Question: What’s the best way to determine if Prozac works?

Answer: Look at your gold portfolio.

I read about two dozen articles last Thursday about the gold market, and not one of them had anything positive to say. Technical analysts, mainstream economists, industry analysts—all were bearish for various reasons and timeframes.

Why invest in gold when…

  • We’re repeatedly told the economy is improving—and basic data like falling unemployment and rising GDP appear to confirm it
  • The stock market continues to rise, despite the obvious artificial interventions
  • Prices remain stuck in a range and look poised to test the 2013 lows.

Each rally in the gold market has been met with less excitement and lower volume. Bullion Vault reported last week that its “private investor sentiment” measure hit a four-year low.

So should we fold? Sell our holdings and lick our wounds? Or should we be bold—buy the dips and continue to be patient?

Here’s the case for each…

FOLD: Bullion Sales at the US Mint Are In Decline

Sales for both gold and silver coins at the US Mint have gone soft. One-ounce American silver Eagle coins have been in a slump all summer and are down 41% from 2013 (6,674,500 ounces June to August, vs. 11,306,500 last summer).

If gold investors are buying less, shouldn’t you?

BOLD: Central Banks Continue to Hoard Gold at Record Levels

Russia, Mexico, Kazakhstan, Kyrgyzstan, Tajikistan, Serbia, Greece, and Ecuador have all reported higher gold reserves this summer. Further, contrary to mainstream expectations, almost no central bank liquidated its gold holdings—just the opposite, in fact…

  • In the second quarter of this year, central banks bought over 118 tonnes (3.8 million ounces), a 28% increase over Q2-2013. They have now been net buyers for 14 consecutive quarters and are on pace to surpass the record of 409 tonnes (13.1 million ounces) last year.
  • In dollar terms, central banks invested $27.1 billion in gold from January 2013 through June 2014. And this excludes all Chinese data!
  • By the end of 2013, central banks around the world were estimated to hold 30,500 tonnes of gold—just under one billion ounces. This is a new record and represents about one-fifth of all the gold ever mined.

If it were time to sell, why are central bankers stockpiling gold bars at a record pace? They may put on a happy face when speaking to the public, but their actions suggest they’re not so optimistic—and in fact are preparing for some type of crisis.

FOLD: The US Dollar Is Strengthening

The US Dollar Index has shot up 6% from its May low, an uncharacteristically strong move for a currency. The Index is now trading at a 14-month high.

This has weakened the gold price, since the two generally have an inverse relationship. And if the dollar is strong, maybe we should expect gold to be weak.

BOLD: Numerous Countries Are Moving Away from the US Dollar

It’s not so much the dollar strengthening as it is other currencies weakening, especially the euro, which comprises 57% of the Index.

But the bigger issue is the trend of countries diversifying out of the greenback, which continues to gain steam…

  • China signed a bilateral currency swap agreement worth 150 billion yuan ($24.17 billion) with the Swiss central bank, which can invest up to 15 billion yuan in China’s bond market. The three-year swap will “provide liquidity support for bilateral economic and trade exchanges and help maintain financial stability,” the People’s Bank of China said in a statement. The swap deal will provide liquidity support for development of the offshore yuan market in Switzerland.
  • “US and European Union sanctions against Russia threaten to hasten a move away from the dollar that’s been stirring since the global financial crisis,” reports Bloomberg. “The crisis created a rethink of the dollar-denominated world that we live in,” said Joseph Quinlan, chief market strategist at Bank of America. “This nasty turn between Russia and the West related to sanctions can be an accelerator toward a more multicurrency world.”
  • At the end of last month’s BRICS Summit (Brazil, Russia, India, China, and South Africa), leaders announced the “Fortaleza Action Plan,” which included among other things, a new financial architecture to counter the international tensions caused by the Fed’s quantitative easing program.
  • Russian radio reports that draft documents on the procedure to admit new members to the Shanghai Cooperation Organization (SCO) have been adopted, which will greenlight admission for India, Pakistan, Iran, and Mongolia. Combine the likely members to join the SCO with the Middle East—which already sends most exports to China and India and thus settles in currencies other than the dollar—and half the world’s population will use a currency other than US dollars.
  • Russia announced last month that oil company Gazprom will accept rubles and yuan for crude oil deliveries. This will directly reduce dollar usage. And Gazprom isn’t a small company—it made $2.4 billion last year, and production is growing.

Clearly, US dollar dominance is on the way out. As the dollar grows less and less crucial for trade, its value will fall.

Most believe the process of the dollar losing its reserve currency status will take years. But as Casey Chief Economist Bud Conrad pointed out to me, with every new anti-US agreement combined with the fact that most trade is now done in computerized bits, we could easily see this trend accelerate

This transition must have consequences for the US dollar—which signals we should remain bold with our gold investments.

FOLD: Chinese Demand Is Falling

Chinese demand for gold fell so much last quarter that India reclaimed the spot as the world’s #1 gold consumer. Total consumption in China dropped 52% vs. the year-ago quarter.

If China’s purchases are slowing, maybe ours should be, too.

BOLD: Western Reports Are Inadequate

As we’ve pointed out before, Beijing now imports gold directly into the capital, with no transparency for Western observers. This makes demand calculations based solely on Hong Kong imports inaccurate.

That’s not all. China also…

  • Has approved 15 banks to accept gold imports
  • Will launch a new international bullion exchange in Shanghai this month (which, by the way, targeted 30 members in the first round but 40 signed up, including many foreign banks)
  • Is the largest gold-producing nation in the world—and exports almost none of it.

Keep in mind that China saw runaway demand last year. It’s hard to maintain a record pace every year. As the World Gold Council points out, “Buyers in China and India were waiting to see a price trend develop.”

This also explains much of the drop in global bullion demand: the comparison to a banner year in 2013 and buyer exhaustion from gold bugs.

Bottom line: I think the Chinese are buying more gold than what the West thinks.

Will You Hold, Fold, or Be Bold?

Every investor has to make his or her own decision. Do you accept the headlines at face value, or do the underlying data show that gold demand is stronger than reported? Is the dollar really “strong,” or is its future as suspect and vulnerable to collapse as any other paper currency? Is gold bullion a short-term investment for profit or a safe-haven asset to hold until fiscal and monetary realities play out?

Here at Casey Research, we’re investing for a sea change, not the daily tides. That tells me we should wait for that sea change to take place, even if it takes longer than anticipated.

It’s up to you to protect your family’s financial future. I hope you’ll join me in being bold, creating your own cache of precious metals and the best related equities. If you want to know which ones I recommend, subscribe to BIG GOLD now and get our brand new Best Buy in the September issue—a gold producer with the strongest free cash flow of all the majors. This company makes lots of money in the current price environment, and its stock will absolutely soar when gold turns higher. The current issue also comes with another Best Buy—a stock that yields over 10% at current prices, one most other gold analysts have overlooked. Check it all out here.