Gold Prices to Soar on Back of Supply Concerns
If you are a long-term reader of Lombardi Letter, you may have noticed a common theme when I talk about gold prices: there could be a supply shock in the gold market in the coming years. I have talked about this rigorously for well over two years now.
Why?
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After the gold sell-off in 2013, miners made a bad decision, not realizing what they were doing. In order to stay in business and look good to investors, they started to cut back severely on exploration spending. Keep in mind, exploration spending is essentially an investment in future production.
This situation wasn’t just at a few companies; it was widespread.
For example, look at Barrick Gold Corp (NYSE:ABX), one of the biggest gold mining companies globally. In 2013, the company spent $208.0 million on exploration and evaluation. A year earlier, Barrick Gold had spent $359.0 million. Year-over-year, this represented a decline of more than 42%. (Source: “Barrick Reports Fourth Quarter and Full Year 2013 Results,” Barrick Gold Corp, February 13, 2014.)
In the following years, Barrick Gold’s exploration spending continued to remain subdued.
Looking at all this, it’s rational to ask: If miners aren’t spending money on exploration, how are they are going to extract more metal in the future? This could create supply constraints, which obviously would have a positive impact on gold prices.
Major Mining Companies Starting to Talk About Their Mistakes
Now, gold mining companies are starting to talk about the supply issue, which is not surprising at all.
According to Randgold Resources Ltd. (NASDAQ:GOLD)—one of the most well-known and profitable gold mining companies in the world—by 2020, there could be supply constraints because mining companies have cut costs and become risk-averse.
Randgold CEO Mark Bristow mentioned that the gold mining industry has been slow to spend exploration and sustaining capital. He also said that half of the gold being extracted isn’t profitable, adding, “The one thing this industry does very well is mine gold at a loss.” (Source: “Gold CEO Lashes Out against His Industry,” Bloomberg, November 24, 2017.)
There was one more thing that Bristow talked about: the grades of gold in the ground. Mining companies have been reaching for the highest grades since 2007. Now the grade of gold that is left in the ground has declined immensely.
Exciting Times Ahead for Gold Investors?
Dear reader, the goal here is not to say “I told you so.” What the CEO of Randgold said isn’t surprising to me, whatsoever. If you followed the data all along, it was very clear.
What’s next?
You see, this is pretty much the first time (as far as my research goes) that someone from the mining industry has gone public about exploration spending, grades in the ground, and supply constraints. Know that Randgold isn’t just any gold mining company. It’s very well respected.
Since Randgold is concerned about the state of the gold industry, this could make investors who have ditched gold for a while to rethink their decision.
Remember, gold prices have already been rising. So far, it looks like 2017 could be the second year when the yellow precious metal prices increase. This could make investors want more gold, going into 2018.
Looking at all this, I can’t help but be bullish on gold for the next few years. I see very exciting times ahead for long-term precious metal investors.
