Gold bullion prices started their run-up way back in 2000, when the commodity was trading around $300.00 an ounce. From there, it took the precious metal 12 years to break above $1,900 an ounce—an unprecedented move. When an investment, such as gold bullion, rises 500%, a major pullback is expected which is exactly what happened since gold is currently down 40% from its all-time high. The bullish fundamentals for precious metals haven’t really changed since the correction. Demand for gold bullion is strong, while supply is actually dwindling as gold miners cut back on production, adjusting for lower gold bullion prices.
Central banks, which I believe will be the major force behind the rise in gold bullion prices going forward, are still buying as the decline in gold prices has not scared them away. My position is that central banks need gold to protect their reserves. According to the International Monetary Fund (IMF), this past June, the central bank of Russia increased its gold bullion holdings for the ninth straight month. (Source: Reuters, July 26, 2013.)
Other central banks are doing the same. Central banks from Belarus, Bulgaria, Greece, Kazakhstan and the Ukraine, to name a few, added gold bullion to their reserves in June. And demand from consumers for the precious metal also remains strong. Demand for gold bullion in India is high in spite of the efforts of the government and its central bank to curb demand for the precious metal. Similarly, China, which competes with India for the position of world’s biggest consumer of gold bullion, is showing increasing demand for the precious metal, as well.
In the U.S., the demand for physical gold is exuberant. Consider this table which shows the total gold coins sold at the U.S. Mint in the first seven months of this year compared to the same period a year ago. As you can see, demand for this time period is up an astounding 82%.
In addition, premiums on silver bullion products such as the American Eagle and Maple Leaf have nearly doubled in the past four years with consumers willingly paying $4 over spot per ounce. Back in 2010, premiums for these coins rarely exceeded $1.99. All of this information taken together leads me to believe that gold bullion prices will ultimately rise over the long term, eventually taking out its all-time-high. Even though the prices have gotten absolutely smashed, the fundamentals for gold have not changed and in reality, have actually improved.