As 2013 progressed, we heard calls for the yellow metal to fall even lower in price. The stocks of gold producers were slammed. Equity research departments at big banks like The Goldman Sachs Group, Inc. (NYSE:GS) called gold bullion a slam-dunk sell (and the last time I checked, their opinion hasn’t changed).
In the midst of all this, a very important phenomenon was forgotten: gold bullion prices are no stranger to price declines. In the table below, I’ve compiled a list of every period since 1974 when gold prices fell more than 20% and what happened after the decline.
|Year, % Drop in Gold Prices||Year, % Increase After Drop|
|1974-1976 declined by 45.67%||1976-1980 increased by 705%|
|1980-1982 declined by 63.84%||1982-1983 increased by 71.8%|
|1983-1985 declined by 45.17%||1985-1987 increased by 76.7%|
|1987-2001 declined by 48.88%||2001-2008 increased by 291.38%|
|Mar. 2008-Nov. 2008 declined by 28.8%||Nov. 2008-2011 increased by 169.56%|
Data source: www.StockCharts.com, last accessed February 6, 2014.
The table above illustrates that the bigger the decline in gold bullion prices, the greater the ensuing rebound.
Since gold bullion prices fell in 2013, gold miners have pulled back on operations at mines where $1,200-an-ounce gold no longer justifies production. This has resulted in a reduction in the supply of newly mined gold.
And while the supply of gold bullion is under pressure, demand for the precious metal keeps increasing. In China, both consumers and the country’s central bank have become gold hoarders over the past two years.