Is the Gold Price Set for an Explosive Rebound? – by By Byron King (July 22, 2013 – The Daily Reckoning Australia)

In recent months, the price of gold has tumbled. Along the way, lower gold prices have undermined the share price of many mining plays. The yellow metal is selling for its approximate cost of production at many of the world’s largest mines.

Yet for all the gloom and doom within the gold investment space, there are indications that physical gold is becoming scarce. In fact, gold may be setting up for an explosive rebound, both in its nominal price and in the value of companies that mine it…

Here’s the posted price of gold over the past year. We’ve endured a steady retreat from near $1,800 per ounce to the mid-$1,200s. Clearly, people are selling.

Gold had a decade or so in the doldrums in the 1990s. Then people started buying gold all through the first decade of the 2000s. Gold’s recent price decline comes after a solid decade of strong, steady gains. That’s what the chart indicates.

The back story to gold’s price rise is that in recent years, investors and some central banks accumulated large holdings of gold. This helped drive the gold price up.

Every buyer has a reason, of course. (And every seller sells for a reason, too!)

For example, at national levels, Russia and China accumulated significant amounts of gold as state assets, along with a range of other nations from India to Vietnam to Saudi Arabia and more. Among other things, foreign powers – certainly Russia and China – want alternatives to the U.S. dollar as a means of storing wealth over the long haul.

Or look at a large fund like SPDR Gold Shares (GLD). This fund advertises gold holdings of more than 30 million ounces – over 930 tonnes – with a value near $40 billion. By comparison, the U.S. Treasury claims that Fort Knox holds about 147 million ounces of gold. Thus, SPDR Gold is the equivalent of one-fifth of U.S. national holdings at Fort Knox. We’re talking about BIG numbers here.

Other sophisticated institutions added gold to their portfolio allocations during the past decade. In 2011, for example, the AAA-rated Northwestern Mutual Life Insurance Co. bought $400 million in gold. It was the first gold purchase in the 155-year history of the company. ‘Gold just seems to make sense; it’s a store of value,’ stated Northwestern’s CEO at the time, Edward Zore. ‘In the Depression,’ he added, ‘gold did very, very well.’

In Austin, the University of Texas Investment Management Fund put nearly $1 billion into gold in 2011, purchasing physical metal in New York. Again, the idea was to diversify the university’s holdings, to preserve wealth over the long haul. Of interest, the U of T received a stiff-arm from any number of suppliers when it requested that gold actually be transferred from New York to a site in Texas.

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