Gold Investors Dont Despair As There Are Many Bullish Catalysts For The Market

  • Gold has been hit hard over the last few months due to a strong US Dollar but investors have plenty of bullish catalysts.        
  • Indian gold demand is reportedly up significantly as premiums and smuggling rises due to upcoming festivals and a strong monsoon.
  • Possibly the biggest catalyst for gold is the upcoming Swiss referendum which could change the way the Swiss bank manages it reserves.
We know it's tough to be bullish on gold with the tough time the metal has had over the last few months with a strong dollar and seemingly little in the way of catalysts.

As investors can see gold has fallen 4.7% over the last month (an extremely large drop for gold) and it's hard to believe that gold is still up in FY2014. But we feel this drop in gold has been overdone and despite the negativity of pundits and analysts, there are plenty of short-term catalysts to take gold higher and even non-precious metals investors should consider investing in beaten up gold.

Swiss Referendum on Gold

The first and most important catalyst that has been flying way under the radar except in some of the deeper precious metals circles is the upcoming Swiss referendum on gold to be voted on November 30th. If this referendum is voted into law, the following three things will happen:
  1. Prohibit the Swiss Central Bank from selling gold reserves
  2. Repatriate all Swiss gold to Switzerland
  3. Require the Swiss Central Bank to hold 20% of its assets in gold
Assuming repatriation wouldn't be a problem (which is far from a safe assumption considering the problems Germany had getting their gold from the US - they just gave up), the Swiss currently hold only 10% of their reserves in gold, which is around 1000 tonnes. That would mean for the country to get gold reserves up to the minimum 20% gold ratio, they would have to buy 1000 tonnes over the next few years - almost half of annual mine production or three times all the gold held in COMEX gold inventories. That would overwhelm an already tight physical market and we're certain that investors would quickly front-run the Swiss bank and make it even harder to buy physical gold.

We don't know the probability of this measure passing, but if it does then that would rock the gold market and be extremely bullish as not only would the Swiss have to buy gold in the market - they couldn't sell any more gold. That's also a big deal since they've been off-loading and leasing their gold for years and that's the reason why gold reserves have dropped from 30% in 2000 to 10% in 2013.

(click to enlarge)
Source: SNBCHF

India and the Middle-East is Back in the Gold Market

It isn't only the upcoming Swiss referendum that is a bullish catalyst for gold - it's an old friend in Indian demand that seems to be returning to the market with a vengeance.

According to Bachhraj Bamalwa, a director at the All India Gems & Jewellery Trade Federation, premiums in India could increase significantly over the London cash price. It's not surprising that Indian demand would be increasing as the traditionally gold-heavy Indian festival season starts, but in the midst of a gold price slump, we may see many more Indian buyers in the market.

We may already be seeing significant Indian buying as a recent article in the Hindustan Times reports that a stunning 50 tonnes of gold may have been smuggled into the country in the last 10 days. If those numbers are even remotely correct, and its obviously tough to tell with smuggling reports, then that would mean that in the last 10 days over 1% of total world gold DEMAND has been smuggled into India - those numbers are tremendous!

Finally, Monsoon season in India has been very good overall and that means more money in the pockets of Indian farmers who traditionally buy gold as a means of saving. So the combination of low gold prices, the upcoming Indian festival season, and a strong monsoon seems like plenty of reason to be short-term bullish on gold.

It is not just India that is buying up gold but also the Middle-East. The declining gold price has increased demand by Dubai buyers as Shamlal Ahmad, Director of International Operations at Malabar Gold & Diamonds comments that "The month when Diwali [the Indian festival when buying jewellery is rated as auspicious] represents a peak buying period for the trade in the Gulf, and this year it's doubly so with Eid also falling the same month." The Muslim festival of Eid, happening to fall in the same month as Diwali this year, is a factor increasing demand in the Gulf states despite the political uncertainty in the region.

Conclusion for Investors

There are many other short-term catalysts that we could add to the list including further tensions with Russia over Ukraine, increasing Chinese physical demand, large short positions by traders and investment funds, and a stock market that is very edgy and due for a decline.

Thus forward-looking investors would be wise to be building gold positions now and we believe they should be increasing exposure to physical gold and the gold ETFs (SPDR Gold Shares (NYSEARCA:GLD), Sprott Physical Gold Trust (NYSEARCA:PHYS), Central Fund of Canada (NYSEMKT:CEF)). Miners have also been hit hard and when gold finds its footing they could provide a lot of leverage to the gold price so investors may want to consider evaluating gold miners such as Goldcorp (NYSE:GG), Agnico-Eagle (NYSE:AEM), Newmont (NYSE:NEM), or even some of the explorers and silver miners such as First Majestic (NYSE:AG) or Pan American Silver (NASDAQ:PAAS) - though we're not suggesting these companies specifically - only suggesting them for further investor research.

But we think the real opportunities right now are in the explorers, as their valuations are much lower than the miners and the fact of the matter is that these gold miners will be looking to expand reserves and buying out the quality explorers, so we'd suggest investors be aggressively investing in these quality explorers. It's very important that investors follow the news flows out of the explorers they own as it is not a "buy-and-hold" type investment.

Gold has been hit very hard over the last few weeks but we hardly think the gold bull market is over, but at this point we feel that even in the short-term gold is due for a significant bounce-back - that could catch gold shorts extremely unprepared as Western investors are completely pessimistic on gold. We think there is very little downside in gold at this point and investors have plenty of reasons to expect a stronger gold price.

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