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Investor Sentiment Drives Gold Rallies

Written by Luke Burgess
Posted February 21, 2019 at 7:00PM

The price of gold is quietly on the rise.

Over the past four weeks, gold prices have climbed over 5% to $1,350 an ounce — a 10-month high.

And this could be just the beginning of a much broader rally — meaning if you want to get into gold, the time is now.

Gold prices have been inching up dollar by dollar for a while now. If you take a look at a one-year chart of gold, you'll see prices bottomed out last fall and have been steadily on the rise since.

gold 2/19

Much of the increase has been attributed to geopolitical uncertainty. Each time the price of gold has rallied over the past few months, the mainstream media has typically credited trade tensions between the U.S. and China or Brexit as the driving force behind rising prices.

But while geopolitical instability is certainly playing a big role in increasing demand, there are actually a lot of things driving prices higher right now. And one of those things is the rising cost of mining gold.

No one will say it's perfect, but a good measure of gold production costs is the all-in sustaining costs (AISC).

AISC is a non-GAAP measure that was introduced by the World Gold Council in 2013. It is intended to provide investors with a metric to equally compare the costs associated with gold mining. And most gold miners have adopted the measure since.

From the reported AISC figures, we can get an idea of whether production costs are generally going up or down.

Starting in 2014, the global AISC average began to fall. And there was a good reason.

aisc1 2/19

You see, the costs associated with gold mining have a lot to do with energy prices.

Gold mining (mining any metal, really) is mostly just one big operation of moving and processing rocks. And to recover just the weight of a U.S. nickel, miners have to dig up, transport, crush, and fully process a metric tonne (2,200 pounds) of ore before refining can even begin.

The density of ore varies, but a tonne of rock would be a boulder about the size of a microwave. Point is, it requires a lot of energy to mine anything.

So gold mining costs are closely related to energy prices. And starting in 2014, energy prices began to fall. This was when we saw oil fall out of the atmosphere from over $110 per barrel to under $50.

Since energy prices bottomed beginning in 2016 and have generally been on the rise since, can you guess what happened?

Yup, global AISC for miners has also been steadily rising.

aisc2 2/19

Of course, there are other significant costs associated with gold mining, including labor. But I expect gold prices to continue to respond positively to increasing production costs.

So geopolitical uncertainty... increasing production costs... there's more than one thing moving gold prices higher right now.

There's also a growing positive sentiment around gold, which is quite evident on social media, although it is difficult to say exactly why.

But I wouldn't be surprised if the American public (maybe the rest of the world, too) has become sick of “fake” everything and has just begun to push back.

Since 2016, it's been fake news, fake votes, fake crisis actors, even fake money (take that, Bitcoin!). I think it's possible we've reached “peak fake” and people are starting to push back in the opposite direction toward what's real. And gold is one of the realest things in terms of money.

Of course, all that is only speculation. But either way, investor sentiment around gold is growing. And that's important.

What most people don't understand about the gold market is this: Big rallies in gold prices are completely investor-based. They're not industry-based.

It's true that the majority of gold demand comes from the jewelry sector — more than 40% of it, in fact. But the jewelry sector is stable relative to the gold investing sector.

Of course, the jewelry business is susceptible to broad economic downturns — if people have less money, they'll spend less on jewelry. But jewelry buyers are nowhere near as fickle as gold investors.

If we look back on the two biggest gold rallies since gold became legal to own again in the 1970s, both were investor-driven. During the big rally in the late 1970s, CPI and inflation fears drove gold to all-time highs. In the late 2000s, it was the global recession that drove investors toward the yellow metal.

Compare that to another metal: lithium.

Yes, the lithium rally has been very much investor-based. But investors are betting on demand from the electric vehicle industry. In neither instance, during the late 1970s or 2000s, were investors betting on higher jewelry sales.

Point is, investor sentiment is very important for gold rallies. And with sentiment around gold just now starting to bud again, I think it's a great time to place solid bet.

Until next time,

Luke Burgess Signature

Luke Burgess

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As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bubble and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.

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