Lower prices for gold and silver bullion are certainly
attracting buyers. The U.S. Mint’s sales of American Eagle gold coins surged
in November, nearly tripling month-over-month. The mint sold 97,000
ounces of American Eagle gold coins in November, up 185%
from October and 62% higher from a year ago.
Sales of American Silver Eagles set a new record
for the third year in a row. Total sales through the end of November stand at
44.7 million ounces passing last year’s record of 44.0 million ounces.
The surging demand is not just in the United States. The
Canadian Mint reported that sales of Canadian Gold Maple Leaf coins rose 135%
year over year in the third quarter and 97% sequentially
versus the second quarter.
Silver demand has also been hot in Canada, with the most
recent quarterly silver sales on pace to break 2014’s
record. Silver sales increased 76% year over
year from 5.4 million to 9.5 million ounces. Year to date through the third
quarter of 2015, the Royal Canadian Mint has sold 25.2 million ounces of
silver, on pace to surpass 2014’s record silver sales.
Mint sales are only small portion of overall demand,
dwarfed by the jewelry market, central bank buying and leveraged paper
markets. Still, total gold demand was up 8% in the third quarter according to
the World Gold Council, while total gold supply was only up 1%.
I believe we will see investment demand for retail
bullion continue to soar, which represents a record amount of physical
gold and silver being removed from the system.
On the flip side of the equation, gold and silver
supply growth is likely to remain anemic and will may turn negative
at some point in the next few years. As prices continue to drop, a growing
number of miners will be forced to suspend unprofitable operations and slash
exploration budgets. This will lead to lower global mine output in both the
short term and long term.The leveraged paper markets may obscure this reality
for a while longer, but economic fundamentals dictate that increased demand
and flat to declining supplies will eventually lead to higher prices.
All of that being said, I think gold is likely to remain
weak in the short term and test the $1,000 price level soon. Any drop below
this price level could see a test of support around the $850-$900 price
range. If we get a major stock market correction, I expect to see gold and
silver gap down initially and then rebound sharply as occurred during
the 2008/2009 financial crisis. Mining stocks are already trading as if we
are in the midst of a financial crisis, at their lowest levels ever relative
to the underlying metals.
The odds of a FED rate hike in December are hovering
around 75%, despite the sharp drop in manufacturing activity reported this
week. The ISM manufacturing index fell to 48.6 in November, entering
contractionary territory for the first time in year and marking the lowest
reading since 2009.
Gold investors may want to consider reducing exposure to
protect capital and/or hedging positions until we see a clear bottoming
process develop. As much as I am bullish on gold in the long-term, I
believe it is prudent to keep powder dry and have a sizable cash
position at this juncture.
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