Supply/Demand Equation for Gold Says Prices to Rise More

SupplyDemand Equation for GoldIn 2013, when gold prices took a severe beating, and through 2014, when prices were not moving, I was one of the very few who kept on saying the depressed prices of gold bullion were a great opportunity for investors.

So far this year, gold investments have been hands down the best performer. I’m not saying this to pat myself on the back—far from it. Gold prices are up 4.4% in the first 15 days of 2015…and I think the party is just getting started. It’s not too late to get into gold.

There are significant constraints to supply as major gold-producing nations are reporting declines in production. On the other hand, demand is rising. As I wrote in these pages for most of 2014, the supply/demand situation for gold demands higher prices for the metal.

Production of Gold Bullion in U.S. and South Africa in Steady Decline

In the first nine months of 2014, gold production at U.S. gold mines totaled 159,000 kilograms, down 6.5% from the same period a year ago when U.S. mines produced 171,000 kilograms of gold. (Source: U.S. Geological Survey, last accessed January 8, 2015.)

South Africa, a major gold-producing nation, is reporting a decline in mine output, too. Look at the table below. It shows the percentage change in gold output in South Africa for the first 10 months of 2014 compared to the previous year. On average, gold production in South Africa declined 5.36% each month.

Percentage Change in South African Gold Production
2014 vs. 2013

Month Change Y-O-Y
January -6.40%
February -3.60%
March -2.60%
April -4.20%
May -2.10%
June -3.00%
July -14.50%
August -8.10%
September -0.20%
October -8.90%
Average -5.36%

 Data source: Statistics South Africa, last accessed January 8, 2015.

Pessimism Towards Supply of Gold Among Mining Executives High

And executives at mining companies are worried about the supply side of the gold equation. They are closest to the market and know firsthand what’s really happening. They are very pessimistic regarding supply. They seem worried about the grades and time it takes to advance projects.

Regarding the coming decline in gold supply in 2015, Sean Boyd, CEO of Agnico Eagle Mines Limited (NYSE/AEM), a well-known senior gold mining company, said, “I think there’s no question that’s going to happen because the lead time on some of these projects is a lot longer than it used to be.” He added, “If you look at the industry 20 years ago, it’s much more difficult now to advance a project, even to find a good quality project.” (Source: Kitco News, December 23, 2014.)

Demand for Gold Rising

Over the past few months, we have seen a huge amount of gold imported into India, mainly due to the country’s government easing import restrictions. Recent news reports have it that Indian officials have no plans to impose new gold import duties in 2015. (Source: Kitco News, January 7, 2015.) This means Indian consumers have access to more gold now. In 2013, China surpassed India and became the biggest consumer of gold bullion. In 2015, I will not be surprised to see India take back its former first-place position.

Meanwhile, I’m watching the activities at the central banks closely. The Swiss National Bank’s decision this weekend to abandon the Swiss franc’s relationship to the euro is a strong vote of non-confidence in the euro. If the European Central Bank gets approval from Germany to stimulate the eurozone economy by buying bonds (via money printing), the impact on gold prices could be very positive.

Lombardi: As Bullish As Ever on Gold

I am as bullish on gold as I can be. And I still see the shares of quality, senior gold producers as selling at massive discounts…a great opportunity for investors with vision.