Looking at the demand and supply situation for gold bullion, it doesn’t look like the precious metal’s price will stay at the current level much longer. Quality gold mining companies are very attractive right now at their depressed stock prices.
Gold Bullion Demand Surging in 2015
In March, gold imports in India were expected to increase to 100 metric tons, up from just 25 tons in February. If it actually happens, this will be a 300% month-over-month increase in demand for the precious metal. (Source: Bloomberg, March 2, 2015.) Since the Indian government has scrapped import restriction on tariffs on gold bullion, we have been noticing huge jumps in monthly demand, suggesting buyers of the yellow metal are coming back very quickly.
In 2014, combined, India and China purchased more than 1,600 tons of gold—that’s almost 60% of the global 2014 mine production of 2,860 tons. (Source: U.S. Geological Survey web site, last accessed March 27, 2015.)
And world central banks are continued buyers of gold bullion. In 2014, they purchased about 500 tonnes of the metal. (Source: World Gold Council, February 12, 2015.) (In 2015, I expect them to buy more.) So if India and China bought 1,600 tons of gold last year and central banks bought 500 tonnes (about 550 tons), that means just three players absorbed 2,150 tons of the 2,860 tons of gold produced last year. That doesn’t leave much gold (even just for jewelry) for the rest of the world.
Gold Bullion Supply Side Facing Hardship
While demand is strong for the precious metal, supply has peaked.
According to Goldcorp Inc. (NYSE/GG), one of the biggest miners, gold production will hit its peak this year. Production of the precious metal will decline from this year on. (Source: Goldcorp Inc. web site, last accessed March 27, 2015.)
There are two reasons why the supply of the yellow metal is declining. First, there hasn’t been a new major gold discovery in years. Gold discoveries peaked in the mid-1980s. In 1985, there were about 150 million ounces of gold discovered. In 2013, this number was less than 20 million ounces.
Second, as gold prices fell from their $1,900-an-ounce peak to $1,200, gold mining producers slashed their gold exploration budgets and took mines offline where production at $1,200-an-ounce gold didn’t make sense.
Where To Next for Gold?
I’ve harped on about it over and over again in these pages: don’t be too concerned about what happens to the price of gold on a daily or even monthly basis. In the short-term, every market is fueled by emotions, irrationality, and, in gold’s case, maybe even manipulation. But in the long run, the prices for all forms of investment regress to the mean; supply and demand eventually set proper prices.
In the long-term, I believe gold will break well above its 2011 price high of $1,900 an ounce. This makes quality gold mining companies very attractive right now at their depressed stock prices.