When it comes to gold prices, don’t pay attention to the short-term fluctuations. Instead, stay focused on the long-term and just look at the supply and demand situation. Saying the very least, the precious metal has a shiny future ahead.
Here’s what is really needed for gold prices to go down: a massive increase in supply, major discoveries, and mining companies starting to produce more. On the demand side, the buyers must decline substantially.
If you follow the gold market closely, you will know this isn’t happening. We are seeing quite the opposite, actually.
Gold’s Supply Side Facing Severe Scrutiny
Looking at the supply side, gold discoveries have plummeted significantly.
To provide some perspective, according to Goldcorp Inc. (NYSE/GG), the peak of gold discoveries occurred in 1995, when roughly 175 million ounces of gold were discovered. In recent years, this has fallen to much less than 25 million ounces. This represents a decline of over 85%! (Source: Goldcorp Inc., last accessed September 15, 2015.)
Here’s something to consider as well: even if we assume that by the end of 2015, there’s a major discovery, it will take a very long time to start producing.
This leads to another question: are gold mining companies producing more of the precious metal?
We have been following companies closely. While the majority of the mining companies have promised to produce the same amount as 2014 or less, only a few have said they will produce more. But, their gold production figures aren’t as impressive to the upside.
Remember this: when prices are down and out, producers don’t have any incentive to produce.
Precious Metal Demand Soaring
When looking at the demand side, it’s impressive. We are paying a significant amount of attention to what is happening in the physical market.
Consider this: at the time of writing, the U.S. Mint has sold 620,000 ounces of gold in American Eagle coins. In the entire year of 2014, the Mint sold just 524,500 ounces of gold in American Eagle coins. (Source: U.S. Mint, last accessed September 15, 2015.)
Simple math will tell you that demand for gold coins in the U.S. is already running 18% higher compared to overall demand from last year! And there are still well over three months left. It will not be surprising to see the U.S. Mint sell one million ounces of gold in American Eagle coins by the end of the year—a similar amount as to what it sold back in 2011.
Dear reader, demand at the U.S. Mint is just a small portion of the total demand. When we pay attention to the bigger picture, it says gold prices could soar rapidly.
Recently, my colleague Peter Prazic wrote about this. See “Gold Price Forecast: Panic for Physical Gold Shows the World is On the Verge of Economic Collapse.”
In London, for instance, the biggest trading place for gold, it has become nearly impossible to get physical gold.
When we look at the premiums, and the amount of gold there is compared to the number of futures contracts out there, it only tells of significant demand for the precious metal.
Gold Price to Soar: $2,000 an Ounce Very Possible
It is critical to understand that the only thing keeping gold prices suppressed is investor sentiment. Investors have bought into the idea that we are headed for deflation and an interest rate hike will be bad for the yellow metal.
Contrary to that popular belief, I remain bullish on gold. My convictions of gold prices testing their highs and going above $2,000 per ounce in a few years are becoming stronger each day.