Mining stocks, Chinese demand, and a potential golden surprise

Over the past couple of days, the performance of the gold and silver mining stocks deserves more attention than it is getting. As many of us argued, the collapse in mining stocks into late 2013 was nothing more than professional liquidation— meaning players who should have known better simply giving up and moving on to some other, hotter, investment. I’m sure many of these managers talked themselves into believing that gold and silver were heading far lower than in they in fact were, and I know that other asset managers had had enough of cost overruns and waste on the part of mining CEOs. Couple this with how loathed the mining shares were among gold and silver bullion investors (and I have the emails to prove it), and I felt you had all the ingredients for a great contrarian trade.

Without getting ahead of myself, and fully realizing how far these mining stocks still have to go just to break even with where they were last year, it looks to me as though mining stocks that were literally priced for oblivion are in fact coming back to life. Those same mining executives may just have learned some lessons regarding the ability of gold and silver to go down as well as up and will not make the same mistakes in terms of unrealistic acquisitions going forward.

At the same time, you have confirmation just this morning of how powerful Chinese gold demand is with the news that China surpassed India in terms of gold demand last year. Anecdotally, the trend continues into 2014, as prices are just too low for Chinese gold buyers to resist. Meanwhile, many Western repositories, like the COMEX continue to report dwindling stocks of deliverable gold.

And what happens if the Indian government actually allows its citizens to buy gold again? While many have been burned buying into the hype of physical bullion shortages, if it is true that last year’s Chinese demand was not simply a one-off event, and if it is true that the Indians may get back in the game in terms of gold buying, I just don’t know where the gold is going to come from. Even as the gold and silver price can ignore physical demand for a while, they can’t do so forever.

The evidence keeps mounting that last year’s Wall Street induced precious metals crash was the real one-off event, and not the record amounts of gold imported into China, or its strong demand as money globally.