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Published: December 1, 2010
By now, you know half the reason the gold price is
set to rise: People are fleeing paper currencies for "real
wealth," including gold, silver, and other hard assets.
But even without this huge new demand, gold prices would likely
rise over the next 10 years or longer. That's because of the
other half of the equation: supply.
Gold is facing a twofold supply crunch right now. And I expect
that crunch to support gold prices for decades. Let me
explain...
In 2006, South Africa was the world's largest gold producer. It
had held that spot forever. It averaged 16.6 million ounces per
year through the 1990s. Gold production peaked in 1993 at 18
million ounces per year.
By 2009, it had dropped three spots, tying the U.S. for the
world's third-largest gold producer. In the intervening years,
production fell an average 6.3%. In 2009, the country only
produced 6.5 million ounces... about a third of its peak.
Several major gold mines closed because the mines lacked proper
electricity... and even with gold prices soaring, there wasn't
enough money to keep the lights on. This is happening all
over the world.
Take a look...
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Major gold mines all over the world are
suffering lower output. Gold production had declined steadily
over the last 10 years.
In short, all the easy ounces are gone. These days, it takes a
whole lot more rock to produce an ounce of gold. And even rising
gold prices haven't kept pace with the cost of production at
many mines around the world.
That's the first reason gold supply is tight. The second is
government sales...
Over the last decade, 11 of the
20 largest gold-holding central banks (including the
International Monetary Fund) sold gold. Those countries dumped
24% of their collective holdings. (Switzerland's central bank
sold 60% of its gold holdings over the last 10 years.)
In total, they dropped 124 million ounces on the market since
2000... That's roughly 15% of the average annual mine production
over that same time.
With the gold price nearing all-time highs, governments are
reversing course. Some are actually buying gold. And the IMF cut
sales by 40% in October.
Here's the thing: Markets work. Mine production is down. Central
banks quit selling. And, of course, demand is rising. These add
up to higher gold prices.
At some point, years and years down the road, higher gold prices
will turn unprofitable mines profitable again... and we'll see
tons of new supply. And maybe when we see South African gold
production at all-time highs again, I'll sell my gold. But
that's decades away.
-- Matt Badiali
Editor
The S&A Resource Report
Note: This article originally appeared on
Growth Stock Wire |
