Goldxtrade - Possible Arguments for Higher Gold Prices

Basic rules of economics are at play with gold bullion prices; when demand rises, prices increase. We currently have a significant amount of demand for gold bullion by both investors and central banks, but the supply for the yellow metal is very limited.

The importation of gold bullion into Mainland China from Hong Kong increased 94% in 2012 to a new all-time high. According to Bloomberg, 834.4 metric tons of gold bullion was imported into Mainland China in 2012, compared to only 432.2 metric tons in 2011. (Source: Bloomberg, February 5, 2013.)

In the first half of its fiscal year 2013, demand for gold bullion increased 29.15% in Pakistan. On a month-to-month basis, the appetite for gold bullion increased 121.96% from November to December 2012. (Source: Bullion Street, February 5, 2013.)

Standard Bank Plc notes that the demand for gold bullion in January 2013 was higher than usual. The Standard Bank Gold Physical Flow Index indicates that gold bullion demand in January increased to the highest it’s been since November 2012 due to “good” buying in South East Asia. (Source: Standard Bank Plc, January 22, 2013.)

In addition to this, the central banks, which I believe will become the biggest driver of gold bullion prices, have been buying more of the metal. In the last six out of seven quarters, central banks around the world have been purchasing about 100 metric tons of gold bullion. (Source: International Business Times, December 28, 2012.)

Let’s remember, central banks used to be the net sellers of gold bullion; now they are buyers. Let me give you some idea about the amount of their buying: the central bank of Ukraine increased its holdings of gold bullion to 7.72% in 2012, compared to 4.36% in 2011. Similarly, the central bank of Brazil doubled its holdings of gold bullion (which it keeps in reserves) from October 2012 to November 2012.

Gold bullion is becoming the “go-to” source for safety once again. It looks to be the only option to store wealth in a world where central banks are in a rush to devalue their paper currencies. Don’t listen to the “noise” about gold bullion; just look at the supply and demand situation, and you’ll see the fundamentals for gold bullion are quite strong.

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Gold Slightly Higher in Quiet Session

Gold prices were slightly higher amid a quiet trading session on Tuesday as investors paused a day ahead of the Federal Reserve's policy-making announcement. Gold for June delivery at the COMEX division of the CME was gaining $6 to $1,473.40 an ounce. The gold price traded as high as $1,479.50 and as low as $1,460.50 an ounce, while the spot price was slipping $2.10, according to Kitco's gold index.

"Ahead of the Fed meeting I think everybody's going to stay somewhat neutral; I don't expect any major changes one way or another," said Tom Power, senior commodities broker at RJO Futures. "It's just relatively flat ahead of the announcement and ... everybody's just looking for direction." Silver prices for July delivery were effectively unchanged at $24.18 an ounce, while the U.S. dollar index was losing 0.45% to $81.76. The Fed on Tuesday started its two-day meeting to determine the federal funds rate target, and will make an announcement on Wednesday afternoon.

Economists aren't expecting a change in policy.

The March Federal Open Market Committee meeting revealed that a growing number of Fed members were opening up to the idea of scaling back the central bank's purchasing programs, but a raft of soft economic data in the past month has likely forced central bankers to change their minds, said Lance Roberts, chief economist at StreetTalk Advisors.

Roberts said it's unlikely that the Fed would announce any changes to its policy, but also said that if there is a surprise it would be more likely to be a hint at greater monetary easing. The possibility that Fed members implement more stimulus would be based on how seriously they believe the weak U.S. data is weighing on the economy.

Gold could receive a bump up if the Fed's message becomes more dovish than its previous meeting as continued monetary stimulus suggests the central bank is favoring inflationary policy. Investors often view gold as a hedge against inflation. Gold mining stocks were mixed on Tuesday. Shares of Newmont Mining (NEM) were plummeting 6.9%, while shares of NovaGold Resources (NG) were up 1.3%.

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