Just as the stock market moving higher on historically high valuations is mind-boggling, suppressed gold prices aren’t making much sense either.
Demand for gold is increasing, while supply is contracting—a perfect recipe for higher gold prices. But despite the demand/supply equations that all things on earth are priced by, gold prices remain flat.
Manipulation? Certainly looks like it at times. But understand this: markets can be manipulated for only so long. Eventually, the fundamentals are what dictate the prices and it will be no different with gold.
Rising Demand for Gold
According to the World Gold Council (WGC), jewelry demand from India for the entire year of 2014 was 662 tonnes—the highest on record since India started keeping track in 1995 and up eight percent over 2013. With this it should be noted that for the majority of 2014, the Indian government had restrictions in place on gold imports. (Source: World Gold Council, February 12, 2015.)
And world central banks continue to have a huge impact on the demand side of the gold market. In 2014, they purchased 477 tonnes of gold—17% more than they did in 2013. Central banks have been buying gold bullion for five consecutive years now.
Gold Supply-Side Scrutiny
On the other side of the equation, in the first 11 months of 2014, U.S. gold mines produced only 193 tonnes of gold, about eight percent less than the 209.7 tonnes they produced in 2013. (Source: U.S. Geological Survey, February 2015.)
As I predicted long ago, when gold prices started coming down, lower gold prices forced gold producers to cut back on exploration costs, thus stinting future gold production. And this is exactly what has happened—less and less new gold production coming on stream.
Looking at the guidance provided by gold mining companies about 2015 production, some senior miners are planning to produce less in 2015 than they did in 2014.
How Long Will the Down Cycle in Gold Prices Last?
The decline in gold prices we have seen since 2011 has discouraged some, but I am looking at it all differently. I’m looking at it as an opportunity. Four years ago, gold prices peaked. A lot has changed since then. Lower gold prices have reduced supply as capital and exploration spending in the mining industry took a massive hit.
At this point, would-be investors need to be smart. They should be looking for gold-producing companies that have become leaner, have reduced their production costs, and have increased their grades. There are plenty of these companies around, and I’m looking at them as great opportunities today.