Direxion Shares Exchange Traded Fund Trust (JNUG): Demand For Gold Persists Despite Shrinking Supply
By Steve Hunt
Recent market events in the gold industry make it worth revisiting the concept of supply and demand. As a fundamental and time-proven economic principle, supply in the gold market carries significant weight when it comes to understanding and even predicting possible future price points for this precious yellow metal.
Gold Supply Diminishing
If you simply accept the idea that increased demand of a limited supply of any commodity will create pressure for prices to rise, a lot about the future price of gold becomes quite clear.
Let’s examine, for a moment, the issue of the current and future supply of this yellow metal. Consider:
- Gold mining output has plateaued, and many predict a decline.
- Even with cheap capital and energy, the all-in cost of production of gold is close to current market prices, leaving little room for profit. The World Gold Council states the current all-in-cost is at least $1,200 an ounce.
- When energy prices and interest rates reach more traditional levels, those production costs will rise significantly.
- There are no major mining development operations that are currently increasing the availability of gold in a significant way.
- Available gold scrap has declined significantly at today’s gold prices.
- Central banks have resumed gold buying and holding large quantities of gold in the midst of global uncertainty.
Consumption of Gold Overtaking Production
These and other factors point to a continuing shortage on the supply side of the gold equation. Moreover, even assuming a doubling of the price of gold to support more expensive mining costs, there is no guarantee of sufficient supplies of the precious metal. Gold is one of the rarest of all elements, and analysts at Goldman Sachs state there is less than “20 years of known mineable reserves of gold.”
With the understanding of a severely limited supply of gold, the situation created by a growing demand sets the stage for a very confident conclusion. Consider that the U.S. has exceeded its consumption of gold over production for at least four years and is expected to continue this trend into the future.
Demand for Gold Expected to Continue
The United States is certainly not alone in this growing demand for gold. Other sources of demand include:
- Significantly increased use of gold in aerospace, industrial and technological applications.
- Increasing development of new medical treatments where use of gold is the only option.
- Central banks have already consumed a great deal of available gold. However, concerns over global financial and economic issues are driving even more gold buying.
- Investors are increasingly turning to gold as the most reliable safe haven investment in these troubling times.
Conclusion: Long-Term Upward Pressure on Gold
When you take into consideration the factors in the gold market that are aggressively driving supply down and demand up, the upward pressures on gold become quite evident. Even more importantly, these factors are both short and long-term concerns. In other words, there is no indication of any rational increase in the supply of gold or any limiting of demand in the foreseeable future.