Is Anyone Still Interested in Gold?

The recent price action of gold has been frustrating for some people. The precious metal logged its second consecutive quarterly loss and remains in consolidation mode amid the greatest financial crisis since the Great Depression. However, there are still plenty of buyers around the world that are interested in gold.

Gold finished 2012 with a solid 7 percent gain, capping its longest steak of annual gains since at least 1920. Despite the performance, gold entered the new year on weakness. The fourth quarter was gold’s weakest quarter in four years and the decline has yet to stop. In the first three months of 2013, gold dipped nearly 5 percent. It was the first time in over a decade that the precious metal posted back-to-back quarterly declines.

The miners have been even more depressed. The Market Vectors Jr. Gold Miners ETF dropped 15.4 percent in the first quarter, while the larger Gold Miners ETF plunged more than 18 percent. In comparison, the Dow Jones Industrial Average and S&P 500 gained 11.3 percent and 10.0 percent, respectively.

Like Warren Buffett says, buy when others are fearful…

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The poor performance by miners has led to very low sentiment in the sector. In an environment of rising mining costs, Bank of America even claimed that a hypothetical drop of gold to $1,000 per ounce could make half of the gold industry worthless, according to WSJ.

Even so, a decline across the board has not deterred executives and officers in the industry. The S&P/TSX Global Gold Index, which includes large miners such as Barrick Gold, Goldcorp, and Newmont Mining, has declined about 25 percent over the past year. However, it now has seven miners with insider buying for every one with selling, according to INK Research. This represents a near doubling of the ratio from the beginning of the year.

Ted Dixon, chief executive officer of INK Reserach, explains, “That is the type of insider buying we saw in the broad market during the height of the great financial crisis in late 2008 and early 2009. A similar situation now seems to be in place among gold and silver miners.” He continues, “With both fundamental and technical conditions supporting recent heavy insider buying, it looks like a significant bottom in precious metals mining shares may be in the process of forming now.”

Demand for bullion rises…

Given the uncertainties surrounding miners, many investors prefer to invest in gold bullion and related products. In the fourth quarter of 2012, total gold demand reached 1,195.9 tonnes, the highest fourth quarter total on record and the best quarterly haul behind the third quarter of 2011, according to the latest report from the World Gold Council. Total demand for the entire year slipped 4 percent to 4,405.5 tonnes, but with a value of $236.4 billion, it was an all-time record in dollar terms. In the bigger picture, annual gold demand was 15 percent higher than the average for the previous five years.

While some central banks print money in historic amounts, others are buying gold. Central banks purchased 145 tonnes of gold in the fourth quarter of 2012, the highest quarterly haul since the sector became net buyers just a few years ago. For the entire year, central bank buying surged 17 percent to 534.6 tonnes, the highest annual total since 1964. In comparison, central banks bought 456.8 tonnes in 2011.

UBS estimates that central banks purchased around 54 metric tons of gold in the first two months of 2013, worth nearly $3 billion. Precious metals strategist Edel Tully explains, “While the information is backward-looking, the vote of confidence from central banks does help market sentiment when the buying is confirmed. The real value in central bank gold buying, though, is when it occurs and/or when market participants think it is around.”

Although the price action of gold over the past year renewed bearish predictions, the need to diversify a portfolio with a hard asset does not appear to be ending anytime soon.

The Federal Reserve decided last month to keep pouring the market liquidity at the rate of $85 billion per month. The central bank’s quantitative easing programs consist of purchasing agency mortgage-backed securities and long-term treasury securities.

In his recent trip to Capitol Hill for the Semiannual Monetary Policy Report, Fed Chairman Ben Bernanke also defended the central bank’s actions by claiming, “To this point we do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more-rapid job creation.”

Earlier this year, the Federal Reserve’s balance sheet broke through the $3 trillion level for the first time in history. In fact, it’s well on its way to $4 trillion by the end of the year. If the central bank continues purchasing $85 billion in securities through 2014, its balance sheet will easily climb near $5 trillion or more.

Here’s how the market traded Tuesday:

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If you would like to receive professional analysis on miners and other precious metal investments, we invite you to try our premium service free for 14 days.

Disclosure: Long EXK, AG, HL, PHYS