-China’s gold demand surges, tops 1,000 tonnes for first time,” Reuters, February 10, 2014.)
China isn’t the only place where we see heavy gold buying. The U.S. is a similar case. For example, until February 7, the U.S. Mint has sold 97,500 ounces of gold bullion in American Eagle coins. (Source: “Bullion Sales/Mintage Figures,” United States Mint web site, last accessed February 10, 2014.) The U.S. Mint also sold 41,500 ounces of gold bullion in American Buffalo 24-karat coins. This was the second-highest amount of gold bullion sold in American Buffalo 24-karat coins since January of 2013. (Source: Ibid.)
Back in April of 2013 and then in June, when gold bullion prices witnessed selling pressures, the general consensus by the bears was that the buyers will eventually run out. This hasn’t happened; in fact, we are actually seeing an increasing number of buyers.
At the end of the day, gold bullion isn’t a bad investment at all. It provides safety in times of uncertainty; we see risks in the global economy increasing, plus the fundamentals that drive the key stock indices aren’t as surprising. The argument to own gold bullion gets even better when the demand and supply situations become promising.
For those investors who agree with this position that gold bullion should be a part of their portfolio, you may want to look at exchange-traded funds (ETFs) like the iShares Gold Trust (NYSEArca/IAU). This ETF provides investors with exposure to gold bullion, and it’s a cheaper alternative to the SPDR Gold Shares (NYSEArca/GLD) ETF.
This article Two Reasons to Consider Gold Investments Right Now by Mohammad Zulfiqar, BA was originally published at Daily Gains Letter.