reply to post by Drew99GT
Gold hit a cyclical bottom in 1999. It’s been moving up ever since, logging a positive return every year in the past 10. That’s soon to be 11, as
the metal is up nearly 25 percent year-to-date.
Most investors already know about gold’s record low. What they don’t know is that it was a state of capitulation, the level where the last person
long on a losing trade finally throws in the towel.
That’s because 1999 was the year when the United Kingdom cried “uncle” to falling gold prices and started selling off its gold stockpile en
You can blame then-Chancellor of the Exchequer Gordon Brown (yes, the future prime minister) for panic-selling. Brown tried to unload so much gold
that the price dropped nearly 10 percent in a matter of weeks, reaching a low of $252.80 in July, 1999.
And yet, you also have to realize that other countries and central banks were doing the same thing to their gold supply for over 15 years before the
Indeed, European banks haven’t been net buyers of gold since 1985 . . . at least until now.
According to a report in the Financial Times, European banks have bought over 25,000 ounces of the metal (yes, at market prices) year-to-date. To be
fair, that’s less than one ton of gold. It’s chump change compared to the massive purchases by Russia, India, and China’s central banks.
But it’s the start of a major shift.
When central banks are net purchasers of gold, the price goes up. When they’re net sellers, the price goes down. And the fact that European central
banks have started becoming net buyers at a time when there’s so much questionable paper debt floating around the EU is hardly a coincidence.
Gold bottomed when every European institution that wanted to be out of gold was finally out. Now they’re starting to come back to the table to buy
again. When it reaches a frenzy in a few years, that’ll be a signal to cash out. For the time being, it’s a small, but incredibly bullish signal
Right now, however, bullion is still within 10 percent of its recent nominal high. There’s no need to rush to add to your gold positions. There will
be plenty of opportunities to pick up bullion at better prices relative to its recent high.
And there will be times when the best way to play gold isn’t with bullion. Now is one of those times. For several months now, gold stocks have
lagged gold’s performance. Despite some cost increases due to inflation, the majors have been expanding their operating and profit margins. In terms
of assets, investors in the majors can buy an ounce of gold reserves for less than $1,200 per ounce.
Junior miners have more upside, but are also dependent on company-specific risks, typically involved with finding and bringing new reserves to market.