Where I’d Put My Money Now

Annual Supply of World Gold ShrinkingAs gold bullion prices declined last year, I said supply would contract as gold miners pulled back on exploration and closed mines that were not profitable at $1,200-an-ounce gold.

For the supply of gold bullion to increase, there needs to be more discoveries. Sadly, the opposite is happening. According to SNL Metals & Mining, gold discoveries have been trending downward. In the 1990s, there were 124 new gold discoveries totaling 1.1 billion ounces of gold bullion. But since 2000, only 605 million ounces of gold bullion in total has been discovered at just 93 discoveries. (Source: Kitco News, July 18, 2014.)

For there to be more gold discoveries, mining companies need to spend more on exploration and that just isn’t happening. In 2013, when gold prices plummeted, major mining companies pulled back on their spending. Furthermore, exploration companies that need funding found it very difficult to get money, so they also pulled back on finding gold.

But gold bullion discoveries aren’t just slowing; the time it takes to start production at a mine is increasing as well. Between 1996 and 2005, it took an average of 11 years to bring a discovery to production. Between 2006 and 2013, this has increased to 18 years. (Source: Ibid.)

With all of this (it being harder to find new gold bullion and it taking too long for production to start once gold is discovered), the supply of world gold bullion is shrinking.

And demand for gold bullion, well, it just keeps rising. Aside from investors buying gold coins and jewelry at near record levels (with India now easing its stiff tariffs on gold imports), in June, the central bank of Russia added 16.8 more tons of gold bullion to its foreign reserves. Other smaller central banks, like Kazakhstan, Kyrgyzstan, and Tajikistan, also added the precious metal to their reserves. (Source: GoldCore, July 29, 2014.)

When supply contracts and demand increases, prices increase. That’s Economics 101. So is it any wonder gold prices are up nine percent this year, while stocks (as measured by the Dow Jones Industrial Average) are down four percent for the year?

Those who thought they missed out in 2011, when gold prices hit $1,900 an ounce, still have an opportunity to get in now at what I believe are great prices. I continue to see the shares of quality gold mining companies selling at opportune prices.