Ailing Supply Side Says Gold Prices Could Skyrocket
There’s a perfect storm brewing in the gold market, and it could send the price of gold beyond $3,000 an ounce. If investors position themselves right, they could generate immense gains in the coming years.
Take a look at the supply side of the gold market. There are so many constraints that, if we assume that the demand remains at its current level and basic economics play out, it’s hard to see gold prices remaining around $1,900 an ounce.
Basic economics say that, when supply drops and demand increases or remains the same, price goes up.
The future supply of gold is becoming questionable. Trends are showing that gold discoveries aren’t as abundant as they used to be. The days of stumbling upon massive gold deposits seem to be fading away.
Gold Discoveries Dwindling; Anemic Production Ahead
According to S&P Market Intelligence, between 1990 and 2021, there were 341 discoveries containing at least two million ounces of gold. Altogether, these discoveries contained 2.7 billion ounces of gold in reserves, resources, and past production. (Source: “Gold RRS 2022 — Surge in Recent Discoveries,” S&P Global Market Intelligence, May 3, 2022.)
Sounds immense, right?
But here’s what you should: the vast majority of these discoveries were before 2010.
The past decade or so has been horrible when it comes to gold discoveries. Between 2010 and 2020, there were only 44 discoveries, and they contained just 278 million ounces of gold. Between 2017 and 2020, there were only eight gold discoveries, and they contained just 35.4 million ounces of gold.
As discoveries continue to be dire, gold production is expected to slow down. S&P Market Intelligence said its most optimistic view is that overall gold production will have very little growth in the coming years and will start to decline by 2028.
Why is this?
Almost half of the gold discoveries studied by S&P Market Intelligence aren’t in production yet. Only 33 of the discoveries have reserves and resources of more than 10 million ounces of gold. That amount could allow a mine to produce more than 200,000 ounces per year over a long period.
What will happen to gold discoveries in the coming years?
Understand this: gold discoveries essentially happen when miners are flush with cash and precious metal prices are high. As it stands, interest rates have increased immensely, stock investors aren’t big fans of precious metal mining companies, and gold prices aren’t flying.
Therefore, it could become difficult for companies to raise money to go out and explore for more gold. This will hurt the supply side further.
Gold Price Outlook: Bases Loaded for Massive Upside Move
Dear reader, there are very few assets right now for which the fundamentals are making a case for soaring prices. Gold prices have a very shiny outlook, to say the least. All the bases are loaded for a massive move to the upside.
I must say this, though: I don’t expect the price of gold to skyrocket quickly. I think the rise will initially be a slow process. When gold prices start to increase consistently by $100.00, $200.00, or more per day, that’s when the gold market could be getting to the mania phase. That might be the time for investors to get out, rather than in.
In the near term, though, I suspect gold prices will drop a little. This is mainly because interest rates have increased a bit and the economy is slowing down. This, I think, increases the odds of something breaking (a crisis of some sort). If something breaks, it could create a liquidity crisis, and gold is one of the first assets that gets sold.
But the lower the price of gold goes in the near term, the better it will be for investors.
Where’s the opportunity?
If gold discoveries are becoming scarcer and production is expected to slow down, won’t miners that are sitting on large (and increasing) gold deposits be considered the kings of the gold hill?
I think so. These companies, by spending money now to build up their reserves and get their production in order, are essentially securing their own futures. They could be the ones that provide the biggest returns to investors.