The gold market surged higher last week, hitting its highest level since mid-July.
Is this the start of a new rally phase in gold? The reasons to be bullish on gold are stacking up fast. Here are five:
- Global gold production growth has declined in recent years
Gold output in key producing countries, such as Australia and Peru, is set to slump to generational lows, according to S&P’s Gold Pipeline report. This is basic economics; less supply and growing demand will lead to higher prices.
Looking ahead, S&P forecasts a 9% fall in gold production for Australia in 2020, and expects the country’s production to reach a generational low of 6.8 million ounces by 2022. That is a 33% drop in only three years. Peruvian production is also expected to decline the most by 2022 — by a significant 1.9 million ounces. Notably, no new gold mines have begun production in the country since the start of 2017, according to mining.com.
- Emerging market consumer demand
China and India comprise over half the consumer demand for physical gold. Looking into 2019, the World Gold Council forecasts solid physical gold buying from these consumers bolstered by good economic growth in these countries.
- Technology demand for gold continues to grow
Gold is the preferred metal for a variety of electronics applications. Gold, for example, is used in “contacts” on semi-conductors which enable your smart phone to be smart. Copper and silver are also conductive metals and have been used as replacements, but both of those surfaces oxidize. Gold does not. Smart phones become more advanced with every new generation. Every new release involves new complexity, including facial recognition, wireless charging, and infrared sensors. All these tasks require advanced semiconductors. This means that, despite the costs, manufacturers are turning to gold for both bonding wire and contacts to ensure they work properly.
- Stock market volatility
The stock market volatility we witnessed last month is expected to heighten as we move into 2019 amid concerns over the aging economic cycle. Gold outperforms other asset classes when hard times come, and typically rises when paper assets like stocks crash.
- The U.S. dollar
Typically, gold and the U.S. dollar trade in an inverse relationship. That means when the dollar goes up, gold goes down and vice versa. Heading into 2019, expectations are for a weaker U.S. dollar, which is gold bullish.