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Fundamentals on Gold Remain Strong

Blog May 4, 2010

The basic fundamentals that move the price of gold are supply and demand and dollar fluctuations.  The price action on a daily basis can be measured in terms of predominant buying and selling of gold, and strengthening or weakening of the dollar.

Even though we are off of our most recent record gold price of $1,218 in December of 2009, the fundamentals for gold remain strong.  Gold is one of the scarcest resources in the world.  Mining output has increased as the bull market has raged on but demand has still outpaced the new supply increases.  This has come from new investors and NGO’s (non-governmental organizations).  In addition, foreign central banks have become net buyers of gold as of late, whereas before they had been net sellers for many years.

The World Gold Council said that “investor flows, specifically from western markets, have provided a key means of support during the course of the credit crisis as investors sought to diversify their exposures to other assets and protect their wealth against market shocks.”  It is simple, demand is outpacing supply, and therefore the price of gold is rising, and has been for the past 9 years.  The fundamental demand for gold continues to grow.

On the dollar side of the equation we continue to see the central banks around the world print money at will.  This helps gold in two ways.  The first way it affects gold is the more money that is printed the more fear it produces in citizens of that respective country.  People become fearful of inflation or a collapse and want to divulge themselves of their currency.  The more fear that exists the more demand there will be for gold.  The second way that money printing affects gold is the more money that is printed the less that currency will be worth over the long-term.  This is simple inflation, which can lead to hyperinflation which can lead to a currency collapse.  As the value of a currency falls, the value of gold will rise in that currency.

Investment demand for gold worldwide is strong and the central banks are helping to fuel that fire.  In my opinion they will continue to do so as it is the path of least resistance in addition to making debt easier to afford, and the world is deep in debt.  So look for the fundamentals on gold to continue to show strength for years to come.

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