Mining Companies’ Lack of Exploration Could Mean Higher Gold Prices
There could be a supply crunch in the gold market in the coming years. This could be great for gold prices. Don’t ignore the yellow precious metal; massive gains could be ahead.
It’s important that investors know what has happened in the last few years.
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After the sell-off in 2013, mining companies pulled back severely on their exploration spending. Remember, exploration is essentially an investment in future production. If companies don’t look for the metal, how are they going to produce it?
Fast forward to 2016…
This is when miners realized they needed to do something about exploration or their future production would be in jeopardy. By exploration, miners can figure out which lands have the most gold. This keep their costs low and makes them more efficient.
2017 was the first year that we actually saw a slight uptick in exploration spending, but it wasn’t anything huge.
Understand this: there was a gap in the mining sector of roughly two to three years when exploration was dismal at best. One could describe the situation as the gold mining sector as a whole being two to three years behind in exploration.
Production Already Facing Headwinds
This could be big. With exploration falling, it’s safe to assume that production could face a lot of headwinds. We see problems brewing already.
Consider Barrick Gold Corp (NYSE:ABX). The company expects to produce between 4.5 and 5.0 million ounces of gold in 2018. In 2017, its gold production was 5.3 million ounces. (Source: “Barrick Reports 2017 Full Year and Fourth Quarter Results,” Barrick Gold Corp, February 14, 2018.)
Simple math here: if Barrick Gold is able to produce 5.0 million ounces in 2018, it would be almost six percent lower than its 2017 production figures.
If you look at major gold-producing regions, you will see anemic gold production, and there’s really not much improvement ahead.
When Does the Supply Crunch Come Into Play?
Since miners have set themselves up for low gold production in the coming years, the reasons to own the precious metal continue to increase.
For example, inflation is starting to pick up speed, and gold does great in times of inflation. So, don’t you think all of a sudden institutions will be looking to hold gold? It’s very possible. We already have major buyers purchasing gold non-stop.
Consider India. In January, almost $1.6 billion worth of gold was imported to the country. (Source: “Quick Estimates For Selected Major Commodities For January 2018,” Government of India Ministry of Commerce and Industry, last accessed February 20, 2018.)
Don’t forget China either. Central banks continue to favor gold as well.
This could cause a supply crunch; more gold buyers = less gold available.
What’s Next for Gold Prices?
No matter how you look at it, gold seems to be presenting a great opportunity for those who are patient.
Dear reader, the case for $2,000 gold continues to get stronger by the day. If demand continues to surge and the supply side continues to see problems, it’s going to have a positive impact on gold prices.
With time, we’ll know more. In the meantime, it’s critical to keep a close eye on mining companies. Don’t be shocked if mining companies that are spending money on exploration, increasing their production, and having more cash on hand see their stock prices skyrocket as gold prices move higher.
