5 Positive Gold Trends

The five main gold trends for higher prices in gold are the following: weak world economies, high fundamental demand, draining supply, long price cycles, and the fact that there is no market bubble.

1. Weak economies mired in debt

The U.S. trade deficit in 2010 alone is totaled at $42.8 billion since July adding to an enormous federal budget deficit which is estimated to be $1.3 trillion for this year. This will increase the national debt estimated at $13.46 trillion. That is equivalent to $43,379 per capita. The U.S. total debt, domestic and foreign, is approximately $53.9 trillion which is equivalent to $173,812 per capita.

In response, there has been a need for major central banks to increase gold holdings. In October of 2009 India said they would begin purchasing 200 tons of gold from the IMF. From 2003 to 2009 China purchased 454 tons of gold. Since January of 2008 Russia has acquired over 218 tons of gold for reserves. This has created a price floor for gold just under $1,000/oz.

2. Total gold demand up 77%

Around 50% of gold demand is driven by overall demand for jewelry. Demand for gold jewelry has high expectations as densely populated and growing countries, India and China have a unquenchable demand for gold jewelry. Of the entire demand of 1,087 tons, jewelry comprised 408.7, according to the World Gold Council.

Investment demand for gold has been reaching new peaks, thanks to gold exchange traded funds which grew 414% to over 291 metric tons. Exchange traded funds in gold comprises nearly 28% of the entire demand for gold.

3. Draining supply of gold

The rate at which supply and discovery of gold from mines is slowing compared to twenty or thirty years ago. Currently, world mine production is 2,500 metric tons. In the second quarter of 2010 supply has increased only 17% from 2009, compared to a 36% increase in demand during the same time frame.

4. Long price cycles 

Commodities price cycles, and specifically, price cycles for gold historically have been very long nearing 40 years during some cycles. According to U.S. Funds, gold has gone through 9 price cycles since 1800 with an average life of just over 22 years, the shortest cycle being 10 years long. The latest price cycle started in 2002 meaning on average we can expect gold to rise until 2024.

5. This is no gold bubble

When deflated and realigned in 2009 dollars, the last peak in 1980 would have equaled $1,600/oz. The amount of change in prices during that price cycle was much more dramatic then what has been experienced during this bull market. There has yet to be dramatic topping effects that are consistent with bubble markets. According to U.S. Funds, record gold prices would have been $2,300/oz. when adjusted for inflation.