Now, more than ever, basic economic factors suggest the gold market is setting up for massive rewards. Give it some time and don’t be shocked to see gold prices move violently to the upside over the next few years.
Gold Marker’s Supply Side Crushed
Economics 101 suggests that when prices are low, manufacturers don’t have much incentive to produce more. This is exactly what’s happening in the gold market. Gold producers have been shutting down operations as gold prices have come down. But they are creating problems for themselves for the long term.
In 2014, U.S. gold mine production declined by eight percent. In 2015, I wouldn’t be surprised to see it plunge.
In the first two months of 2015, January and February, gold production from U.S. mines amounted to 33,600 kilograms (kg). (Source: U.S. Geological Survey, last accessed June 8, 2015.) In the same period a year ago, these figures were 39,400 kg. (Source: U.S. Geological Survey, last accessed June 8, 2015.) This represents a decline of 15% year-over-year!
Mind you; gold production isn’t just declining in the U.S. Other precious metal-producing regions are reporting similar, if not worse, figures.
Since gold prices peaked in 2011, across the mining sector, companies have been cutting back on their exploration expenses; be it on already built mines or at new ventures. Reducing exploration spending means mining companies are jeopardizing future growth and production.
Take Barrick Gold Corporation (NYSE/ABX), for example. In 2014, the company spent $392 million in exploration, evaluation, and project expenses. That’s a 42% decline from the $680 million the company spent in 2013 on exploration. (Source: Barrick Gold Corporation, February 18, 2015.)
Demand Side Remains Solid
Central banks are still buying gold. And it’s not the major ones that you should be paying attention to; look at the ones from fast-growing smaller nations. If you follow them closely, they are hungry for the yellow metal.
Consumer demand from India and China remains as strong as ever.
Gold Outlook Remains Bright
I have said it before, and I say it again; precious metal prices declining in 2013 and 2014 was a blessing in disguise for investors. It created a great opportunity for those who are looking at the yellow metal for the long term. As I see it, 2015 will likely be the “bottom” year for gold prices.