Don’t pay attention to the current gold prices. Think long-term when looking at the precious metal. As it stands, the fundamentals are improving. This will eventually reflect in prices.
I am paying extra attention to the supply side.
Gold Mining Companies Falling Victim to Low Prices
You see, when the prices are low, the producers struggle by facing severe scrutiny.
So far, we have heard some miners already giving up as they have stopped their operations. For instance, Midway Gold Corp. filed for Chapter 11 bankruptcy. The reasons for this were too much debt, and needing to restructure the company. (Source: Midway Gold Corp., June 22, 2015.) There are other companies that have stopped their operations as well; Allied Nevada Gold Corp. is another.
Sadly, there are many more companies that are currently in business and producing. But if they are faced with even a minor issue that results in cash outflow, they won’t be operating for too long.
What does this all mean? All of this will impact production. As mining companies shuffle to keep their business in order, or give up, they are bound to produce less.
We already see it happening; if you pay attention to production figures from gold producing regions, you will notice a decline. I will not be surprised if there are even further declines in production.
Gold Recycling Hitting Multi-Year Lows
Another major source of gold supply is from recycling.
To give you some perspective on how big this factor is to the gold market; in the first quarter of 2015, recycled gold amounted to 355.1 tons of the 1,089.2 tons of total supply. Simple math will tell you this was about one third of the total. (Source: World Gold Council, last accessed June 29, 2015.)
Thanks to the low prices, gold recycling has been hurt.
According to a report by the World Gold Council and the Boston Consulting Group, gold recycling in 2014 hit a seven year low and will remain low in 2015 as well. (Source: World Gold Council, last accessed June 29, 2015.)
Over years, it has declined significantly; in 2009, it was 42% of the total gold supply. By 2014, it declined to just 26% of the total supply.
For the recycler, life has become difficult. For example, the Cash4Gold.com mail-in refinery. The company bought gold, silver, and platinum from consumers. In 2009, it even ran an ad during the Super Bowl. Due to the decline of this sort of business, it had to file for bankruptcy just three years later.
Where’s Gold Headed?
Over the past few years, the mainstream has made it appear that gold is a useless metal and shouldn’t be held in a portfolio. I completely disagree with this claim.
I certainly agree that the metal prices are going through a rough phase, and mind you; every asset class does this. In 2008 and early 2009, stocks were a horrible investment. After a period of security, they turned out to be great. Gold is in very similar state.
As I see it, just from basic economics, the yellow metal is setting up to reward big-time. Investors should at least keep an eye on it.