Gold Market’s Supply Side Foretells Higher Gold Prices
It’s important to pay close attention to the basic economics of the gold market. They suggest that gold prices could skyrocket in the coming months and years.
You see, Economics 101 suggests that when supply declines and demand remains strong, prices move higher.
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In the gold market these days, we see supply declining and demand remaining strong. With this, a massive move to the upside in the price of gold could be possible ahead.
Global Gold Supply Is in Trouble
Digging into the details…
Gold miners are having a very difficult time producing gold at the current prices. We see it in the data very clearly.
For example, look at the gold mine production in the United States.
In the first four months of 2018, U.S. mines produced 69,500 kilograms of gold. In the first four months of 2017, gold mine production was 76,900 kilograms. (Source: “Gold In April 2018,” U.S. Geological Survey, last accessed July 4, 2018.)
If you do the simple math, this represents a decline of close to 10% in gold production in the United States. Mind you, the U.S. is the fourth-biggest gold producer in the world.
But don’t get fixated on U.S. gold production alone. Look at the supply of gold on a global level, and don’t just look at mine production. Look at other sources, like recycling of the precious metal, as well.
In 2017, according to the World Gold Council, the total global gold supply declined by four percent. (Source: “Gold Demand Trends Full Year 2017,” World Gold Council, February 6, 2018.)
Could the supply side improve? Remember, gold prices are the key for supply. If precious metal prices remain suppressed, recycling of the precious metal may not be as profitable.
As for mine production, it could face a lot of scrutiny ahead; it could decline a lot more.
Between 2012 and 2015, as gold prices were tumbling, gold producers reached for the “low-hanging fruit.” Those are the grounds with the most gold in them. They really had no other option; their survivability could have become questionable.
At the same time,gold miners pulled back severely on exploration of the precious metal. Keep in mind, exploration is essentially an investment in future production. In mining, resources deplete. If miners are not constantly looking for more gold, they can’t remain in business in the long run.
Gold Price Outlook: Don’t Rule Out $2,000 Gold Just Yet
Dear reader, we have a very interesting situation at hand.
The gold grades in the ground are not that great. It costs more to produce gold from low-grade grounds. Therefore, exploration has taken a massive hit, so we haven’t seen many discoveries.
With this in mind, if you look at the demand side, it remains very strong. The big buyers, like India and China, remain in the market. We also see central banks buying quietly and constantly. Additionally, there has been a surge in demand from Europe for the precious metal.
If this situation—the supply side facing problems and demand remaining strong—remains persistent, don’t be shocked to see gold prices surge.
How high could gold go? I am not focused on daily fluctuations, because they are a result of noise. In the short term, I am watching the $1,350–$1,375 level closely. If gold breaks above that level, the precious metal’s price could soar.
In the long term, I believe that $2,000-an-ounce gold price isn’t unreasonable.
