4 Reasons Why Gold Could Have A Major Rally In 2015
Last month was an eventful one for me.
#-ad_banner-#I climbed hundred-foot waterfalls, traversed century-old bridges, and navigated rotten planks hanging over raging whitewater rapids.
All of this is par for the course in the mineral exploration business, which is what I was doing recently in the eastern mountain ranges of Colombia.
Over the course of my travels, I kept getting asked the same question.
“Dave, where are gold prices headed?”
“Up,” I answered.
I say that confidently because I’ve become more and more convinced that the rebound in gold is inevitable. Already this year gold has rallied almost 10%, and this could be just the beginning.
In a recent issue of my premium resource advisory, Scarcity & Real Wealth, I laid out four themes that I’ve been watching closely to give me clues as to what’s next for gold. If I’m right, then it means it could kick off a serious gold rally.
Today, I’d like to touch on each of these and explain why they should be of interest to investors right now.
1) Global Production is Actually Shrinking — except in China and Russia.
Now, these nations were the largest and fourth-largest gold producers in 2013, but neither of these producers exports gold.
China has an outright ban on bullion exports, and Russia has an “unofficial” ban, with the vast majority of domestic production being bought up by the country’s central bank.
That observation becomes critical when you look at the global production profile for gold. The supply of gold available to most global investors is actually shrinking. The chart below shows the picture clearly.
Source: U.S. Geological Survey, StreetAuthority
That’s a situation that could make the global gold market a lot tighter than might be expected when looking at overall supply and demand fundamentals. I’ll be watching closely to see what the numbers for 2014 look like — but I strongly suspect this trend will continue.
2) A Potential Fall in Mining Costs
Yes, profits can increase because of a rise in the gold price. But gold mining profits could also go up if costs in the sector go down.
I believe such a scenario is possible this year.
After all, there have been numerous gold mining projects globally being put on hold the last two years due to low gold prices. Just last month for example, the world’s largest gold miner, Barrick Gold (NYSE: ABX), announced it will be suspending its mining operations in Zambia.
That means lower demand for services like engineering and mine labor, as well as equipment like drilling rigs and earth-moving machinery.
Amid such a scenario, there could be a substantial drop in prices for these mining inputs. That would, in turn, lower gold miners’ production costs and cause profits to increase — even without any upward movement in gold prices.
3) India’s Return to the Market
There are a number of reasons to believe that gold prices could see a rise this coming year. One of the biggest is the world’s number-two consumer: India.
In previous years, India was a force in global gold buying — number two behind China.
But in 2014, this player disappeared from the market in a major way. Nationally imposed tariffs and restrictions on gold imports put India on pace for an annualized fall in demand of 20%. That, however, could change this year due to recent changes made by the Indian government to its gold import rules.
In November, the government discarded one of the largest import restrictions it had put in place. This went a long way toward opening the door for higher gold consumption there.
Talk has been swirling that further relaxation of gold import rules may be coming. If we do see big rules changes in 2015, it could spark a return of Indian gold buyers to the market en masse. That’s something that could give a big lift to bullion prices.
4) Financial Weapons of Mass Destruction
One of the major reasons for gold’s steep drop in price over the past few years has been a perceived sense that instability in the global financial sector is largely behind us, pushing investors away from “safe haven” investments like gold.
But I believe that sense of optimism may be misplaced.
You see, there are still plenty of pitfalls lurking in the global financial system. And I believe 2015 could be the year we see some of these come to a head.
One potential issue is derivatives — the financial instruments that Warren Buffett famously referred to as “weapons of mass destruction.”
The Bank for International Settlements estimates there are still some $691 trillion in derivatives outstanding around the planet.
Regulators in the United States, Europe and Asia have all been targeting this sector with new rules designed to increase transparency around derivatives trading and portfolios held by banks and other major investors. And whenever you first shine a light into a dark corner, chances are you’re going to find some cockroaches.
I believe 2015 could be the year when the new derivatives regulations shake markets. That could mean some nasty surprises.
Remember in 2008 when the “too big to fail” companies from the financial industry went from solid to insolvent nearly overnight? The derivatives debacle has the potential to do exactly the same thing — which will be painful for the companies involved, but great for gold.
If we do see a blow-up of this nature, I expect it will be a significant catalyst for investors to return to safe-haven assets like gold, potentially prompting a buying spree that could send the metal considerably higher very quickly.
Gold prices are already looking up. We’ve seen a 9% gain so far this year, and if any one of the themes I’ve mentioned above plays out, it could lead to a lot more gains ahead. Not only have I been monitoring these trends, but I’ve also been loading up on shares of my favorite gold stocks.
In fact, I’ve been pounding the table in my Scarcity & Real Wealth newsletter on my two preferred ways to play the rebound in the gold sector. One of the companies just reported a great quarter, and is sitting on over $300 million in cash with no debt all. The other is flush with cash, about $1 billion, and is on track to generate nearly $1 billion in cash flow from operations this year thanks to its low-cost mining operations.
I recently outlined why I’m recommending both companies in my report The Top 2 Junior Resource Picks To Buy Now. Both have enormous upside potential ahead, and are poised to profit from a gold rebound. To get access to this timely report as well as my newsletter, follow this link.