by Adam Hamilton, GoldSeek:
Gold certainly had a rough year in 2015, grinding inexorably lower on Fed-rate-hike fears and investor abandonment. But gold is poised to rebound dramatically in this new year, mean reverting out of its recent deep secular lows. The drivers of gold’s weakness have soared to such extremes that they have to reverse hard. The resulting heavy buying from dominant groups of traders will fuel gold’s mighty 2016 upleg.
Investment demand, or lack thereof, is what overwhelmingly drives the gold price. Investment certainly isn’t the largest component of gold demand, a crown held by jewelry at roughly 4/7ths of the total. But that is somewhat misleading, as gold’s investment merits are the primary reason Asians flock to gold jewelry. But since global jewelry demand is fairly consistent, it’s not what drives the gold price on the margin.
Investment demand is much smaller. According to the World Gold Council, it only accounted for 17.7% of global gold demand in 2013, 19.4% in 2014, and 22.0% in 2015 as of the end of the third quarter. So call investment demand something like 1/5th of total world gold demand. While that isn’t huge, it is a super-volatile demand category. That’s where gold’s biggest demand swings emerge, driving its price.
The reason gold prices plummeted 27.9% in 2013, slipped another 2.0% in 2014, and then fell 9.6% in 2015 by this essay’s data cutoff on the 29th was because investment demand first collapsed and then remained weak. Without strong global investment demand, gold is going to struggle. It is the big swing category of demand, the outlying volatile variable imposed on the steadiness of other demand and supply.
It’s hard to believe after the brutal gold wasteland of recent years, but this unique asset hasn’t always been despised. Between April 2001 and August 2011, gold skyrocketed 638.2% higher in a mighty secular bull earning fortunes for brave contrarians. The flagship S&P 500 stock index actually slipped 1.9% lower over that same span. Even after gold’s summer-2011 peak, its price averaged $1669 in all of 2012.
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