Will Investors Jump On Gold's Bandwagon?

02/19/2014 12:01 am EST

Focus: COMMODITIES

Jim Jubak

Founder and Editor, JubakPicks.com

MoneyShow's Jim Jubak looks at the overseas demand for gold and shares his outlook for what it may take to push gold even higher.

For the week ahead, let's take a look at gold. Gold's had a pretty good rally in 2014, which reverses the really bad year it had in 2013, and the question is, going forward, whether this rally will continue. There are lots of ways to look at this. You could look at technicals. You could look at gold money stocks, the supply of gold, trying to figure out, as I have recently, whether the downgrades, the cuts and reserves that gold miners are putting in, is enough, whether there's going to be more to fall, but what I'd really like to look at is where the buying is coming from right now. There are really usually two different sources of buying. One is that you get investors, mostly in the developed world, but not always, who buy gold as a safe haven against turmoil, fear, whatever, or declining currencies.

The other is, you get demand for physical gold, and the two big sources of that demand right now are China and India. China number one; India number two. That's where the demand actually is coming from right now to drive up the price of gold. We've seen an increase in demand from China of about 32% in 2013, a huge increase in demand, and that's helped drive up the price of gold; first stabilize it and then drive it back up. Now, one of the things about this is, demand for physical gold, especially demand for gold from China and India, is very, very price sensitive. These are buyers who tend to buy when the price is low and stop buying as the price rises. In other words, there is a kind of self-breaking mechanism here from this kind of demand that pretty much insures that, as gold rises in price, either the rally will go away because this demand will fade as the price goes higher, or you'll have to have buyers from the investing world step in. Right now, there doesn't seem to be any evidence that you're going to see a lot of buying from the investing world step in. The ETF flows have only turned barely, barely, barely positive, which is a good sign after they were very, very, very negative in 2013, but it's hard to see them making up for the big demand in physical gold that is so price sensitive.

If you're looking at this, my thought right now is that we're going to see this rally play out. We're going to see gold fall again and then, maybe then, finally will really get a solid bottom, and then gold demand, both in the physical world and in the financial world, will start to rise, so maybe this is just the first rally that starts to put in a bottom, but we haven't seen a bottom yet, and that's what it looks like to me. Watch it for the week ahead. We've pretty much seen the end of earnings from gold miners, so it's going to be all about gold and gold demand going forward.

This is Jim Jubak for the MoneyShow.com video network.

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