Gold prices have skyrocketed almost fivefold in the last nine years, and pessimists are voicing concerns about a possible bubble forming in gold assets and related exchange traded funds (ETFs) as prices stall out. However, market fundamentals are still backing gold’s claim to fame.
According to The Trading Report, there are four driving factors pushing gold prices:
- Global stimulus measures that are fueling inflation, which is a bullish signal for gold. All major economies have “stimulated” their economies by printing more money. Most of that free-floating money is finding its way into emerging markets and hard-asset resources like gold.
- Even with record prices in gold markets, gold suppliers are still unable to meet demand for the precious metal. The supply side in the economics of gold can’t meet the demand side. This situation translates to higher prices of the precious metal. Gold prices are now high enough that gold miners are going back to what was considered “waste rock” to squeeze out what little gold the ores may yield. In the last year, gold production only increased 3.0% while prices jumped 20%. It has certainly translated into improved profit margins for miners, and solid performance for Market Vectors Gold Miners (NYSEArca: GDX), which is up 25.9% in the last year alone. [Are Commodity ETFs Too Popular?]
- Demand is increasing from the growing middle class in emerging markets like China and India. Both nations have already bought more gold so far this year than they bought for whole of 2009. Global net retail investments in gold for the third quarter surged 60% year-over-year, with jewelry and industrial demand increasing 8% and 13%, respectively. Additionally, central banks are also actively purchasing tons of gold to hedge against the volatility in currencies. [China Goes for the Gold ETFs.]
- Global investors remain under-invested in gold. In the last secular bull run, gold and gold-mining investments accounted for 26% of global assets. However, in 2009, that number plunged to 0.80% of global assets, which goes to show some retail and institutional investors still haven’t entered the gold markets. Amazing, considering the growth in assets we’ve seen in ETFs like SPDR Gold Shares (NYSEArca: GLD), iShares COMEX Gold (NYSEArca: IAU) and ETFS Physical Swiss Gold Shares (NYSEArca: SGOL) this year. [What Affects Gold ETFs?]
For more information on gold, visit our gold category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.