How long will the gold rally run?

The metal may be spiking now, but outflow from ETFs and slowing central bank demand may balance those figures out.

By Jim J. Jubak Aug 15, 2013 5:49PM

Gold spiked higher Thursday, on news of more violence in the Middle East and an afternoon tumble in the dollar. Gold for December delivery is up 2.34% to $1364 an ounce. Gold stocks are up even more. Jubak’s Picks portfolio members Goldcorp (GG) and Yamana Gold (AUY), for example, both ended the day up more than 6%.


But the medium-term trends make me cautious here. The second quarter numbers from the World Gold Council, out Thursday, show a multi-year high in demand from the jewelry sector and record demand for gold bars and coins. But big outflows from gold ETFs and slowing demand from central banks more than balanced that out. Gold demand fell 12% in the quarter of a four-year low.

Of course, that's backwards looking. The one piece of data that makes me especially cautious, looking forward, is that a 6% year-over-year drop in gold supply in the quarter, which helped support gold prices, was almost totally due to a reduction in recycling -- as individuals held onto to gold jewelry rather than selling it because of low prices.


Image: Gold (© Comstock Images/Jupiterimages)Mine output increased by 4% in the quarter and supply from recycling fell 21% to 308.3 tons, the lowest since the third quarter of 2009. If gold supply from recycling picks up (or doesn't fall as much) that will remove some support for the price of gold -- and if it picks up enough it could lead to another round of production cuts from gold miners.


What's hard to call, of course, is the level of demand from ETFs. In the quarter, John Paulson's hedge fund Paulson & Co, the biggest investor in the SPDR Gold Shares (GLD), reduced its holdings by 53%. George Soros' Soros Fund Management sold its entire 530,000 shares in the Gold Shares fund, the world's largest gold ETF. Gold-backed ETF holdings fell 404.4 tons in the second quarter, according to Bloomberg.


The good news is, so much selling indicates that investment demand might be bottoming. However, investment demand didn't bottom with the end of the quarter. Gold holdings at the SPDR Gold Shares ETF have fallen another 97.4 tons from the end of the quarter through August 8, according to Bloomberg.


The other uncertainty is central bank buying/selling. In the second quarter central banks added just 71.1 tons to their reserves, down from 164.5 tons in the second quarter of 2012. Central bank buying totaled 534.6 tons in 2012, but central banks are on a pace to buy just 350 tons in 2013.


My own projection is that volatility in September (and fears of a government shutdown) and the current momentum in gold could take the metal back to the $1400 level of June or the $1460 level of May. But the big danger to this rally is that a tapering off of asset purchases by the Fed in either September or October could lead to a strengthening of the dollar that would stop the rally.


Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did own shares of Yamana Gold as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio.


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Tags: AUYGG
29Comments
Aug 15, 2013 8:12PM
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For me it is interesting that the ETF flood the market  with almost 500 t of paper gold in few months. However, several funds came to the media telling that they tried to buy physical gold and there is a delay of several months for deliver. If there is a huge supply where is this pile of physical gold available?
Alchemists tried to convert lead in gold for centuries, economists converted paper in gold in seconds !
Aug 15, 2013 9:01PM
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VL says "Own it right now and you bought a ticket to a train wreck. The price is fully exposed to manipulation and with volatility in stocks, junk in bonds... you are volunteering to be a victim of your own making."

 

You must mean all bonds, commodities and equities because that's what Bank of America, Citicorp, Goldman sucks, JP Morgan and Morgan Stanley manipulate every day of the year.

Aug 15, 2013 6:07PM
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If I may be so bold,
in every portfolio young and old,
there should be a prudent bit of gold.
.....So I am told.

Aug 15, 2013 8:56PM
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The one piece of data that makes me especially cautious, looking forward, is that a 6% year-over-year drop in gold supply in the quarter, which helped support gold prices, was almost totally due to a reduction in recycling -- as individuals held onto to gold jewelry rather than selling it because of low prices.

 

Really and Barrick Gold the largest gold producer is evaluating shuttering 12 mines until gold prices go up. I wouldn't hang my hat on an increase in supply in the next two quarters. The real issue is has the stock market peaked for now and where will the profits from selling go - into bonds, don't think so, into cash, not much. How about short covering gold and at least buying the miners until their PE is at least 8-10. So Barrick Gold with earnings of $2.40 should be at $19.20-$24.00 PS. Sounds about right it hit $19.81 today.

Aug 15, 2013 8:43PM
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And then there is that nasty rumor going around (again) about a new reserve trading currency that doesn't involve our Dollar too.  The reported inflation rate was up slightly too, which means that the true gross inflation rate including food, fuel, health care, and the cost of utilities is up substantially more and may spell a quick end for more Fed stimulus too.  Here in metro-Denver, average food prices are up by at least 15-20% just since Christmas.  So, maybe gold is up because of the declining dollar and some worry about rising inflation, reduced stimulus spending, and a continued fall in the value of our Dollar too?
Aug 15, 2013 8:49PM
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Who knows, but bet it will.....Up over 7.5% today.....woooohooooo !!
Aug 16, 2013 9:46AM
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I have to assume that VL's opinions are tainted... he is apparently independently wealthy because all he does is sit around all day and predict doom over EVERYTHING.  While I agree with him on many subjects, I don't think his investment advice (sell everything and hide out in a cave, bury your loot, I guess...) is of much value. 
Aug 16, 2013 8:35AM
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Jim

 

I like your $1,400 projection but I can see a higher number. The embedded video interviewing Elizabeth McDonald smacks of negativity. It appears to me many are hot to trot on Gold except our corrupt government and our US Media that suck up to Obozo and Bernake. We are still printing money and playing war. AQ hasn't stopped blowing stuff up. The Politicians are afraid to do what's right so I see a bigger number on gold. Nobody really knows, we may be seeing the beginning of a big up move, right now.

 

The game ain't over yet! Yogi Berra said it " It ain't over til it's over". .

 

I'm keeping what I got. Bought more in the recent drop. Now I'm getting giddy but not euphoric!

 

 

Aug 16, 2013 10:08AM
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TO WORK THROUGH ALL THIS MUMBO-JUMBO, REMEMBER ONE SIMPLE THING, IT PRESENTLY COST ABOUT $1,250.00 TO DIG AN OUNCE OF GOLD OUT OF THE GROUND AND AS PRICES COME NEAR THIS PRICE, THE DIGGING STOPS THEREFORE DECREASING SUPPLY AND INCREASING DEMAND THEREFORE INCREASING PRICES AGAIN.
Aug 16, 2013 12:20PM
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ANSWER: NOT LONG.I`ve bought quality stocks for 20 years and it works like a charm.
Aug 16, 2013 11:54AM
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Although some miners do garner Gold, sometimes Silver as a by-product of other mining endeavors.

There are quite a few pure plays in the Mining world...

Many are exploration and specific miners of certain precious metals...

They are looking for reefs, veins or geological formations that yield those metals.

 

Under those ideal conditions, once met; The cost of mining, ore breakdown, smelting or producing pure metals comes down to a workable cost...Larger Miner's cost are normally somewhat higher and they are also mining other commodities under demand and Market conditions.

 

Lower cost producers are in the $400-550 range, sometimes depending on mine conditions, Country of origin, and intensity(or amount) of gold in the ore/rock.

"All in Costs" are a new terminology, lately being stated to show whether a mine or a miner is actually profitable in their operations...

Those additional cost' can vary by wide margins....adding 75% or doubling the cost per troy ounce of production....All in vs. can be $750-1000 dollars for total production.

 

This is where bigger mining companies suffer some disadvantages, having older played out or down mines...Or very small amounts left to retrieve; Not being worth the trouble.

And their cost or "all-in" cost can approach $1100-1200 for ounce production...

Therefore they are "shuttering" mines, until prices rise to a value, worth the operation.

YES, if enough of this supply is cut...Prices will have tendency to once again rise, for many or various reasons....And yes History is a good read, along with "Current Conditions."

Aug 16, 2013 9:47AM
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We have bought and sold miners for a few years, maybe about 5-7 over a period of 10 plus years.

Having settled more or less on a couple that we like better them most; It's been worthwhile.

 

There are Gold miner Funds, and Gold ETFs, several ways to invest in Gold on paper.

Same with Silver or other PGMs..

And countless ways to hold Hard assets or commodities, Bullion, Coin, Jewelry, etc.

 

Although Gold and Silver have been oppressed and in a period of stagnation for close to 18 months or so...Central Bank purchases, World "stimulus actions", Inflationary pressures and demand from investors will certainly play a part in upcoming pressures on the commodity...

Whether you are involved, invested, holding or believe....Is up to the Individual.

 

Aug 16, 2013 10:42AM
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havasu46, so FUNNY yet true as you put it.

 

Here is some more great comedy spin!

 

Aug. 16,2013 - Dollar Heads for Weekly Gain as Economic Data Support Tapering

source/Bloomberg

 

A gain as in how....? Fed is holding by default how much of the playing board now. Not to mention the rest of the back burnered NEWS events transpiring.

 

PPT must be back with fury hey.

 

 

Aug 15, 2013 8:54PM
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Own it right now and you bought a ticket to a train wreck. The price is fully exposed to manipulation and with volatility in stocks, junk in bonds... you are volunteering to be a victim of your own making.
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