It's been a good few days for investors holding on to gold, and we've been getting lots of questions as to why gold prices are up this week.
Gold futures had their biggest one-day gain of the year Thursday, up nearly $40 an ounce, and ended the week up 4.2% at $1,453.60.
At one point this week, gold had retraced half the loss it incurred during its April nosedive. In a two-day period, the yellow metal fell $225 an ounce, hitting a two-year low on April 15.
It is natural for any financial asset to enjoy some sort of a rebound after such a steep plunge. But there are some sound fundamental reasons as to why gold is up.
Here are four.
Why Gold Prices Are Up Reason #1: Asia's Gold Rush
As discussed in previous articles at Money Morning, one of the biggest reasons for the bounce in gold prices was the unexpectedly strong demand for physical gold around the world.
Long-term investors, particularly in Asia, considered the drop in gold prices a gift from the short sellers on Wall Street.
Sales at Australia's Perth Mint doubled after the two-day gold price tumble. The China Gold Association reported retail gold purchases tripled across China in that time frame. Japanese consumers were net buyers of gold for the first time in eight years.
The buying led to huge premiums to the quoted London gold price across Asia's physical gold markets - pushing premiums to 15-month highs.
In addition, gold shipments to India - traditionally the world's biggest buyer of gold - were at record levels. Shipments this past week to India doubled from the prior week.
Why Gold Prices Are Up Reason #2: Buying Frenzy for U.S. Gold Coins
Physical demand was readily apparent here in the United States as well.
The U.S. Mint reported that sales of gold coins were at the highest level since December 2009. As of April 24, the Mint had sold 196,500 ounces of gold coins - the best level since 231,500 ounces of gold coins were sold in December 2009. Sales in March were a mere 62,000 ounces.
Remarkably, the U.S. Mint ran out of its smallest gold coin, weighing one-tenth of an ounce, and forced to suspend sales.
Why Gold Prices Are Up Reason #3: Central Banks Lead the Charge
Another reason behind gold's strength this week was continued support from central bank purchases.
The World Gold Council says that central banks bought the most gold in 48 years last year, adding 534.6 metric tons to reserves. The WGC expects that central banks this year will add between 450 and 550 metric tons to reserves.
The main drivers here are emerging market central banks, which are seeking to diversify away from the U.S. dollar. For example, according to the International Monetary Fund, both Russia and Turkey added to their gold reserves in March.
Money Morning Chief Investment Strategist Keith Fitz-Gerald believes that the world's central banks will add more gold to their reserves in 2013 than they did in 2012, led by emerging markets.
Why Gold Prices Are Up Reason #4: The Smart Money Is Still In
Finally, the really smart money is not being scared out of gold by Wall Street's short sellers.
Billionaire investor John Paulson is staying the course. John Reade, a partner at Paulson & Co., said that despite more expected short-term fluctuations in the price of gold, his firm will not veer off its thesis about gold and money printing by the Federal Reserve.
Famed investor Jim Rogers shared a similar outlook in an exclusive interview with Money Morning on April 21.
Rogers told Money Morning gold must go higher longer-term because of the massive global money printing. He added that once gold does bottom, the precious metal will enjoy another multi-year bull market.
- Money Morning:
Why Gold Really Crashed and What You Can Do About It
- Money Morning:
Gold Price Drop Drives Global Buying Frenzy
- Bloomberg News:
US Mint Sales of Gold Coins at 3-Year High After Prices Tumble
PaulsonSays He's Staying the Course on Gold
Gold Jumps 2.5 Percent for Biggest One-Day Gain Since June