With gold production significantly down, will the simple laws of supply and demand affect the price of the shiny yellow metal?
From L Todd Wood, for Birch Gold Group
The law of supply and demand works for anything you want to price, especially precious metals like gold. According to analysts, we are hitting the peak of the current production cycle for the “barbarous relic” (as some gold-naysayers like to call it).
With new investment trailing off due to a recent decline in price, the resulting lack of supply should be a bullish scenario for owning the metal.
Kelvin Dushnisky, president of Barrick Gold, the world’s largest gold miner by annual output, told FT, “Falling grades and production levels, a lack of new discoveries, and extended project development timelines are bullish for the medium and long-term gold price outlook.”
The price for gold has declined by about forty percent in the last four-plus years. This has crippled investment by miners who have a hard time making money at the current price point. If they cannot foresee a reasonable chance of earning money on a project during an appropriate time frame — a simple present value calculation — then mining projects don’t get started and production estimates in the out years decline.
While the threat of rising interest rates (which will create lower inflation expectations) has limited gold in the short term, over time, lack of market forces and simple supply and demand should push the price for gold higher. Vitaly Nesis, chief executive at Polymetal said this:
“It is fruitless to try to predict demand dynamics for gold — I always put my faith in a recovery driven by reduction in supply and I believe we will see the first signs of impending recovery in the second half of this year. The fourth quarter last year was in my opinion the peak quarter for fresh global mine supply. I think supply will drop by 15 to 20% over the next three to four years.”
Nick Holland, chief executive of Gold Fields, a South African-based gold miner, said the industry had abandoned a previous fixation on rising output: “We were all talking about how production was going to increase every year. I think those days are probably gone… you are not going to see massive production increases in the industry.”
With gold prices at a relative historical low, and supply and demand prospects for the metal looking favorable in the medium term, now may be the time to add precious metals to your savings. And don’t forget, with the stock market tanking, gold can help to further protect what you’ve worked so hard for. Don’t wait any longer — call us today.
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