By Steve Hunt
The numerous complexities of the gold market often make it difficult for investors to see a clear trend in prices and market activity. However, it is important to not miss the forest for the trees when grappling with those many indicators.
When it comes to commodities, there are a few basics that will always dominate the direction of prices. The balance between supply and demand is the most fundamental of those factors, and it is essential to understand that relationship, especially for long-term buyers of gold and other precious metals.
A Finite Supply and Increasing Demand
It is one of nature’s more astonishing facts that all the gold ever mined and produced would easily fit into a cube of just 67 square feet (20 square meters)—slightly bigger than an Olympic pool. 1 Even more interesting is that more than 80 percent of the above-surface gold has been mined since the 1850s, in spite of its historical role as one of our most prized resources.
In other words, if not for dramatically greater production of the valued yellow metal over the past 15 or 16 decades, the demand for gold would greatly exceed the supply. This is especially the case since there are so many new and vital uses of gold. Gold is valued as unequalled material for jewelry and storing wealth, but is beginning to be used for so much more.
Demand for Gold in Medicine and Technology
Today, one of the rarest metals on earth (composing roughly only 0.003 parts per million of the crust of the earth), gold is being utilized in a broad number ofmedical, industrial, and technological applications. From providing microscopic connections in tiny electronics to nanoparticles in medical testing devices, science continues to find new ways to put gold to use. Moreover, the unique characteristics of this metal make it irreplaceable in many of these applications.2
Political and Economic Factors Increase Demand
These new uses are, in fact, only a part of the reason gold consumption is hitting record highs. Other pressure points on the demand side of the gold equation include:
- Increased buying and decreased selling of gold by central banks around the globe, especially in China and Russia.
- Steadily growing culturally driven purchases in countries like China and India from a growing and newly prosperous middle and upper class.
- Significantly increasing interest in physical gold for investment from buyers and investors, ranging from hedge funds to individuals.
The combined effect of these and other areas of demand drove the investment demand for gold to 1064 tons in H1 2016, the highest level since 917 tons in the same period in 2009. 3 The net effect of this global consumption of gold is underpinning a steady increase in the price of gold.
While demand is being driven by an increasingly dark global economic scenario, many analysts and serious investors in gold are taking note of the growing role of supply as a factor.
The Limits to Mining?
Heavy investment and technology has provided the world a century of increased production of gold, with new production and new demand roughly matching over the period. However, many are concerned that the ability to affordably produce new supplies of gold may be severely limited.
One of the more pessimistic analysts resides at no less an authority than Goldman Sachs. Eugene King, an analyst at the firm, recently stated, “…we have only 20 years of known mineable reserves of gold.” 4 Additionally, even if new reserves were found, the costs of production would undoubtedly exceed the current market prices of the commodity.
Outrageous or Not? Gold Could Reach $12,000 Per Ounce
Understanding and extrapolating the impact of these supply and demand realities on the market price of gold, some analysts are predicting gold prices per ounce as high as $10,000 (Jim Rickards) to $12,000 (James Turk). 5 Of course, this predication takes a long view and accounts for many different factors, but considering the long-term trends of gold demand and the finite supply of the yellow metal available in total, it’s not outside the realm of imagination for the price of gold to hit never-before-seen highs in decades to come. Whether or not these forecasts prove true or not, the natural and immutable impact of supply versus demand continues to exert very bullish long-term pressure on the market for gold.