The Gold Market is Broken Which Means a Rally Could Be Near

Demand for physical gold continues to exceed supply but the gold price keeps falling.

Apr 11, 2014 at 12:41PM

Gold has had an interesting year to date. Thanks to the Russian crisis and subsequent geopolitical tensions, the price of the yellow metal rallied 17% to a high of around $1,400 per ounce after entering the year at around $1,200.

However, now that the Russia crisis has deescalated, the price of gold has fallen back to the $1,300. Looking at it further, these price movements tell a completely different story to physical gold sales.

Indeed, although the price of gold continues to slide, demand for physical gold continues to rise and supply keeps falling. With this being the case, it would seem that the gold market is heading for a reversal, making industry-leading miners such as Barrick Gold (NYSE:ABX) and Newmont Mining (NYSE:NEM) as well as industry leader by market capitalization Goldcorp (NYSE:GG) look attractive.

Demand exceeds supply
Currently, I'm not much of a gold bull. However, developments in the gold market are starting to make me think otherwise.

First of all, at the end of last year, volume of gold flowing into China reached record highs; there was also a 500-tonne gap in China's gold-consumption data -- that's right, 500 tonnes of gold went missing. In dollar terms, that translates into about $23 billion worth of gold. At the time, there was speculation that the Chinese central bank swelled excess demand, panic buying, and stockpiling.

Aside from this stockpiling speculation, China's reported gold imports hit a new high of 109.2 tonnes in February, a month-on-month rise of 30%; year-on-year, gold imports have surged 79%!

Iraq has also been stockpiling the precious metal, buying 36 tons during March -- a dollar value of around $1.5 billion. 

India's gold imports have also surged, rising by more than 100 tonnes during full-year 2013. On top of this, despite stringent import and trading restrictions, "unofficial imports" almost doubled according to some estimates. 

Taking these factors into account, I'm looking to invest in the gold mining sector as demand for the yellow metal continues to rise. However, to limit my risk, I'm only looking for industry-leading, low-cost producers boasting high quality assets.

Working hard but progress is slow
Barrick Gold has been the poster child of gold industry excesses that have occurred during the past few years. In particular, rising debt, disproportionate levels of executive pay and bloated capital spending budgets ultimately resulted in a collapse in company profits.

However, the company has actually made some really great progress trying to restructure its operations during the space of the last year.

For example, during the past year Barrick has reduced capital spending and operating costs by about $2 billion and announced agreements to divest six high-cost, non-core mines and other assets for a total consideration of almost $1 billion. The most recent move by Barrick to streamline operations and reduce costs was the divestment of the company's 33.3% interest in the high-cost Marigold mine, which is jointly owned with Goldcorp.

Management currently predicts that Barrick's all-in sustaining cost of production, or AISC, per ounce of gold produced is expected to be in the region of $950 during 2014. The company is expected to produce 6.5 million ounces of gold at the high end during 2014, 10% below 2013 production of 7.2 million ounces. 

Good progress
Meanwhile, Newmont is also working hard to reconfigure its operations.

Newmont divested $600 million of non-core assets throughout 2013 and has bumped up gold production estimates for 2014. Specifically, Newmont's management believes that the company will produce 5 million to 5.3 million ounces of gold during the year, compared to 5.1 million ounces produced during 2013.

Further, Newmont is targeting an AISC per gold ounce of $1,075 to $1,175, below the $1,100 to $1,200 figure reported for 2013. Cost cuts are also set to continue throughout 2014 as the company plans to reduce operating expenses by 20%.

Still, Newmont is facing some tax issues in Indonesia, where the government has decided that it will place a 25% tax on any unprocessed materials leaving the country, this tax rate rises to 60% by year end 2016. It is rumored that the government is reconsidering this tax, but in the meantime, Newmont has curtailed output. This might have an effect on the company's 2014 output forecasts which should be revealed within first quarter results. 

Best of breed
One company that has been behaving itself during the past few years is Goldcorp. Indeed, Goldcorp has kept its spending and expansion plans under control during the past few years, and as a result, the company is much more efficient than its larger peer Barrick Gold.

Goldcorp is predicting that its AISC will drop to less than $1,000 per ounce during 2014; gold production is also expected to increase around 13% to 18% for 2014.

That said, the company is having some operational issues around the world, notably its hostile takeover of Osisko mining, which now seems unlikely to go ahead. Additionally, Goldcorp has suspended operations at the Los Filos mine in Mexico, pending renewal of a land occupancy agreement. Goldcorp's first quarter results are worth keeping an eye on for any outlook adjustments. 

Foolish summary
So all in all, it would appear that as physical gold demand continues to rise, the yellow metals price is set for a move higher. The best way to play this would be with Goldcorp, easily the most efficient of the companies above.

That said, investors should keep an eye of Goldcorp's first quarter results to see what effects the company's global setbacks are likely to have on output and profits for the year. 

Buffett isn't known as a gold bug, but he's certainly worth following
Warren Buffett has made billions through his investing and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers