Wednesday, August 25, 2010

Gold Fundamentals

The world council reported this morning that gold demand surged 36% in the second quarter.

Investment demand is now back to levels seen during the height of the financial crisis, and we haven't even entered the next crisis yet.

You can determine when an investment is overvalued because as prices rise, an enormous surge of supply comes onto the market.

This was seen during the telecommunication boom in 2001 as companies were purchasing enough underground wiring to supply four times the world's population.  It was also seen during our housing boom as inventory supplies surged with the prices rising.  Today we see it in the US government debt bubble as record new supply year after year is now being met with record high prices paid for these bonds.

Gold today is in the exact opposite situation.  The graph below (right) shows that new mining supply is now lower than the fourth quarter of 2005, with prices now over 100% higher from that period! (Click on graph for larger image)


It takes years to develop a new gold mine, unlike building a home or putting wires underground.  This comes at a time when the Fed is ready to unleash the next flood of printed currency into the market.

(The supply/demand situation for silver is far better than gold.  In fact it is almost unbelievable when you review the numbers)

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