Gold Market Supply and Demand Suggests Higher Prices Ahead

Gold marketI can’t stress this enough: the supply and demand picture of the gold market is severely distorted and it’s keeping me bullish in the long term.

Gold Supply Is in Trouble

I have been paying a considerable amount of attention to gold production levels. As it stands, there’s a major problem: mines are simply not producing. Please look at the table below. It shows gold bullion production at the U.S. mines in kilograms (kg) and the year-over-year change.

Year Production (kg) % Change
2009 223,000
2010 231,000 3.59%
2011 234,000 1.30%
2012 235,000 0.43%
2013 230,000 -2.13%
2014 212,000 -7.83%

(Source: U.S. Geological Survey, last accessed April 27, 2015.)

For the last two years, precious metal production in the U.S. has been declining and moving in the wrong direction very quickly. Other gold-producing regions are showing gruesome production figures as well. You must remember; when prices are low, producers don’t have much incentive to produce. We are currently witnessing something similar in the gold market.


Demand Remains Solid

Over the past few years, I have been paying attention to two main sources of gold demand: India and China; and the central banks. As of yet, they haven’t disappointed me.

Central banks continue to buy the yellow metal. In 2014, they purchased for a fifth consecutive year and bought almost 17% more than they did last year. You have to keep one thing in mind when looking at the central banks: they were against the precious metal, and all of a sudden their rationale changed. This is a noteworthy consideration.

Also, I don’t expect big central banks to buy gold. I see the smaller ones changing the fundamentals of the market. They don’t have gold, and they will want the metal for their reserves.

As for demand in India and China, it remains robust.

Consider this: for the fiscal year 2014-2015 ended March 31, India imported 900 tons of the yellow metal with demand increasing 36% from a year ago. Over this period, there were restrictions on importing gold into India. I expect these figures to increase going forward. (Source: Reuter, April 10, 2015.)

In China, gold is still popular. For the entire year of 2014, the country consumed its second-highest amount of gold ever recorded.

From a Technical Point of View

In the mainstream, it is said that gold is useless and will only decline. With this in mind, please look at the weekly chart of gold below:

Gold Spot Price Chart

Chart Courtesy of

Here you will notice something interesting. Despite all the pessimism toward the precious metal, the price hasn’t declined. This tells us there are buyers. Gold has been trading in a range since the beginning of 2014. If investors believed that gold was useless and not worth holding, we would see selling continue. I see a substantial amount of support at $1,150.

Outlook Remains Shiny

I remain bullish on gold in the long term. This is not an emotional call, but something based on facts. When demand rises or remains the same, and the supply declines, the price increases. This is economics 101.

In the short term, too many investors are worried about deflation. And they aren’t paying attention to the yellow metal. In my opinion, it is currently undervalued severely. Deflation worries may be able to drive the global market lower, but I believe the yellow metal will just become more attractive.

To keep an eye on the whole situation, investors should be paying attention to the mining sector.